Delay to introduction of new rules of origin is a window of opportunity

Sheena Patel is a Director and Automotive sector specialist at Vendigital. She recently shared her insights with Automotive Logistics.

The proposed delay to the introduction of the new rules of origin is a window of opportunity for UK and European carmakers to accelerate all-electric vehicle (EV) design programmes, strengthen supply chains and put the right technical support and capabilities in place to meet demand in a fast-growing market.

The new rules of origin are part of the EU-UK Trade and Cooperation Agreement (TCA), which was provisionally enforced in May 2021 to aid customs officials in determining the nationality of a product so that tariffs can be applied appropriately. If the planned introduction of the new rules had gone ahead on January 1, 2024, there could have been disastrous consequences for the UK’s and Europe’s developing EV industries as they scale to meet projected demand in an intensely competitive global marketplace.

In the UK and Europe, industry bodies have been campaigning to delay the new rules of origin for some time because of a lack of EV battery capacity, which could force them to import battery packs and other high-value components from outside of the EU. Under the new rules, this shortfall in domestic battery capacity could add as much as £3,600 to the price of a UK-made EV sold in Europe; leading to an end product that lacks competitiveness.

Even with the proposed three-year delay to the introduction of the new rules of origin, EV makers in the UK and Europe are concerned that scaling to meet growing demand in a market that is increasingly saturated with competitively priced, products from Asia, which has been leading the way in EV technology, is going to be extremely challenging. To secure market share, EV makers and OEMs in the UK and EU must develop local ecosystems, which allow them to source key and critical products and materials, including lithium-ion batteries, domestically as far as possible.

Based on predictions by the Faraday Institute, ten UK-based gigafactories will be required by 2040 to meet demand for lithium-ion batteries and to support consumers as they switch to EVs ahead of the ban on the sale of new internal combustion engine (ICE) vehicles in 2035. However, currently there are plans for just two gigafactories in the UK – one to support Nissan’s EV production in the northeast of England and another to supply JLR’s production plants in the Midlands. As each gigafactory will require a minimum of 18 months to build and approximately 15 months to reach full production capacity, it is clear that a massive supply shortfall is looming and urgent intervention is needed to support the UK’s position in the electromobility industry.

Achieving the right price point for a new mass-market EV is essential as consumers seek products that meet their expectations in terms of performance and convenience of use, while also representing value for money. As a result, many EV makers and OEMs are employing design-to-cost principles, with the aim of developing consumer-oriented solutions that are both scalable and commercially viable. The proposed delay in the introduction of the new rules of origin has granted the industry much-needed time to accelerate R&D programmes and tap into domestic software, engineering and electronics capabilities as they do so. For example, one key area of focus for innovators is reducing the weight of EV battery packs to improve vehicle performance and allow more space and load capacity to facilitate a switch to solid-state batteries in the future. Extra time to develop such solutions now, at this critical point in the industry’s lifecycle, could enable UK-based EV makers to develop products with a competitive edge.

As well as allowing time to onboard production capacity, delaying the new rules of origin would create a window of opportunity to strengthen the EV industry’s end-to-end value chain by sourcing products and raw materials more efficiently, streamlining production processes and gearing up the aftermarket to maintain and service the end product. For example, people with the right skillsets will be needed to calibrate and manufacture EV equipment and design software programmes to make the most of onboard connectivity. As supply chains become more localised and the industry’s footprint expands, demand on the value chain will increase; meaning more people with the right skills will be needed. This shouldn’t be overlooked and the industry and government must invest in upskilling and reskilling programmes now to ensure that the value chain can meet demand in this fast-growing sector of the economy.

Investment in EV infrastructure is another key area of concern for EV makers and their supply chains. With the industry gearing up for growth, investment in charging infrastructure must keep pace with demand. Earlier this year, a new trade association called ChargeUK was established to spearhead plans to invest £6 billion into installing and operating new EV charging infrastructure by 2030. Working collaboratively with the UK Government and other stakeholders, the quicker that ChargeUK can get this activity underway the better in terms of delivering a boost to the industry at a critical time.

With so much to do and so little time to do it, the delay to the new rules of origin will be a source of relief for EV makers and their supply chains. However, there is no time to waste, and a wider review of trading rules may yet be needed to support these evolving industries. The UK government must also focus on investing more widely in areas such as training and the end-to-end value chain development to facilitate the sector’s sustainable growth.