New challenges for the UK automotive industry
Nord France Invest recently collaborated with Bob Hancké (Professor at the London School of Economics) and his business partner Laurenz Mathei (co-founder of PEACS consultancy) to produce an overarching report on the impact of Brexit on UK companies. The report focuses in particular on the car manufacturing sector, which is exposed not just to Brexit challenges, but also to broader challenges related to Covid, and Electric Vehicle (EV) Revolution. This article summarises the broad risks to the UK car manufacturing sector, and the solutions that the Hauts-de-France region (France’s largest car manufacturing region, and the UK’s closest neighbour) could provide to UK companies.
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A report written by Nord France Invest, Bob Hancké, Associate Professor in Political Economy at the London School of Economics and Political Science, and Laurenz Mathei, Founding Partner and Managing Director at the consultancy cabinet PEACSDownload the full report
Car manufacturing: the Brexit challenge
The automotive sector illustrates how the combination of Brexit and the shift to electric vehicles forces radical changes in supply chains. The Rules of Origin requirements embedded in the Trade and Cooperation Agreement (TCA) between the UK and the EU are crucial in this regard.
In January 2021, a six-year transition period started, with a gradually increasing percentage of ‘originating’ components (i.e. produced in the UK or EU) for exports of cars from 40% (as of 2021) to 55% (as of 2027) of the final value. If car manufacturers do not respect these thresholds, their exported cars in both directions will face a 10% tariff. Yet more than 80% of all UK-made vehicles are exported, and since more than half of exported UK cars go to the EU, the cost of Rules of Origin will disproportionately be felt in the UK. Not only does the EU export proportionately considerably less to the UK, intra-EU trade is not subject to these Rules of Origin requirements, which makes them, all other things equal, more competitive.
The Brexit challenge to the UK car manufacturing sector is therefore about restructuring supply chains, potentially shifting from non-European to European suppliers of car parts, to avoid the hit of tariffs at any stage of the car manufacturing process.
Car manufacturing: the Covid challenge
In addition to the dramatic sanitary impact of the Covid pandemic, the virus also had a very heavy impact on the global economy and global supply chains. Surprisingly, the main problem for car manufacturers is less about demand for cars (especially as households in developed economies accumulated substantial savings, which they can use to buy a new car), but more about physical limits and constraints to car production.
The chips shortage is probably the main constraint here, as it led several car manufacturers to slow down car production in 2021. But there are also broader impacts: the stark rise in the price of raw materials is also taking its toll on car manufacturing processes and costs. With essential metals seeing their price radically increase (eg. Aluminium prices doubled in two years), this is bound to have an impact on overall car prices, but also on manufacturers of car parts all along the supply chain.
Last but not least, the substantial disruptions in global maritime trade flows have hit all trade-dependent sectors, including cars, eg. with container prices between Asia and Europe being multiplied by 10.
Car manufacturing: the Electric Vehicle challenge
All these challenges are further exacerbated by one broad and structural trend: the shift to electric vehicles, as part of the public effort to accelerate the green transition.
Both the UK government and the EU are proposing a de facto ban of new diesel and petrol cars by 2030 and 2035, respectively. Against the background of this shift to battery-powered electric vehicles (EVs), the Rules of Origin requirements imply dramatic changes in supply chain and the organisation of manufacturing.
Very few of the complex, high-value added batteries that power EVs are made in the EU or UK at the moment. But they can represent up to half of the EV value, which means that most other parts have to be domestic (UK or EU) in origin to meet the current generous Rules of Origin conditions. The relative value of batteries is likely to remain high: newer, stronger and fast-charging batteries will remain expensive, especially because we are only at the start of innovations in batteries. Additionally, the continuing shortage and price increases of semiconductors – which are important parts for consumer electronics and EVs (and their batteries) – will put further pressure on British automobile manufacturers in their quest to
comply with Rules of Origin requirements, especially as these components are mainly produced in Asia.
Therefore, car manufacturers risk being squeezed in the years ahead by high battery prices (thereby representing a high percentage of final EV value) and rising Rules of Origin requirements. In order to avoid this, and potentially large-scale job destructions, it is essential for the UK to vastly expand its battery-production capacity. Some large-scale Gigafactory projects have already been announced, with startups such as Britishvolt and InoBat Auto, large conglomerates such as Samsung and LG, as well as car manufacturers Nissan and Ford.
Building enough battery-production capacity to preserve domestic car manufacturing added value: this is a tremendous challenge for all European countries with large car-production sectors. But this challenge is made even more pressing for the United Kingdom by Rules of Origin requirements. In addition, a recent report warns that the planned annual battery production capacity of 45 GWh from 2030 is almost 100 GWh short of the forecasted demand in 2040 (140 GWh).
Despite this process being riddled with uncertainty, there seem to be three basic possible scenarios.
- No or low progress in the battery supply chain by 2027: higher Rules of Origin requirements bite and EVs built with non-UK-originating batteries are subject to a 10% tariff when exported to the EU.
- Medium to strong progress in a UK battery supply chain: On the contrary, even if there is not a full delivery but at least credible progress in battery production capacity, UK carmakers could temporarily import batteries from the EU to complement the remaining domestic shortage. Alternatively, the UK government could ask for an extension of the Rules of Origin transition period, but that depends on EU goodwill.
- Goal met with successful delivery of battery supply chain: In the best-case scenario, the UK succeeds in setting up a large-scale domestic battery supply chain, UK-based car manufacturers can continue to export cars tariff-free to the EU and the British automobile industry continues to exist. However, even in this best-case scenario, UK-based producers might face a cost-disadvantage in EU exports relative to continental manufacturers, as – due to the Rules of Origin requirements, which don’t apply to intra-EU exports – they have to use a minimum level of locally-sourced (and therefore usually more expensive) parts.
Next steps: Hauts-de-France, your gateway to Europe
Given the scale of these challenges, and the need for UK companies in the car manufacturing supply chain to potentially restructure their operations to make them fully future-proof, having a foot inside the single European market may help. The solution that would allow to maintain smooth trading conditions with the Single Market would be having a footprint on the continent. With that in mind, EU countries benefiting from a seafront offer the possibility to maintain an easy-to-cross and efficient connection with the UK; considering that proximity is a necessary asset for that type of development operations.
And of all locations, why chose Hauts-de-France, the closest European region to the UK?
Why is the automotive industry thriving in Northern France?
First and foremost, the automotive sector is historically rooted in the region’s DNA. It is France’s first automaking region and also a leading player in Europe.
Facts and figures to keep in mind:
- 1 out of 3 cars produced in France are produced in Hauts-de-France
- 40% of the national engine and gearbox production is concentrated there
- 2 out of 3 European manufacturers are present within a 600km radius
- 3 globally known manufacturers are located there: Toyota, Renault and Stellantis
The Region’s greatest asset is undoudtedly its strategic location. Olivier Silva, Plant manager at the Maubeuge Construction Automobile plan for Renault-Nissan told us in an interview:
“The big advantage is geography. If you draw a 300-km circle around our plant, it covers 110 million people—mostly city dwellers. Having energetic officials at local, metropolitan and regional levels also makes a big difference, because they fight to preserve manufacturing jobs and support our projects.”
Battery production is one condition to the development of electric vehicule subsidiary. The Hauts-de-France Region is the only territory to have three gigafactories within a 100km radius.
The Hauts-de-France region is the leading European host region for international industrial projects (according to EY). The industry is deeply rooted in the region’s DNA. Its workforce is particularly loyal, skilled and with competitive wages (the average wage for a skilled operator in the industrial sector is 27% lower than in other European countries). More than 50.000 workers are immediately available for a production site.
With new challenges emerging for the UK automotive industry, such as the requirements of Rules of Origin, the Green Transition or labour shortages, maintaining a smooth and efficient access to your markets is a top priority. As such, having a footprint on EU soil appears to be the easiest solution to keep reaching European consumers efficiently. Nord France Invest is the economic promotion agency for the Hauts-de-France Region and can help you in your development project free of charge and confidentially.
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