Friday, October 22, 2021

Lack of EV battery capacity leaves looming levy threat for UK’s car makers

The trade deal thrashed out between the UK and the EU a week before its withdrawal from the economic bloc meant the industry’s worst fears over trade barriers were abated, but things haven’t exactly been plain sailing since.

Since January, the UK’s bilateral automotive sector trade with the EU has “underperformed” compared with the rest of the world, said Konstanze Scharring, director of policy and government affairs at Society of Motor Manufacturers and Traders told its inaugural Global Trade Conference on Tuesday.

“We have seen this in our own production and registration data in 2021, as well as in HMRC and Eurostat datasets, most clearly in the import of finished vehicles.”

Average monthly exports of cars from the EU into the UK dropped a third in the first five months of 2021 when compared with the last quarter of 2020, Eurostat data shows. Imports of cars from UK into Europe fell by 27.6 per cent.

The UK exports 80 per cent of the cars it makes and more than half (53.5 per cent) of these end up in the EU. More than 90 per cent of cars sold in the UK are imported, and 78 per cent of these come from the EU.

More worrying for the UK’s car makers, though, are the protocols in the agreement that specify how much of a vehicle has to be produced within a jurisdiction. These ‘rules of origin’ are set to tighten in 2024 and again in 2027.

This is a concern for UK producers, particularly as the shift to electric cars ramps up. Cars made in the UK could be hit with higher levies when exported if the rules deem that not enough of their value was created locally. 

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The issue for the UK is around batteries, which make up about 30 per cent of the cost of electric vehicles (EVs), according to a BloombergNEF survey published last December.

EU-made batteries could count as locally-produced for vehicles sold to the bloc, but might struggle to make origin requirements when sold to other parts of the world.

And although the EU remains the UK’s biggest market in volume terms, exports by value to non-EU countries have exceeded those to the EU for the past decade, driven by “high value premium and small volume” manufacturers, Ms Scharring said.

Despite the UK government blocking the sale of fully petrol or diesel-powered cars by 2030, there hasn’t yet been enough investment in ‘gigafactories’ needed to produce EV batteries at sufficient scale and bring on local manufacturing capacity. Additionally, there is little lithium processing capacity outside of China. 

So far, only two major UK EV plants are in progress. Nissan and its Envision AESC joint venture is building a £1bn plant next to its Sunderland factory with a capacity to produce batteries for 100,000 EVs per year, while the £2.6bn Britishvolt gigafactory will make enough cells for 300,000 cars annually once it hits full capacity in 2027.

Manufacturers are “cognisant of these challenges and working with the government” to try to secure external investment in gigafactories, the SMMT’s chief executive, Mike Hawes, said.

More broadly, the car industry is having a tough year even as demand remains high. The number of new cars registered in the UK last year was 1.63m, according to the SMMT, which was the lowest since 1992.

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Availability of batteries isn’t the only issue. Premium and luxury car makers will have dramatically different battery requirements to volume car makers, said Bentley Motors chief executive Adrian Hallmark.

“It’s very difficult to get critical mass of a gigafactory with seven or eight manufacturers with different needs.”

The high proportion of an EV’s cost taken up by the battery will make meeting ‘rules of origin’ targets difficult, he said.

“Of course, we seek to secure supply in the UK wherever we can, where it’s competitive, but this ‘rules of origin’ challenge is really driven by batteries, not by the rest of the car.”

A workaround that would still incentivise local sourcing could be to adopt a phased approach “where you discount the value of the battery, or take the value of the car without the battery and phase in that value over a five to 10 year period”, Hallmark suggested, which would give more time for investment in building UK capacity.

Investment in charging infrastructure also needs to improve, Hallmark argued, to spur the broader adoption of EVs that investors will want to see. Currently, there is not enough charging capacity to serve the 40 per cent of car owners who do not have their own driveway and inter-city charging can be particularly problematic, he said, citing a lack of interoperability between service providers.

More pressingly, they are also continuing to grapple with a shortage of semiconductors which has hobbled new car production. 

Demand for new cars remains buoyant – dealer network Pendragon (PDG) upped its full-year profit guidance by £10m-£15m to about £70m, citing “robust” orders. Bentley Motors, which is owned by Volkswagen Group (GER: VOW3), has seen sales grow 40 per cent year on year and is making record profits after cutting its cost by “about a quarter” after restructuring the business during the pandemic, Hallmark said.

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Yet chip shortages means deliveries are lower. New car registrations in September dropped 34 per cent year on year, according to the SMMT. The lack of new cars continues to push up used car prices – Auto Trader’s (AUTO) Retail Price Index recorded its highest ever increase in September, climbing 21 per cent year on year.

Restructuring specialist AlixPartners estimated last month that car makers globally will this year lose out on about £210bn in revenue as 7.7m fewer cars are produced. This is almost double its previous estimate of $110bn in lost revenue in May.

The SMMT estimates that around 1m vehicles will be manufactured in the UK this year, which is 100,000 fewer than previously expected.

The EU and the US are responding to the semiconductor shortage with industrial strategies to localise chip manufacturing, said Andrew McCall, vice president of government and community relations at Ford’s European arm. This could take years to come to fruition, though.

“It’s not going to solve the issue in the short term,” said McCall.

“On the semiconductor issue, it’s a question primarily around advocacy … to make sure the automotive industry is getting its share of these computer chips. I think we’re all being affected pretty much equally and to some extent we need to ride it out.”


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