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As the global race to build the cars of the future intensifies, stalwarts such as Jaguar Land Rover, Ford, Volkswagen and BMW are eager to take on Elon Musk’s Tesla and a host of Chinese giants.
Britain wants to win this “automobile renaissance”, said investment secretary Grimstone, who runs the little-known investment office that links 10 Downing Street to the trade and business sectors.
Grimstone’s job is to help the UK win in “one of the most competitive sports in the world” – attract foreign investment. “
However, one of the biggest barriers to investment in the sector is regulations on how much products UK manufacturers must make in Europe to receive lower tariffs when they trade with the rest of the EU.
With most Electric Vehicle batteries – at least components – produced further afield, manufacturers will find it difficult to keep their cars within the tight constraints needed to make exports to Europe competitive, while at the same time driving up exports globally under the U.K.’s new trade deals.
London’s Brexit trade deal with Brussels in 2021 limits the share of electric vehicle parts that can be made outside Europe, so manufacturers can benefit from duty-free trade.
By 2027, these limits will drop from an initial 60% to 45%. If manufacturers fail to meet these limits, their cars could become so expensive that manufacturers simply won’t make the investment worthwhile.
Britain may have left the EU, but it cannot escape this vital trade relationship. Europe remains the largest market for British carmakers, with 55% of British-made cars ultimately exported to the EU.
Mike Hawes, chief executive of lobby group the Society of Motor Manufacturers and Traders, said the U.K. needs to “transform a lot of its production “into electrified competence,” a process which won’t happen quickly and is “not easy.”
Whether Grimstone can get carmakers to build electric vehicles in Britain, Hawes said, “depends on whether the underlying conditions for investment are competitive.” China is currently number one in the world for Electric Vehicle manufacturing, with the U.S., Japan, and Korea all strong performers too. “So there is quite a lot of competition.”
Grimstone has already had one clear win.
On the evening of June 30 last year, he attended a ‘Sunderland dinner’ hosted by senior Nissan officials to celebrate, ahead of an announcement by senior Nissan officials and Chinese battery maker Envision Group for a £1bn stake in Sunderland. His early success in trying to change the industry produced electric cars the next day.
British Prime Minister Boris Johnson and Business Secretary Quasi Kwaten even appeared in Sunderland, a major political battleground in northeast England, to celebrate.
For the deal to happen, three parties “needed to be brought to the finishing line simultaneously,” Grimstone recalled — Nissan, Envision and Sunderland City Council.
But the race to seal the deal started months earlier, with Grimstone heading up regular weekly meetings between the three, and “a tracker which said who had to do what to get this done.”
Grimstone used his bargaining skills while working at a merchant bank to help sponsor government grants and aid, while Sunderland City Council completed a microgrid and moved pylons to allow factories to be sited where needed.
“Traditionally, any one of those things can cause projects to fail,” Grimstone said. “What we haven’t traditionally been very good at in this country is clearing barriers to investment.”
With Nissan in the bag, Grimstone traveled up and down the country from Birmingham and Manchester to Glasgow and Teesside in a bid to launch that “auto Renaissance” and draw in more foreign investment.
In less than a year, the Office for Investment has helped attract deals worth around £5bn, including Ford’s £230m investment in Halewood, Stellanti’s £100m stake in Vauxhall’s Ellesmere Port plant, more than £1.7 billion in private funding for Britishvolt and a £2.5 billion investment in Bentley Crewe.
The threat of a trade war is threatening auto investment as Britain tries to tear up a post-Brexit trade deal with Northern Ireland, Ford UK chairman Tim Slatter said this week.
Slides and briefings prepared for a meeting between Grimstone, SMMT’s Hawes and senior officials from various carmakers last May listed Brexit as a key “cost and competitiveness” issue alongside the COVID-19 facing the industry.
“I’m aware the sector continues to face headwinds as it recovers from COVID-19 and adjusts to the new trading arrangements with the EU,” Grimstone told participants at that meeting, according to the documents. “While the U.K. business environment is relatively competitive,” he said, citing the barriers, “I do not underestimate the challenge of landing these investments.”
A report at the meeting laid out a long list of “Brexit issues”, including rules of origin for the UK-EU trade deal, increased customs and border costs, the Northern Ireland protocol and freight delays.
The Brexit trade deal “just about works for us,” said Hawes. But “don’t get me wrong,” he adds, “it’s still time-sensitive.”
It is unclear whether British manufacturers can phase out foreign components in their batteries to meet European timetables.
“Ultimately all electric vehicles sold in Europe will have to have a European-made battery,” said Hawes. The Brexit trade deal will tighten British electric battery supply chains within Europe.
Further complicating matters, he says, is that “when the U.K. comes to trade with other countries, then you’ve got to agree rules of origin” all over again.
The UK is currently in trade talks with countries including India, Mexico, six Gulf states and the 11-nation CPTPP trade bloc that must embrace UK supply chains in Europe. Each of these transactions sets its own rules for where components are produced.
“When you’re doing a deal with an automotive-producing nation,” said Hawes, “they’re used to high levels” of local content — usually 55 percent of the vehicle’s production for their own domestic industry. “So that’ll be their starting point” in trade talks, he said.
Yet this “is too high for Electric Vehicles to clear,” Sam Lowe of consultancy Flint Global has warned. “This is due to the battery of an Electric Vehicle accounting for a significant percentage of the final value of an electric vehicle (35 to 45 percent), and invariably being sourced from outside the EU (usually Asia).”
Tatiana Clouthier, Mexico’s trade chief, has confirmed that the interests of domestic manufacturers will be a key part of Mexico’s electric vehicle trade talks.
Mexico specializes in developing parts. “We integrate them into the vehicles not only in Mexico, but we sell parts to almost everywhere in the world. And that’s what we are looking for.”
India and its growing middle class of millions also provide a huge market for British carmakers.
Yet what Indian Prime Minister Narendra Modi wants most is to be able to manufacture cars in India under his Make in India policy, Suresh Surana, founder of the consultancy RSM India, explained. He’s worked closely with Indian auto manufacturer Tata Group, which owns Jaguar Land Rover, currently Britain’s top car maker.
India already slaps a 150 percent tariff on imported finished electric vehicles and steep duties on components. It keeps Elon Musk’s Tesla out of the country.
Indian negotiators will oppose lowering tariffs on finished electric vehicles and components in trade talks, a former British diplomat who has been stationed in India for nearly a decade said. “Made in India is just that,” they said.
Surana said it is possible that some parts will be manufactured in the UK and India and exchanged between the two to produce complete vehicles, while intellectual property rights are transferred. “Over-dependency on China is becoming very clear,” he said. “India can be used as a regional hub for component manufacturing and also, of course, for the local market in India.”
British manufacturers “may want to use British know-how and British components to build manufacturing in India,” said investment minister Grimstone, citing Tata Motors, which owns Land Rover, as a beneficiary.
“A trade deal which allows freedom of flow of that is really important,” he adds.
Nonetheless, Jaguar Land Rover already plans to produce a new range of electric vehicles in Slovakia. Britain has also lost out to Berlin in winning Musk’s Tesla factory.
“If they’re building a very large factory in Berlin, it’s very unlikely they want to build another very large factory in Britain — it’s just the dynamics of it,” Grimstone said.
“Tesla has competitors,” he points out. “We’re always looking at the potential of new entrants coming into the market.” Yet newcomers like Lucid and Rivian don’t have any revenue, just the promise of success.
Manchester and Birmingham are both vying to attract more investment. The Conservative Mayor of the West Midlands, Andy Street, has even teamed up with landowners in a “local joint venture” to prepare the site for an electric car gigafactory.
“What we’re trying to do is to move that on as rapidly as we can by doing the planning application in advance,” he explained, in the hopes of attracting a large industry that once “provided for the majority of the exports for this region in Britain.”
Are there more investments like Nissan’s coming? “I hope so,” said Hawes. “We need more.”
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