Hit the brakes

Today's newsletter is a 6 min read:

• 🚗 Hit the brakes: Why is the UK car industry struggling?
• ➕ Plus: Green subsidies trouble, Burst Balloons, Indonesia's Booming Economy and changes at the Bank of Japan.

🤿 Deep Dive

Hit the brakes

In brief:

• The UK's car industry is having a tough time keeping up with the competition, but a few right moves could make it a leader in the electric vehicles (EV) market.

The Downfall

Six years ago, the UK was a major player in the auto industry with 1.7 million cars rolling off production lines. Come 2022, the country had the worst year since 1956, only 775,014 cars were produced in British factories (ouch!).

Why is it struggling?

The last few years haven't been easy. The industry has had to deal with the impacts of COVID, and the shift to electric cars which decreased demand for its non-EV production. Plus Brexit added lots of trade-related paperwork and economic uncertainty which reduced the allure of the UK auto industry.

The UK is also particularly vulnerable as it's mainly used by giant global companies (e.g. Toyota) as their European production outpost. Once things turn less attractive (like they did with Brexit), these companies have no problem taking their business elsewhere in Europe.

Can this be fixed?

That's the big question, and the answer is...maybe.

Batteries are key to EV production. Therefore, for global car manufacturers to choose the UK as a place to make electric vehicles, the country needs a strong battery industry. Currently, the UK only has one gigafactory (in Sunderland) while over 40 gigafactories are already up and running or planned in Europe.

• Can't the UK just import these batteries? Sure, importing batteries is not impossible but it is more costly and adds friction to the production process. Having a strong local battery industry would provide the UK's industry with greater efficiency and resilience.

Check out the competition

It's not just internal problems the UK has to deal with. Other countries, such as France, Germany, Italy, and Spain, have more support from their governments and clearer investment and industrial policies. Making them more attractive solutions for international producers who want the best deal on European production.

How does this Impact Law Firms and their Clients?

💼 What does this mean for law firm's clients?

Battery producers

• As global firms, these clients are investing millions in this industry. This means they need confidence that this is the best market to invest in. At present, they're not getting that confidence and they're not seeing the signs of a strong battery industry which would make them pick the UK over other European countries.
• Concerns: These clients may be concerned about the lack of government support in comparison to other countries such as France, Germany, Italy, and Spain. They may also be worried about the complexities of trade post-Brexit.
• Opportunities: They won't ignore the UK completely as it has some long-term advantages such as cheap and clean energy from the North Sea. They will also be open to government investment which may be needed to push the UK back up the production rankings.

Car and Engine Manufacturers

• These clients will be keeping an eye on developments in the UK whilst looking to shift production to other European countries, and back production of battery factories.
• Concerns: These clients may be concerned about the EU's deadline for stopping the sale of internal-combustion-engine cars, and the requirement of 55% of components in exported cars to originate in either the UK or Europe by 2027 to avoid tariffs. They will also be concerned about the lack of battery production in the UK which could leave any of their car factories without these essential parts.
• Opportunities: Car manufacturers will be looking to invest in electric battery producers to get a direct line to an essential piece of kit for the production of EVs. This is precisely what Volvo and Volkswagen have done by backing battery startup Northvolt in Sweden.

Governments

• These clients are looking to establish dominance over the growing EV market. No one wants to be left without strong EV production as car manufacturing shifts to this new dimension.
• Concerns: Governments (like the UK) will be concerned about large car manufacturers leaving the country to establish operations elsewhere in Europe. This leads to less economic productivity, and fewer jobs available which bumps up unemployment. It is also a bad sign for other industries who may see this as a sign that the UK is no longer the place to be in and who may consider other solutions too.
• Opportunities: Other governments both in Europe and around the world, will see this as a great chance to boost their support of EVs to attract manufacturers, and boost economic activity and job availability. We have discussed in previous newsletters how the US has pushed for this strategy via its Inflation Reduction Act (you can read more about this here). This strategy was the reason for electric van start-up Arrival to switch its strategy from focusing on the UK to developing a foothold in the US market.

⚖ Which legal departments would this impact?

Commercial

This department would likely see an increase in work due to the shift to electric vehicles (EVs) and the formation of new partnerships and joint ventures between carmakers and battery manufacturers. They would advise companies on the negotiation and drafting of key contracts.

Examples of work:

• Advising car manufacturers on joint venture agreements drafting and negotiation in relation to building gigafactories for EV battery production. For example, Nissan and Envision now have a £1bn joint venture to build one in Sunderland.
• Advising on the variation of supply and manufacturing agreements in factories from standard cars to EV ones. For example, Stellantis, owner of Vauxhall, is converting its plant at Ellesmere Port to produce electric vans.

International Trade

With Brexit and the addition of paperwork for cars and parts crossing the English Channel, the international trade law department would see an increase in work advising on trade and customs issues. They would advise companies on complying with trade regulations, handling tariffs, and navigating trade disputes.

Examples of work:

• Advising a UK-based car manufacturer on the compliance of its exports to the EU with the new rules-of-origin requirements under the post-Brexit free-trade deal for cars.
• Assisting companies with the import of EV batteries into the UK. Under rules-of-origin requirements negotiated as part of the post-Brexit free-trade deal for cars, 55% of the value of components in cars exported from Britain to Europe will have to originate in either place by 2027 to avoid 10% tariffs.

Environmental

With the shift towards EVs and the growth of battery production, this department would see an increase in work due to the need for companies to comply with environmental regulations and standards. They would advise companies on meeting their environmental obligations and managing the environmental impact of their operations.

Examples of work:

• Advising Ford on its £150m commitment to make EV components at Halewood, ensuring compliance with environmental regulations.
• Assisting Nissan and Envision in the environmental assessment and permitting process for their £1bn "gigafactory" in Sunderland.

Mergers & Acquisitions

As global firms make decisions on where to produce EVs, the M&A law department would see an increase in work advising on the acquisition of existing battery production facilities or the establishment of new ones. They would advise companies on the due diligence process, the negotiation of terms, and the execution of M&A transactions.

Examples of work:

• Advising Tata on its acquisition of an existing battery production facility for Jaguar Land Rover to make EVs in Solihull from 2025.
• Assisting a startup in the acquisition of a battery production facility in the UK for the manufacture of EV batteries.

📰 News Spotlight

🌍 Subsidies Trouble

• France and Germany's economy ministers will ask the US to stop trying to lure green investment away from Europe with aggressive tactics. They hope to address EU concerns about Biden's climate bill and push for better cooperation.

💼 Burst Balloon

• The US is sending divers to retrieve what they believe is spy equipment from a Chinese balloon shot down off South Carolina. The government expects to find advanced photography equipment and other sensors.

💥 Indonesia's Booming Economy

• Indonesia's GDP rose by 5.3%, the fastest annual rate in 9 years, thanks to the end of COVID restrictions, a rebound in tourism, and a global boom in commodity prices. However, growth slowed in the last quarter of 2022 due to weakened demand for exports like palm oil.

💰 Yen Tumbling: Who will lead the Bank of Japan?

• The Japanese government is said to be considering Bank of Japan Deputy Governor Masayoshi Amamiya to succeed Haruhiko Kuroda as the head of the central bank. The deputy government spokesman later denied the report, but the currency remained weaker, indicating that some investors believe it to be true.