While the British automobile industry was spared from costly tariffs in the Trade and Cooperation agreement (the Brexit deal), Bob Hancké and Laurenz Mathei argue that strict Rules of Origin requirements could spell its demise in the near future if the UK doesn’t boost its efforts to establish a large-scale battery supply chain.
If you listened carefully, you could hear a sigh of relief going through the UK automobile industry on Christmas Eve 2020. The final Trade and Cooperation Agreement (TCA) between the EU and the UK was good news for the manufacturing sector in the UK, as goods (including cars) will be more or less freely traded between the UK and the EU without many of the obstacles a hard Brexit would have imposed. Ignore for a moment that many UK businesses are still trying to come to terms with the new arrangements, which seem to impose rather significant transaction costs: paperwork, red tape, unclear, unknown and undeclared restrictions.
However, it turned out to be only a short-lived period of ease. Carlos Tavares – the CEO of Stellantis, the new giga-carmaker created by a merger between Fiat Chrysler Automobiles and Peugeot SA – has already issued a warning about the potential closure of the UK Vauxhall plant. His remarks came in response to the UK government’s decision to ban the sale of new petrol and diesel cars from 2030 and fit in with industry-wide concerns about the UK’s viability as a production location in the era of electric vehicles.
It’s about where the batteries come from, stupid
Let’s start from the beginning. While the British automobile industry was spared from costly tariffs, the devil is in the detail. The Rules of Origin (RoO) requirements seem to throw up important new barriers to trade. Before 1 January 2021, any product legally made in the UK could be sold anywhere in the UK and the EU. From this month on, though, UK carmakers will have to prove that at least 40% of the value of parts in a finished car that is exported to the EU – be they internal combustion engine vehicles (ICEVs), battery-powered electric vehicles (EVs) or plug-in hybrid electric vehicles (PHEVs) – were produced in the UK or the EU. The threshold for so-called originating content will climb to 45% from 2023 until the end of 2026, and to 55% from 2027. This is particularly challenging for EV production because the batteries alone, which are currently mainly imported from Asia or the US, often make up 50% of the total value of a car.
The good old battery bottleneck
We pointed out in December 2020 that the transition towards EVs is not as simple as producing them on an existing assembly line. Not only will original equipment manufacturers (OEMs) need to restructure their plants, they also require access to a functioning EV supply chain – most importantly battery production facilities. The new RoO requirements further increase the need for domestic British battery production, which will likely shape the cost-benefit analysis for carmakers with plants in the UK.
The underlying logic is the following: if OEMs can source batteries in the UK, they will invest in EV plants and the British automobile industry has a future. Note that this is a one-directional condition – the costs of setting up EV assembly facilities in the UK are prohibitively high without a sufficiently developed battery supply chain. Or, as Ralf Speth, the CEO of Jaguar Land Rover is quoted in AM Online (an automotive industry magazine): “If batteries go out of the UK, then automotive production will go out of the UK.”