UK carmakers after Brexit: a race to attract battery production

From Tokyo to Paris to Detroit, the headquarters of the world’s major carmakers let out a collective sigh of relief when Britain signed its last-minute deal with the EU on Christmas Eve.

The dreaded prospect of tariffs, which would have crippled the industry and jeopardised Britain’s fragile smattering of auto plants, had been avoided.

“From an auto industry point of view it’s the best deal that we could wish for,” says Johan van Zyl, European chief executive of Toyota, the world’s largest carmaker which has two UK plants. “It was a very good Christmas present.”

But in the silence following the sound of champagne corks, the realisation has dawned across the UK that the real work — of gradually replacing traditional engine plants with battery factories — is only just beginning.

While one existential threat was swerved, another one was waiting just behind it. With carmakers expecting to shift completely away from petrol over the coming two decades as emissions rules tighten, countries with vibrant auto sectors are scrambling to attract the growing battery-making industry needed to protect their existing factories.

The Brexit deal has skirted the “cliff edge” of tariffs, but it leaves the UK plants facing higher costs at exactly the time they need to become more competitive to attract work for new models including electric vehicles.

The need under Brexit to revamp supply chains to comply with local content rules, the requirement for fresh export certificates and the uncertainties of delayed parts imports are just some of the other barriers now facing manufacturers with UK sites.

“I suppose shooting yourself in the foot is better than shooting yourself in the head,” says Ian Henry, who runs the forecasting and data group AutoAnalysis and advises several carmakers on production strategies. “There’s no gain from this, just a reduced loss.”

Extra costs

Ever since the opening of Nissan’s Sunderland site in 1986 triggered a wave of international investment, Britain’s mass-market car industry has been built on the cornerstone of European access.

“Build in Britain, sell in Europe” was the sales pitch trotted out by trade envoys who travelled the world drumming up business. Last year, four out of five UK-made cars were exported, with the majority going to the EU.

While cars shipped across the channel will avoid tariffs if they contain enough parts from the UK and Europe, the “non-tariff” barriers are likely to pour sand into the once-pristine gearbox of the industry’s “just in time” delivery model.

The changes have spawned snaking queues at ports as lorry drivers fumble to produce the right paperwork, while several carmakers including Jaguar Land Rover and Nissan have been forced to rely on expensive air freight to ensure parts arrive at their plants on time.

“I would not characterise this as teething difficulties, because it is now the system,” says Mike Hawes, chief executive of the Society of Motor Manufacturers and Traders, the industry’s trade body.

While the estimated additional cost of around 2 per cent pales next to the 10 per cent tariffs vehicles would have faced under a no-deal Brexit, it all weighs down the competitiveness of Britain’s plants, making it harder for them to win future work the next time a new model is launched.

“We do have to overcome some of those costs,” says Mr Hawes. “We have got to go out and promote [the idea that] the UK auto industry remains a good place to invest.”

Investment in new projects, which typically runs at around £2.5bn annually, fell as low as £590m in the years after the Brexit vote, as international headquarters delayed or diverted spending. Planned models were pulled, and Ford and Honda announced plant closures, though stressed they were not influenced by the impending Brexit.

Last year saw the new investment figure rise to £3.3bn according to SMMT calculations, helped in part by an ambitious plan from start-up Britishvolt to build a £2.6bn battery gigafactory at Blyth in north-east England.

Projects such as this are critical to sustaining the future of the UK’s plants. While carmakers are used to shipping parts for traditional cars across the world, the emergence of battery vehicles bolsters the argument for localised production.

“Ideally you want your battery plant very close to your manufacturing plant, because of the weight,” says Andy Palmer, Aston Martin’s former chief executive who launched Nissan’s electric Leaf car when at the Japanese carmaker. Batteries for the electric Jaguar I-Pace, which is made in Austria, weigh close to a tonne once packaged for transport, while even batteries for a Nissan Leaf weigh around 300kg each.

To secure plants therefore, the UK needs to attract gigafactories. “It’s existential,” says Mr Palmer, who points out all manufacturers will be seeking this decade to set up plants and supply chains for electric cars.

“Everywhere else in the world is trying to attract battery production, and everywhere else is offering incentives. If the UK doesn’t, the UK loses. It’s not a philosophical discussion, it’s one country against another.”

Content concern

While the race for battery production continues, carmakers themselves are considering their next decisions on UK sites. The Brexit agreement brokered between the UK and the EU grants hybrids and electric vehicles a crucial grace period of six years so carmakers can rejig their supply chains in the face of rising global pressures to meet carbon neutrality targets.

While several UK-built hybrid and electric models today avoid EU tariffs, they will need to increase the amount bought from local suppliers in order to avoid penalties by 2027.

“If you raise the bar of local content for electrified vehicles, that means that if I want to avoid tariffs, I have to increase local content to sell the car, which means I have to invest in the UK for electric components, which means I have to sell those cars in the UK at the end of the day,” Carlos Tavares, chief executive of Vauxhall’s owner Stellantis, told the FT last month.

The company — formed by the merger of PSA and Fiat Chrysler which was completed this year — will decide within weeks whether to invest further in its Ellesmere Port plant in north-west England, he said.

The UK government’s decision to phase out the sale of new petrol-only cars by 2030 means the company must decide whether to make battery models at the site.

“The questions are therefore what is going to be the affordability of UK-manufactured EVs, and how many of them can I sell if they are less affordable, and what is going to be the size of the UK market,” Mr Tavares said.

Many of the answers ultimately “depend on the UK government’s willingness to protect some kind of auto industry in their country”, he added.

Sensitive decisions

For carmakers from Japan — the country with the largest investments in the UK automotive industry — the Brexit deal comes at a critical moment, as a global push for carbon neutrality forces a shift towards electric vehicles that will require a fundamental rethink of how their supply chains are built around key markets worldwide. 

In the 1980s, Margaret Thatcher’s promises of a gateway to Europe convinced Toyota, Nissan and Honda to open their plants in the UK as a route to achieving their global ambitions. But investment decisions by more than 300 Japanese manufacturers operating in the UK going forward will be far more complex than simply expanding their European footprint.

With Europe competing against China to become a major market for gasoline-electric hybrids and electric vehicles by the mid-2030s, Japanese manufacturers will need to strengthen their European supply chains for batteries and other components for hybrid systems and reduce their existing reliance on factories in Japan.

The decisions will be politically sensitive, with Japanese manufacturers already alarmed by the speed of electrification worldwide. The country’s automotive parts industry will be hit hard by the shift to electric vehicles, which uses fewer components than petrol cars. Even if Japanese carmakers are to build these vehicles closer to Europe, they would still want to keep core technologies and jobs at home. 

“Japan has historically exported to overseas products that are manufactured at domestic plants, and we would like to maintain some elements of this,” energy minister Hiroshi Kajiyama told the Financial Times.

The shifting of supply chains will need to be made before the grace period given to hybrids and electric vehicles expire in six years, and Japanese manufacturers face tougher rules to use local components for their cars.

Parts coming into the UK from Japan are not counted as “local” under the UK-EU deal, unlike parts that are imported from the EU.

Mr van Zyl at Toyota says 95 per cent of the cars made at its Derbyshire site avoid tariffs because they are hybrid models with significant Japanese componentry. Hybrids currently face a lower threshold for local parts, which will begin rising in 2024 until 2027, when they will be treated the way that petrol models are today.

Toyota is paying a small sum in tariffs on the few non-hybrid models it exports to the EU, Mr van Zyl adds, but at least the company can now see the targets it needs to hit by 2027.

“Now that we know the rules, that is what we need to plan towards and achieve that, we can plan accordingly,” he says. “That makes it more palatable for the industry we have time to achieve it.”

Big decisions needed

Still, Japanese officials and the country’s auto executives privately admit that the actual window is tight considering the long development cycle of vehicles. Each model is typically manufactured for seven years, with investment decisions about the next iteration taken several years in advance.

“There are actually only two or three years left, since decisions for post-2026 investments need to be made by around 2023,” says one government official.

Honda, which is due to shut its Swindon plant in south-west England in the summer as part of a global winnowing of facilities, is already paying tariffs on the Civic cars it exports to the EU.

Nissan has already responded to the changes by announcing it will move production of the 62kWh battery used by the long-range edition of its electric Leaf car from the US to the UK. This avoids the model facing tariffs under the local content rules.

The fact that Nissan already has a battery factory close to its Sunderland site is a key advantage as it plans for the future, company executives believe.

“We have a state-of-the-art plant which has already been making EV cars for the last 10 years,” Nissan’s chief operating officer Ashwani Gupta told the FT. “There is no reason it will not be sustainable if we have competitive localisation of the car and battery.”

Sunderland, the UK’s largest plant and one of the most efficient factories owned by any carmaker in the world, became a lightning rod in the years running up to Brexit, with Nissan saying its export model would be “jeopardised” by tariffs.

Following the deal, Mr Gupta said none of Nissan’s models made at the site — aside from the long-range Leaf — face tariff penalties.

Nissan got “everything they wanted” from the deal, according to a person close to the business. “The albatross is finally gone.”

Nissan has an advantage when selling in the UK over rivals that import, some of whom have already raised prices. But the carmaker is uniquely positioned in the UK. The Sunderland plant is its single most critical manufacturing base in Europe especially as the Japanese carmaker streamlines its operations and relies more heavily on its alliance partner Renault to lead functions on the continent.

“Now that the Sunderland issue has been cleared, Nissan can focus on putting its European operations back on track,” says one person close to the company’s board.

Toyota, in contrast, has other options in mainland Europe, where it operates five vehicle plants. As the group weighs its post-2026 options, people close to the company say a critical part of the equation will be how it can maximise the benefits from both the EU-Japan trade deal and the UK-Japan trade deal. This week, Britain also formally applied to join the Trans-Pacific Partnership.

These pacts should allow Japan’s largest carmaker to maintain its two plants in the UK particularly, these people said, as sales of hybrids and EVs in Europe grow. But the company is expected to be cautious in expanding investment in the UK, considering the additional costs related to border checks and other Brexit-related paperwork.

“The tariffs are important but other additional costs cannot be underestimated,” says one of the people close to Toyota. “It won’t be acceptable to shareholders for the company not to consider shifting production to the EU from a competitiveness viewpoint.”

Additional reporting by Robin Harding in Tokyo