The UK needs to do more to encourage investment in its automotive sector to combat the “fierce” competition from the US and European Union, the head of the sector’s trade body warned. Current low levels of investment in parts of the supply chain put the sector’s long-term viability at risk.
Speaking ahead of Thursday’s government energy policy update, the Society of Motor Manufacturers and Traders’ (SMMT) chief executive, Mike Hawes, said the scale of incentives being offered to electric vehicle (EV) and battery manufacturers elsewhere could “suck up investment from the rest of the world”, citing Volkswagen’s (DE:VOW3) decision to prioritise a new battery plant in North America that could attract almost €10bn (£8.8bn) in assistance.
Although free trade advocates would argue that the market should decide where battery capacity should be built, “it’s not a level playing field”, Hawes said.
More than £11bn has been invested by manufacturers in UK EV production so far, and around £10bn of the £24bn in export revenues the industry generated last year were through sales of EVs, according to an SMMT report published earlier this month. However, investment in the batteries that are the bulkiest and most expensive components of EVs is lacking.
Although Envision AESC – a joint venture between Japan’s Nissan, NEC and Tokin Corporation – began work on its second gigafactory in Sunderland in December 2022, it will only have the capacity to supply batteries for around 100,000 cars a year. The Britishvolt factory in Blyth was meant to be building capacity to supply another 300,000 cars, but after the company collapsed in January its assets were bought by Australia’s Recharge Industries, whose owner told the BBC that it will initially focus on producing batteries for stationary energy storage instead. Current UK capacity is 2 gigawatt hours (GWh), enough for 40,000 base-level Tesla (US:TSLA) Model 3s, and the SMMT reckons the UK can get to 11GWh in just two years, although recent bidding wars could divert investment.
Jaguar Land Rover’s parent group, Tata Steel, is seeking over £500mn from the government to commit to building a European battery plant in the UK rather than Spain, according to the Financial Times. A company spokesperson declined to comment.
The US is charging ahead
The incentives being offered to battery and EV makers under the US’s $369bn (£299bn) Inflation Reduction Act have triggered more than $40bn of investments since the act was passed in August last year, according to RBC Capital Markets. Tax credits of up to $35 per kilowatt hour per locally-produced cell helped to convince one manufacturer to build three sites, which could allow it to claim up to $4.5bn in tax credit per year until 2030, the bank said.
Fearful of the potential investment drain, the EU published its Green Deal Industrial Plan in February, which will allow countries to “match the aid received for similar projects by competitors located outside the EU”.
Both Europe and the UK “have no choice but to move in line” with the US, said Paul Betts, managing director of RBC Capital Markets. Without sufficient battery capacity, the UK runs the risk that its automotive supply chain “is no longer economical”, he added.
The post-Brexit trade agreement signed with the EU currently allows tariff-free trade, but with rules of origin on cars tightening next year, and in 2027, there is a danger that not enough of an EV could be deemed to be locally produced. This could mean EVs made in the UK are subject to a 10 per cent tariff when exported to the EU (and vice versa), Hawes said.
“So the very vehicles – on both sides of the channel – [that] you’re trying to encourage people to buy will actually become 10 per cent more expensive,” he said. Given vehicles from major car-producing nations such as South Korea enjoy free trade access, there may need to be an easing of current rules until battery manufacturing capacity improves, he argued.
He acknowledged that the UK “can’t compete” with the scale of subsidies on offer from the US, but said the government could do to make the country more investable, by improving planning laws, fast-tracking project approvals and streamlining funding applications.
The UK market is less appealing to carmakers
The UK market remains less appealing to global carmakers post-Brexit, though. The European president of BYD, the Chinese company that is the biggest EV maker by volume, told the Financial Times earlier this month that the UK didn’t even make the long list for its first European factory, given the smaller marketplace.
Although the UK has several plants producing “a decent number of vehicles”, anyone looking to invest the several billion pounds required to build a gigafactory may need to secure agreements from more than one UK-based manufacturer to make their investment worthwhile, said Ian Fletcher, a principal analyst with S&P Global Mobility.
“So, a BMW Group may need to share with a Toyota or a JLR to really justify that – unless you can find another outlet for those batteries, such as standalone storage.”
Another factor holding back investment in gigafactories is the fast-moving nature of the underlying technology, said Tony Gott, executive chair of Saietta (SED), an Aim-listed manufacturer of drive systems for EVs.
Developments in solid-state battery technology could eventually lead to them replacing the lithium-ion batteries currently being used, meaning that those weighing up spending billions on gigafactories fear the prospect of them becoming quickly outdated, he argued.
“I think that's causing some investment pausing, just understanding which technology to follow,” he said.
