The Triple Cost Squeeze: Why UK Manufacturing Competitiveness Hits a Tipping Point in 2026

The numbers landing on UK manufacturing directors’ desks this January tell a story that is difficult to ignore. Vehicle production has fallen to a 73-year low. Make UK warns that competitiveness warning lights are “flashing red”. Industrial electricity prices sit 125% above the EU median. And the employer National Insurance hike that took effect in April 2025 continues to compound already stretched wage bills.

This is not a single problem. It is a convergence of three distinct cost pressures arriving simultaneously, each reinforcing the others. For operations directors, procurement managers, and factory engineers trying to hold margins together, understanding the anatomy of this squeeze is the first step towards navigating it.

The Three Pillars of the Cost Squeeze

1. Energy: The UK’s Most Stubborn Competitive Disadvantage

The latest government data, published at the end of November 2025, confirms what manufacturers have known for years: the UK has the highest industrial electricity prices in Europe.

Large industrial users in the UK pay 25.33p per kWh, some 125% above the EU-14 median of 11.25p/kWh. Very large consumers fare little better at 22.39p/kWh, which is more than five times the rate paid by equivalent users in Finland (4.37p/kWh). UK steelmakers alone pay roughly 40% more for electricity than their French counterparts, totalling an estimated £41 million penalty in 2025/26 according to UK Steel.

This was not always the case. In 2008, UK industrial electricity prices were below Germany’s and only marginally above the EU-14 median. The divergence has been driven by a combination of policy costs layered onto electricity bills (Renewables Obligation, Feed-in Tariffs, Capacity Market levies), higher wholesale gas prices feeding through to a gas-dependent generation mix, and network charges that reflect decades of underinvestment.

For a mid-sized manufacturer running three shifts, energy can represent 8-15% of total operating costs. At 125% above the European median, that gap alone can be the difference between winning and losing an international contract.

2. Employment Costs: The NI Hike Bites Harder Than Expected

The increase in employer National Insurance contributions from 13.8% to 15% of earnings, effective April 2025, was always going to hurt. But the real sting was the reduction in the threshold at which contributions become payable, which hit manufacturers with large, lower-paid workforces disproportionately.

The S&P Global UK Manufacturing PMI data tells the story clearly: manufacturing employment has now contracted for fourteen consecutive months. Companies consistently cite higher labour costs from the NI changes as a primary driver. For a firm employing 200 people at an average salary of £30,000, the NI changes add roughly £50,000-£70,000 to the annual wage bill before any pay rises are factored in.

This is not simply a cost absorbed and forgotten. It cascades. Recruitment freezes become the norm. Overtime budgets are cut. Training investment is deferred. And the efficiency gains that manufacturers need to stay competitive become harder to fund.

The Make UK Executive Survey 2026, published in association with PwC, found that escalating employment costs were one of the two biggest concerns for senior manufacturing leaders, alongside energy. More than half of the 174 businesses surveyed warned these pressures were approaching a “tipping point” beyond which investment decisions would be delayed, cancelled, or moved overseas.

3. Trade Barriers: Death by a Thousand Tariffs

The third pillar is less about a single cost increase and more about accumulated friction.

The SMMT’s latest production figures, released on 29 January 2026, show UK vehicle output fell 15.5% in 2025 to just 764,715 units, the lowest level since 1952. While the JLR cyber attack and Vauxhall Luton closure were significant one-off factors, the underlying trade environment made a tough year worse.

US tariffs on UK vehicles rose from 2.5% to 10% in 2025, dampening exports to what remains a critical market (15% of UK automotive exports by volume). The uncertainty alone, with tariff announcements, negotiations, and partial resolutions playing out over months, was enough to cause manufacturers to limit shipments and delay commitments.

But the more structural threat lies with Europe. SMMT chief executive Mike Hawes has warned that “increasingly protectionist” proposals from Brussels, including plans to restrict government subsidies for low-emission vehicles to those built in Europe and measures favouring European-made cars for corporate fleets, represent a “significant threat” to UK industry.

From January 2027, tougher EU rules of origin requirements will significantly increase the proportion of a vehicle’s components that must originate within the EU or UK to qualify for tariff-free trade. For manufacturers relying on global supply chains, meeting these thresholds will require costly restructuring of procurement networks or accepting tariff penalties.

These three pressures do not simply add up. They multiply. Higher energy costs make UK-sourced components more expensive, which makes it harder to meet rules of origin thresholds cost-effectively, which exposes exports to tariff penalties, which further compresses margins already squeezed by employment cost increases.

What the Government Is Actually Offering

To its credit, the government has not been silent. The Modern Industrial Strategy, the DRIVE35 programme (£4 billion committed to automotive), and the British Industrial Competitiveness Scheme (BICS) represent genuine policy responses. But the detail matters enormously, and manufacturers need to understand what is actually on the table versus what is still aspirational.

The British Industrial Competitiveness Scheme (BICS)

BICS is the headline energy intervention. It offers eligible manufacturers exemptions from the indirect costs of the Renewables Obligation, Feed-in Tariffs, and Capacity Market schemes, delivering discounts of up to £40/MWh on electricity bills.

That £40/MWh figure sounds significant, and it is. For a facility consuming 10 GWh annually, it could mean savings of up to £400,000 per year. The government has stated this will cut eligible manufacturers’ electricity bills by approximately 25%.

However, several critical caveats apply:

• Launch date is April 2027, not today. Manufacturers must survive the next 15 months without this relief.
• Eligibility is restricted to businesses operating within the government’s IS-8 frontier sectors (Advanced Manufacturing, Clean Energy, Defence, Digital and Technologies, Life Sciences) and qualifying foundational industries.
• Electricity intensity thresholds will determine who qualifies, but final levels are still subject to consultation.
• Businesses already receiving EII exemptions are excluded from BICS, as the benefits cannot be duplicated.
• Mixed-output manufacturers face uncertainty. The consultation is still exploring whether to prorate support (e.g. 60% eligible output = 60% levy exemption) or apply a minimum threshold for full exemption.

For many small and mid-sized manufacturers sitting outside the IS-8 sectors or below the electricity intensity threshold, BICS will offer nothing at all. The scheme is explicitly targeted at strategically important, energy-intensive operations, not at manufacturing broadly.

The Industrial Strategy: Promise vs Delivery Timeline

The Make UK Executive Survey found that over half of respondents believed a comprehensive industrial strategy would be the single biggest driver of manufacturing growth in 2026, with nearly two-thirds prepared to accelerate investment in response.

That is encouraging. But it also reveals a vulnerability: confidence is being extended on credit. If delivery stalls, the backlash in deferred investment could be severe.

The strategy’s automotive ambition is to reach 1.3 million vehicles per year by 2035. The SMMT considers a more immediate target of one million vehicles by 2027 to be “optimistic but realistic”, contingent on new model launches staying on track and export market recovery. Mike Hawes has been candid that reaching 1.3 million would likely require a new manufacturer, most probably Chinese, to establish a UK factory.

What Manufacturers Should Be Doing Now

Policy advocacy is important, but waiting for government relief is not a strategy. Here is what practical action looks like in the current environment.

Conduct a Granular Energy Audit

Many manufacturers have a general sense of their energy costs but lack the granular, machine-level data needed to identify genuine savings. With UK electricity prices at 125% above the European median, every kilowatt hour matters.

Prioritise:

• Sub-metering of major energy consumers (compressors, furnaces, HVAC, lighting)
• Demand-side response enrolment where shift patterns allow flexibility
• Power Purchase Agreements (PPAs) for longer-term price certainty
• On-site generation feasibility, particularly solar PV with battery storage, which has become increasingly cost-effective for facilities with large roof areas

Model Your BICS Eligibility

Even though the scheme does not launch until April 2027, the consultation is open now. If your operations fall within or adjacent to IS-8 sectors, engage with the consultation process. If you are a mixed-output manufacturer, the decision on prorating versus threshold-based eligibility will directly affect your bottom line.

Reassess Supply Chain Exposure

The 2027 rules of origin changes will reshape procurement decisions for any manufacturer exporting to the EU. Map your component sourcing now. Identify where you are dependent on non-EU, non-UK suppliers for critical inputs and begin evaluating alternatives. The cost of switching suppliers in 2026 is significantly lower than the cost of tariff penalties from 2027 onwards.

Automate Before You Hire

With employer NI now at 15% and the threshold lowered, the economics of automation have shifted. Tasks that were marginal cases for automation at 13.8% NI now have a clearer payback. This is not about replacing people for the sake of it. It is about recognising that the government has made labour structurally more expensive, and investment in productivity is the rational response.

The December PMI data shows manufacturers are already doing this. Employment is contracting, but output is growing. That gap is being filled by efficiency improvements, automation, and process optimisation.

Build Resilience Against Cyber Risk

The JLR cyber attack of September 2025 was a watershed moment for UK manufacturing. Production at Britain’s largest automotive employer halted for over five weeks. The company reported a pre-tax loss of £485 million for the quarter, with revenues plunging by more than £1 billion. The ripple effects ran through the entire UK automotive supply chain.

If your cyber resilience strategy has not been reviewed since the JLR incident, it is overdue. The attack demonstrated that manufacturing operational technology (OT) networks are high-value targets, and that recovery timelines can be measured in months, not days.

The Outlook: Cautious Optimism With Structural Caveats

The data is not uniformly bleak. The December PMI of 50.6 marked a 15-month high for UK manufacturing, with output and new orders both edging higher. Electrified vehicle production rose 8.3% in 2025 to a record 41.7% share of output. Nissan’s new electric Leaf is rolling off the Sunderland line. JLR’s electric Range Rover and the new Jaguar are due later this year. The SMMT expects car output to rise 10% in 2026.

But these are largely automotive-specific tailwinds driven by new model cycles, not a broad-based manufacturing recovery. The underlying cost structure remains punitive. Industrial electricity prices are not falling. NI is not being reversed. Trade barriers are tightening, not loosening.

Make UK’s Stephen Phipson put it plainly: “The warning lights are now flashing red on the UK as a competitive place to manufacture and invest. The Government promised significant change. Now is the time to deliver it.”

For manufacturers on the ground, the message is equally plain. The triple cost squeeze is real, it is structural, and it is not going away quickly. The businesses that come through it strongest will be those that have audited ruthlessly, automated intelligently, and positioned themselves to capture policy support the moment it arrives.

The tipping point is here. The question is which side of it you land on.