Can Britain really be an electric vehicle powerhouse?

LONDON — Britain wants to become a powerhouse for electric car manufacturing — but Brexit is making that harder.

As the global race to build the vehicles of the future hots up, stalwarts like Jaguar Land Rover, Ford, VW and BMW are clamoring to compete with Elon Musk’s Tesla and a host of Chinese giants.

The U.K. hopes to win this “auto renaissance,” Investment Minister Gerry Grimstone, who heads the little-known Office for Investment connecting No.10 Downing Street with the trade and business departments, told POLITICO.

Grimstone’s task is to help Britain win at “one of the most globally competitive sports that there is” — attracting foreign investment. He eyes electric cars as a route to re-establishing the U.K. “as one of the leading auto manufacturers in the world.”

Yet one of the biggest obstacles to investment in the sector is the set of rules dictating how much of a product must be made inside Europe in order to qualify for lower tariffs when U.K. manufacturers trade with the rest of the EU.

It’s a post-Brexit snag some producers say they could do without.

Because most electric car batteries — at least the parts — are made further afield, it will be tough for manufacturers to keep their vehicles within the strict limits needed to make exporting to Europe competitive while at the same time driving up exports globally under the U.K.’s new trade deals.

The Brexit trade pact London signed with Brussels in 2021 sets limits on the proportion of electric vehicle components that can be made outside of Europe for manufacturers to benefit from tariff-free trade.

These limits will fall from 60 percent initially to 45 percent by 2027. Unless manufacturers comply with these limits, their cars could become prohibitively expensive and the investment simply won’t pay off for manufacturers.

Britain might be out of the EU, but it can’t escape this crucial trading relationship. European countries remain the biggest market for British car manufacturers, and 55 percent of cars manufactured in Britain ending up being exported to the EU.

Mike Hawes, chief executive of lobby group the Society of Motor Manufacturers and Traders (SMMT), said the U.K. needs to “transform a lot of its production “into electrified competence,” a process which won’t happen quickly and is “not easy.”

Whether Grimstone can get carmakers to build electric vehicles in Britain, Hawes said, “depends on whether the underlying conditions for investment are competitive.” China is currently number one in the world for EV manufacturing, with the U.S., Japan, and Korea all strong performers too. “So there is quite a lot of competition.”

Wooing Nissan

Grimstone has already had one clear win.

On the night of June 30 last year, he celebrated early success in his bid to transform the industry with “a dinner up in Sunderland” hosted by senior representatives of Nissan before they and Chinese electric battery maker Envision announced their £1 billion stake in Sunderland electric vehicle production the following day.

Prime Minister Boris Johnson and Business Secretary Kwasi Kwarteng even turned up in Sunderland, a key political battleground in the North East of England, to celebrate.

For the deal to happen, three parties “needed to be brought to the finishing line simultaneously,” Grimstone recalled — Nissan, Envision and Sunderland City Council.

But the race to seal the deal started months earlier, with Grimstone heading up regular weekly meetings between the three, and “a tracker which said who had to do what to get this done.”

Flexing his deal-making muscles from his merchant banking days, Grimstone helped drive government grants and assistance, while Sunderland City Council finalized a micro grid and moving electricity pylons so that the factory could fit where it needed to.

“Traditionally, any one of those things can cause projects to fail,” Grimstone said. “What we haven’t traditionally been very good at in this country is clearing barriers to investment.”

With Nissan in the bag, Grimstone traveled up and down the country from Birmingham and Manchester to Glasgow and Teesside in a bid to launch that “auto Renaissance” and draw in more foreign investment.

In less than a year, the Office for Investment has helped attract some £5 billion worth of deals, including Ford’s £230 million Halewood investment, Stellantis’s £100 million stake at Vauxhall’s Ellesmere Port plant, more than £1.7 billion in private funding for Britishvolt and Bentley’s £2.5bn investment in Crewe.

Brexit bumps

The government might not like to talk about it, however, but one of the things standing in Grimstone’s way is Brexit.

Ford’s U.K. chair, Tim Slatter, said this week that threats of a trade war over British moves to tear up post-Brexit Northern Ireland trade arrangements threaten automotive investments.

Slides and briefing notes prepared for a meeting between Grimstone, the SMMT’s Hawes and senior representatives from a host of carmakers last May list Brexit as a key “competitiveness and cost” issue facing the industry along with COVID-19. The documents ere obtained by POLITICO through freedom of information law.

“I’m aware the sector continues to face headwinds as it recovers from COVID-19 and adjusts to the new trading arrangements with the EU,” Grimstone told participants at that meeting, according to the documents. “While the U.K. business environment is relatively competitive,” he said, citing the barriers, “I do not underestimate the challenge of landing these investments.” 

A presentation given during the meeting contains a laundry list of “Brexit issues” including the U.K.-EU trade deal’s rules of origin, increased customs and border costs, the Northern Ireland protocol and freight delays.

The Brexit trade deal “just about works for us,” said Hawes. But “don’t get me wrong,” he adds, “it’s still time-sensitive.”

It’s not clear that U.K. manufacturers can phase out foreign components in their batteries to meet the European timeframes either.

“Ultimately all electric vehicles sold in Europe will have to have a European-made battery,” said Hawes. The Brexit trade deal will tighten British electric battery supply chains within Europe.

Further complicating matters, he says, is that “when the U.K. comes to trade with other countries, then you’ve got to agree rules of origin” all over again.

What about the rest of the world?

Britain is currently in trade talks with countries like India, Mexico, six Gulf nations and the 11-nation CPTPP trade bloc which have to accept British supply chains in Europe. Each of those deals will set their own rules for where components can be produced.

“When you’re doing a deal with an automotive-producing nation,” said Hawes, “they’re used to high levels” of local content — usually 55 percent of the vehicle’s production for their own domestic industry. “So that’ll be their starting point” in trade talks, he said.

Yet this “is too high for EVs to clear,” Sam Lowe of consultancy Flint Global has warned. “This is due to the battery of an EV accounting for a significant percentage of the final value of an electric vehicle (35 to 45 percent), and invariably being sourced from outside the EU (usually Asia).”

Mexico’s trade chief Tatiana Clouthier has already confirmed that the interests of domestic producers will be a key part of her country’s calculation in trade talks when it comes to EVs.

Mexico specializes in developing parts. “We integrate them [into the vehicles] not only in Mexico, but we sell parts to almost everywhere in the world,” she told POLITICO in May as the U.K. launched Mexico trade talks. “And that’s what we are looking for.”

India and the tens of millions of people that make up its growing middle class also offer a vast market for U.K. carmakers.

Yet what Indian Prime Minister Narendra Modi wants most is to be able to manufacture cars in India under his Make in India policy, Suresh Surana, founder of the consultancy RSM India, explained. He’s worked closely with Indian auto manufacturer Tata Group, which owns Jaguar Land Rover, currently Britain’s top car maker.

India already imposes 150 percent tariffs on the import of a completed electric car and steep levies on components too. It’s kept Elon Musk’s Tesla out of the country.

Indian negotiators will be resistant to lowering tariffs on both finished electric vehicles and components in trade talks, said a former British diplomat who was posted there for nearly a decade. “Make in India is all about that,” they said.

There’s an opportunity, said Surana, for some parts to be manufactured in both the U.K. and India and swapped between the two to make a finished vehicle, along with the transfer of intellectual property. “Over-dependency on China is becoming very clear,” he said, and “India can be used as a regional hub for component manufacturing and also, of course, for the local market in India.”

British manufacturers “may want to set up their manufacturing in India using British know-how, British components,” said Investment Minister Grimstone, pointing to Tata Motors, the Land Rover owners, as a firm that would stand to benefit.

“A trade deal which allows freedom of flow of that is really important,” he adds.

Hoping for the next Tesla

Yet Jaguar Land Rover is already looking to manufacture a new range of EVs in Slovakia. Britain also lost out to Berlin in efforts to woo Musk to set up a Tesla factory.

“If they’re building a very large factory in Berlin, it’s very unlikely they want to build another very large factory in the U.K. — it’s just the dynamics of it,” Grimstone said.

“Tesla has competitors,” he points out. “We’re always looking at the potential of new entrants coming into the market.” Yet newcomers like Lucid and Rivian don’t have any revenue, just the promise of success.

Manchester and Birmingham are both vying to attract more investment. Andy Street, the Conservative Mayor for the West Midlands, has gone as far as working with landowners in a “local joint venture,” Grimstone said, to prepare a site for an electric vehicle gigafactory.

“What we’re trying to do is to move that on as rapidly as we can by doing the planning application in advance,” he explained, in the hopes of attracting a large industry that once “provided for the majority of the exports for this region.”

Are there more investments like Nissan’s coming? “I hope so,” said Hawes. “We need more.”