July 10, 2021
F.Five years ago, right after the UK voted to leave the European Union (EU), Nissan, a Japanese automaker, warned that the future of its Sunderland plant was in doubt. On July 1, the company announced a £ 1 billion ($ 1.3 billion) investment in a new battery plant that will secure the future of the factory. And on July 6th, Stellantis, another engine maker, announced it would invest £ 100 million in the production of electric vans at Ellesmere Port. More news is expected from BMW and Toyota shortly. The trade deal that the UK signed with the EU in December 2020 – and staggering amounts of government money – make bosses think less about sticks and more about the benefits of post-Brexit regulation.
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Before the vote, it was all about the British automotive industry. Production reached a two-decade high in 2016 at over 1.8 million units. In terms of vehicles per employee, the UK had risen to become one of the most productive car manufacturers in Europe by 2016, with around 160,000 employees producing almost 11 vehicles each year, compared to an EU average of less than eight. Brexit puts this at risk due to the difficult cross-border transport of parts.
A modern car is the result of a complex, international production process. It typically has around 3,000 components. For UK assembled cars, only about 40% of these components are made domestically. The crankshaft crosses the canal three times in a BMW Mini before it is installed in Oxford. Around four out of five cars made in the UK are exported, more than half of them to the EU. Nissan opened its Sunderland plant in 1986, attracted in part by the prospect of labor liberalization, but also by easy access to Europe. Others followed, and since MG Rover’s failure in 2005, all volume manufacturers in the UK have been foreign-owned.
While the UK-EU Trade and Cooperation Agreement (TCA) did not meet all the industry’s hoped for, it came close. Trading can usually be continued without tariffs or quotas. Customs controls and fees lead to some frictional losses, but are low compared to the impending tariffs of 10% according to the rules of the World Trade Organization if no agreement had been reached.
The requirements for “rules of origin” are more difficult. These aim to prevent companies from importing goods from a third country and re-exporting them as if they were domestically produced. In terms of tariffs, the TCA treats the UK and the EU as a single bloc, but excludes countries that both have a trade agreement with, such as Japan. To avoid tariffs, the proportion of value components originating outside the UK or the EU must be reduced to 45% for most cars by 2027. Manufacturers who sell in the EU and have supply chains as far as Asia therefore have a choice: switch from the UK or double it. They make different calls. Nissan invests in the UK; Honda will close its Swindon plant next year.
All of this coincides with an industry-wide reinvention as automakers switch to electric vehicles. Batteries, like the engines of gasoline-powered cars, are expensive. “If you don’t get the batteries domestically, I don’t see any possibility of complying with the regulations,” says a production manager. Great Britain currently lacks a so-called “Gigafactory” – a word coined by Elon Musk of Tesla – to mass-produce them.
Nissan’s planned new plant, a joint venture with Envision AESC, a Chinese company, will be able to produce 9 gigawatt hours (GWh) annually through the mid-2020s, enough to power 100,000 cars. By 2030, the capacity could reach 25 GWh. Britishvolt, an independent consortium of battery manufacturers, plans to have 30 GWh capacity by the end of the decade. But both together would not reach the 60 GWh that the society of automobile manufacturers and dealers estimates will be needed by 2030 if as many cars are to be built then as today.
In the upheaval, the British government sees an opportunity to influence car manufacturers’ deliberations on where to invest. The “Super Deduction,” a particularly generous temporary tax break announced in the budget in March, will allow companies to reduce their tax liabilities by up to 25p for every pound of investment this year and next. Billed as a pandemic recovery measure, it is better viewed as a “huge subsidy to cover the cost of Brexit-adjusting supply chains,” says one accountant. Cash is also splashed. Nissan and its partners are receiving around £ 100 million direct subsidies for the new Gigafactory, in addition to the £ 80 million from Sunderland City Council to build an energy grid that connects it to wind farms and solar parks. Such measures would have been possible while the UK was in the EU – but may not have been necessary.
Power play
For those who hoped Brexit would mean less bureaucracy than more handouts, it is rather gratifying that climate change targets and new technologies are used as a pretext. Automakers believe that the UK government will be more agile and proactive in regulating electric and autonomous vehicles. European regulators who have to hold the ring between 27 countries always move slowly. In addition, they are heavily influenced by the major German automakers for whom reinventing the industry poses a serious threat. Industry leaders point out that while the UK has already committed to banning the sale of new diesel and gasoline cars by 2030, the EU is still only debating a ban from 2035. Big auto companies are pushing to go even slower.
Overall, Brexit is likely to continue to have a negative impact on the UK economy and reduce potential growth. But subsidies, tax breaks and fewer barriers to innovation make life outside the bloc more comfortable for car manufacturers than they previously feared. ■
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This article appeared in the UK section of the print edition under the heading “Pedal to the metal”