Batteries for Electric Vehicles: Stellantis Warning Highlights Complex Post-Brexit Rules of Origin Quotas

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THE warning by Stellantis that Britain’s trade rules with the EU threaten the viability of its electric van factory in Ellesmere Port has reopened one of the car industry’s most complicated headaches: rules of origin .

The UK’s failure to attract international investment in batteries means UK factories will be dependent on imported batteries for years to come.

The wider automotive industry, which includes JLR, Nissan, BMW and Toyota, depends on exports to Europe even after Brexit. These companies fear that anything that penalizes their vehicle sales will make their factories less competitive and more risky in the future.

How do rules of origin for vehicles work?

Rules of origin, sometimes abbreviated as “ROO”, are a common condition of trade agreements to ensure that goods have enough locally manufactured content to qualify for duty-free access to a market.

Under the UK’s post-Brexit trade and cooperation agreement with the EU, cars sold side to side must have 55% of their ‘contents’ – whether engines or other costs such as materials or components – sourced from the EU or the UK. in order to gain duty-free access to the other’s market.

Electric vehicles initially received a concession because the battery represents such a large part of the vehicle’s value and many still come from China, South Korea or Japan.

However, from January 2024 around 45% of an electric vehicle must come from the UK or EU to avoid tariffs when sold across the Channel, but 60% of a battery must come from Europe or UK for the whole battery to be eligible. as “local”. These levels increase to 55% for vehicles and 65% for batteries in 2027.

The concession was set up to allow fledgling battery industries to develop on both sides of the Channel.

How do the rules affect UK carmakers?

Many British car factories, from Nissan in Sunderland to Toyota’s site in Derbyshire, have been opened to export vehicles to mainland Europe. Around four in five cars built in the UK are sold overseas, more than half of them in the EU.

Stellantis, owner of Vauxhall’s factories in Luton and Ellesmere Port, says price rises outside Europe, particularly for battery materials, mean it will no longer comply with upcoming rule changes, which puts the site at risk.

The company, assembled by combining Opel, Peugeot and Fiat Chrysler, has an extensive network of factories across Europe and currently manufactures the same electric vans as Ellesmere Port in Spain and Portugal. It is also planning a similar factory in South Africa.

This means it will be able to meet some of the EU demand without exporting from the UK, and may be able to support its UK factory on domestic sales only if it can secure the batteries. , suggest trade experts.

The company is currently importing batteries from China’s CATL, making it more difficult for the company to comply with the higher threshold requirements.

Other car manufacturers are less exposed to the rules. Nissan manufactures batteries in the UK with Envision, while BMW’s electric Mini uses batteries imported from Germany.

JLR, whose parent company Tata Motors is about to decide whether to set up a battery factory in Spain or the UK, is less dependent on European sales as it exports more of its cars to the US or China , which have no trade agreement with the EU. or UK.

Toyota, the other major British automaker, does not yet manufacture battery-electric models in Europe and does not expect to do so before the middle of the decade.

However, the risk is still significant. In its submission to MPs on the Business Select Committee, Nissan warned: “It is vital to meet the rules of origin requirements for UK battery content required to export electric vehicles, not just to Europe. but also to the rest of the world, and to create the demand on the supply side that is necessary to justify the establishment of an EV battery supply chain and battery manufacturing presence in the UK .

Will the EU agree to a delay?

The European Commission is under pressure from European and UK carmakers to delay imposing stricter thresholds for originating content, but has so far not bowed to industry pressure.

The commission also sees rules of origin as a lever to encourage European carmakers to invest in European battery factories, partly to the detriment of British industry, which is struggling to attract investment in the sector.

However, the UK accounts for nearly a quarter of EU-built electric vehicle exports, but since 2019 the number of imports from China has been increasing. European carmakers fear that if a 10% tariff is added to their vehicles, they will lose more market share in the UK.

Despite industry concerns, insiders on both sides say the Commission is in principle reluctant to set a precedent by renegotiating the UK-EU trade and cooperation agreement, although the agreement allow the rules of origin to be changed by a joint EU-UK decision. , without the need to continue the ratification process.

A commission official said Brussels was “not open to changes to the rules of origin”.

Still, leading industry experts believe Brussels could, at the last minute, give manufacturers more time to adapt. It would also avoid a political confrontation with London, just as post-Brexit relations have improved under Prime Minister Rishi Sunak.

UK Business Secretary Nusrat Ghani told MPs on Wednesday that ministers ‘had productive conversations with our counterparts in the European Union’ and said they would ‘continue to make a strong representation’ on the issue.

Sam Lowe, trade expert at consultancy Flint Global, said it was clear neither European nor British manufacturers had the domestic manufacturing capacity to meet the requirements of the 2024 rules of origin.

“At the end of the day, I think the EU will agree to some form of extension – a scenario where combustion engine cars can be traded duty-free but EVs cannot is absurd – but the decision could be made quite late in the day so as not to weaken the desired offshoring impact,” he said.

How will this affect the UK car market?

While the UK imports far more electric vehicles from Europe than it sells on the market, the overall impact of tariffs on UK carmakers will be greater than on European carmakers.

The UK is one of the main markets for electric vehicles in Europe, with many battery-powered Volkswagen, Peugeot and Fiat models imported from the continent.

If the rules are not relaxed, models that do not use European batteries will be subject to 10% tariffs.

Electric vehicles are already more expensive to buy than their gas-powered rivals, and further price increases will dampen demand significantly, industry executives fear.

Additionally, the UK will introduce an electric vehicle sales mandate from next year, penalizing companies that fail to meet their quotas.

If electric vehicles become more expensive, it will be more difficult for automakers to meet the targets, which start at 22% from 2024 and increase each year, and could see them reduce their offers of gasoline or hybrid models for compensate, according to industry executives privately. .

The coming wave of Chinese electric vehicles from brands such as BYD, Great Wall and Geely are already causing concern. These are likely to be cheaper than European models, a gap that will widen if EU-made cars are subject to additional tariffs.