What’s at stake in the EU/UK battery deal

The warning from Stellantis, that Britain’s trading rules with the EU could threaten the viability its electric van factory at Ellesmere Port, has opened one of the most complex headaches in the auto industry: the rules of origin.

Because the UK has failed to attract international investment in battery technology, British plants will depend on imported batteries for many years.

Even after Brexit, the wider auto industry, including JLR, Nissan and Toyota, relies on exports to Europe. These companies worry that any action that reduces their vehicle sales could make their factories less competive and put them at greater risk.

The rules of origin are common conditions of trade agreements to ensure that the goods qualify for tariff-free market access by having enough locally manufactured content.

The UK and EU have agreed to a Trade and Cooperation Agreement that will allow cars to be sold to each other with no tariffs. This includes engines, materials and components.

The battery of an electric vehicle is a large part of its value, and many come from China or South Korea.

To avoid tariffs, an electric vehicle sold across the Channel must contain 45 percent of the battery pack from Europe or the UK. However, the entire battery must consist of 60 percent of the battery pack from Europe or the UK to be considered “local”. In 2027, these levels will increase to 65 percent for batteries and 55 percent for vehicles.

This concession allows the battery industry to grow on both sides.

Many UK car plants were built to export cars to Europe. More than half of the UK-built vehicles are exported to Europe.

Stellantis, the company that owns Vauxhall’s plants in Luton, and Ellesmere Port argues that the price increases outside Europe in particular in battery materials mean that it won’t be able to comply with the new rules, which puts the plant at risk.

The company was created by merging Opel, Peugeot, and Fiat Chrysler. It has many plants in Europe and makes the same electric vans that Ellesmere Port does in Spain and Portugal. The company is planning to build a factory similar to that in South Africa.

Experts in the trade suggest that it may be possible to maintain its UK factory on domestic sales only if the company can secure batteries.

The company currently imports its batteries from China’s CATL. This makes it difficult to meet the threshold requirements.

Other automakers are less affected by the rules. Nissan produces batteries in the UK through Envision while BMW’s Electric Mini imports batteries from Germany.

JLR’s parent company Tata Motors, which is close to making a decision on whether or not to build a battery plant in Spain or UK, is less dependent on European sales because it exports more cars to China or the US, both of whom do not have trade agreements with the EU and UK.

Toyota, Britain’s second largest carmaker, has not yet introduced battery-electric models to Europe and will not do so before the middle of this decade.

The risk remains substantial. Nissan’s submission to the MPs of the Business Select Committee warned that it was vital to comply with the rules of origin for UK batteries required to export EVs to Europe and the rest of world. It also warned of the need to create a supply-side demand necessary to justify establishing an EV battery supply and manufacturing presence in the UK.

Both EU and UK auto manufacturers are lobbying the European Commission to delay the implementation of tougher thresholds on originating content. However, the Commission has not yet yielded to the pressure.

The Commission also views the rules of origin in a way to encourage EU automakers to invest in EU batteries plants, partly to the detriment of the UK sector, which has been struggling to attract investment.

Since 2019, however, imports of EVs built in the EU from China have increased. EU carmakers are worried that adding a 10% tariff to their vehicles will cause them to lose market share in the UK.

Insiders from both sides claim that despite industry concerns, the commission is reluctant to create a precedent in renegotiating the UK/EU Trade and Cooperation Agreement. However, the agreement does allow the EU and UK to change the rules of origin by making a joint decision. This can be done without a ratification procedure.

Un official of the commission said that Brussels “was not open to changing the rules of origin”.

Even so, industry leaders believe that Brussels could, in the eleventh-hour, give manufacturers additional time to adapt. This would avoid a confrontation between London and the EU at a time when relations with London have been improving under Prime Minister Rishi Sunak.

Nusrat Ghani, UK Business Minister, told the UK Parliament on Wednesday that the ministers had “productive conversations” with their counterparts in Europe and would “continue making strong representation” regarding the issue.

Sam Lowe, a trade expert with the consultancy Flint Global, stated that it was evident that neither EU nor UK manufacturers have the capacity to meet 2024 rules of Origin requirements.

He said: “I think that the EU will eventually agree to some kind of extension. A scenario where combustion engine cars are allowed to trade without tariffs, but EVs are not, is absurd. But the decision can be made late so as to avoid reducing the onshoring effect.”

The UK imports more electric cars from Europe than they sell in the market. However, the impact of tariffs will be greater on UK carmakers than EU carmakers.

Many battery-driven Volkswagens, Peugeots and Fiats imported from mainland Europe are among the UK’s leading electric vehicle markets.

Models that don’t use European batteries are subject to a 10% tariff if the rules do not change.

Industry leaders are concerned that further price increases will significantly reduce demand for electric vehicles.

The UK will also introduce a mandatory electric vehicle sale mandate next year. This will penalize companies who do not reach their sales quotas.

Industry executives privately say that if electric vehicles become more costly, carmakers will find it harder to reach the targets. These start at 22% in 2024 and increase every year. They may also reduce their petrol and hybrid model offerings to compensate.

Concerns are being raised about the upcoming wave of Chinese electric vehicles from brands like BYD, Great Wall and Geely. These models are likely to cost less than European ones, and the gap will grow if EU cars face increased tariffs.

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