Find out the latest news and trends in UK automotive – and how they affect you.
Our experts explain how the UK’s zero-emission vehicle mandate will apply in practice, what the US Inflation Reduction Act means for the battery supply chain, and why the UK is presenting China with challenge in supplying battery-grade lithium hydroxide to the electric vehicle market. Plus, our tips on creating business plans that help navigate an industry in flux.
In order for the country to meet the strict emissions target set out by Boris Johnson in October 2021 – that all new vehicles sold in the UK should have zero tailpipe emissions by 2035 – the government is proposing that the minimum ZEV target for new cars sold in the UK is 22% of their new vehicles sold in 2024, including 10% of vans, and 100% by 2035.
Source: Department for Transport
Source: Department for Transport
If manufacturers don't meet their targets, they'll be penalised £15,000 per car and £18,000 per van. However, if they exceed their ZEV targets (over 22% and 10% in 2024), excess ZEV mandate (ZEVM) allowances will be permitted and can be used in the future or traded freely to other manufacturers at any price.
Between 2024 and 2026, the government is suggesting that there could be some flexibility during the initial phase of implementation. If manufacturers miss the vehicle percentage targets in these initial years, they may be permitted to borrow limited number of ZEV allowances from future periods; however, it appears that there's no flexibility on achieving the target after 2026. The level of borrowing will change across 2024 to 2026, declining each year: 7% of the target may be covered by borrowing in 2024, 50% in 2025 and 25% in 2026. Furthermore, any borrowing must be repaid with 3.5% annual interest to maintain carbon savings. All deficits must be paid by the end of 2027.
The ZEV mandates will apply to all manufacturers responsible for the 'type approval' of cars or vans registered in the UK. Those vehicle manufacturers selling fewer than 2,500 vehicles per annum in the UK will be exempt from the targets until the end of 2029. Special purpose vehicles (SPVs) are also exempt from the ZEV mandate, given the challenges involved in producing zero emissions SPVs. To qualify as a ZEV, it's proposed that a vehicle must emit no CO2 or any other targeted greenhouse gas emissions at the exhaust, have a minimum range of 120 miles according to the worldwide light vehicle test (WLTP) standards, and meet certain minimum warranty conditions to ensure a consistent and predictable consumer experience.
Each year all participants must satisfy compliance in the following ways:
UK new non-ZEV sales activity- credits ≤ allowances
|
|
|
2024 |
2025 |
2026 |
2027 |
|
Borrowable fraction of trajectory |
75.0% |
50.0% |
25.0% |
0.0% |
|
|
cars |
ZEV trajectory |
22.0% |
28.0% |
33.0% |
38.0% |
|
Borrowing allowance share |
16.5% |
14.0% |
8.3% |
0.0% |
|
|
Minimum in-year compliance |
5.5% |
14.0% |
24.8% |
38.0% |
|
|
Vans |
ZEV trajectory |
10.0% |
18.0% |
22.0% |
33.0% |
|
Borrowing allowance share |
7.5% |
9.0% |
5.5% |
0.0% |
|
|
Minimum in-year compliance |
2.5% |
9.0% |
16.5% |
33.0% |
|
Source: Department for Transport
The most recent consultation period took place between March and May 2023. A summary of the responses, including the next steps will be published by 24 August 2023. More detailed information can be found here.
For more insight and guidance, get in touch with Owen Edwards.
The US Inflation Reduction Act became law in August 2022. The objective of the act is to drive record emission reductions by investing USD 370 billion into clean energy technology, manufacturing, and innovation over the next 10 years. It's also intended to lower consumer costs, strengthen supply chains, accelerate investment, and create jobs across the US's green economy (The White House, January 2023).
The Inflation Reduction Act covers more than 20 consumer and corporate tax incentives and includes billions of dollars in the form of loans and grants.
This is what the incentives could look like - with an example tailored to new electric vehicles:
Source 1: Transport Environment, January 2023
Source 2: The White House, the Inflation Reduction Act Guidebook, January 2023
Source 3: Internal Revenue Service US, June 2023
Note 1: The example excludes loans and grants available as part of the the Inflation Reduction Act
Note 2: The information here is high-level for illustration purposes. For details around specific incentives and eligibility criteria please refer to The Inflation Reduction Act Guidebook
We've seen an influx of companies increasing their investment in the US. For example, Ford secured a USD 9.2 billion loan from the US government to build three battery factories (under BlueOval SK Joint Venture) and will be also eligible for subsidies.
Since incentives are provided throughout the supply chain, batteries and EVs in the US will become more price-competitive compared to China and other countries, with the aim of targeting an increased share in the US, as well as the European and UK markets.
In addition, companies from the same supply chain will be able to co-locate in the US, further growing the industry. This is demonstrated by BlueOval SK manufacturing batteries next-door to Ford’s EV assembly site.(Bloomberg, June 2023)
To date the EU has invested billions of euros into the battery supply chain.
Nevertheless, given the magnitude and clear bankable subsidies, grants, and loans offered under the Inflation Reduction Act, European companies are looking for additional support and simplification of the funding process to prioritise European expansion. Northvolt AB has considered postponing building its third plant in Germany and focusing on one in the US, to benefit from the support from the Inflation Reduction Act. This has forced German authorities to pledge c. EUR 1 billion in the form of loans and subsidies to retain the focus on the German plant.
The EU’s potential response to the Inflation Reduction Act could see the creation of a European Sovereignty Fund financed via new joint debt issuance from the European Commission. However, there's minimal clarity on the progress made since September 2022 when it was first announced.
The key question is timeliness given the momentum in the industry as Tesla, Inc. and Italvolt S.p.A. are now considering investing in the US while Chinese giants enter the European market. How long will it take for the EU to match the Inflation Reduction Act and streamline the complex, bureaucratic procedures regarding funding?
The UK government committed £1 billion in October 2019 through the Automotive Transformation Fund and other smaller amounts towards research and development, and manufacturing and recycling of batteries via Faraday Battery Challenge and Advanced Propulsion Centre.
The amount of funding available, the complex and lengthy process of obtaining the funding and the Rules of Origin regulations make it harder for the UK players (vs the US) to establish themselves in the automotive market. This is what causes the mixed signals being sent to the market by the likes of Power by Britishvolt Limited and Cornish Lithium Plc. There is optimism for increased funding opportunities and support for the EV supply chain following the General Election next year, but will it be too late?
Nevertheless, the UK remains one of the key research and development hubs for the battery supply chain. For example, UK Battery Industrialisation Centre (UKBIC) and its £36 million Flexible Industrialisation Line, plays a key role in the development, testing and production of future technologies. Likewise, Warwick Manufacturing Group and Coventry University offer high-spec facilities to enable innovation. The existence of such facilities reduces capital expenditure requirements for individual research and development facilities, making UK an attractive location and one of the leading research countries for EVs.
For more insight and guidance, get in touch with Oliver Bridge and Galyna Tkalenko.
The demand for electric vehicles (EVs) is asking questions of global capacity for building the batteries required to run them. In response the UK and EU are building enough gigafactories to produce over 700 gigawatts hours of batteries with over 50 site being announced already. These gigafactories will require over 400,000 tonnes per annum (tpa) of lithium hydroxide.
There are now several lithium mines around the UK, but after extraction lithium also needs to be refined. China currently dominates the refining industry - producing 90% of lithium hydroxide, while Europe's capacity is zero. This will change soon, as the largest processing facility in Europe is being built in Teesside, North East England. The facility will process lithium hydroxide produced in Australia and other countries.
Sam Quinn shared more details about Tees Valley Lithium's (TVL) operations and why they believe we have the potential to become a centre of lithium-refining as well as production.
"By using the electrochemical processing route and powered by 100% certified green energy, our facility will be one of the lowest-carbon Lithium refining projects in the world.
At full scale, our USD 300 million state-of-the-art facility will produce 96,000tpa of low-carbon battery-grade lithium hydroxide, equating to 15% of Europe’s projected demand.
We'll process high-value, low-carbon lithium sulphate feedstock from Port Hedland Lithium, and can also process technical grade lithium carbonate from South America, both for conversion to battery-grade Lithium Hydroxide.
TVL will therefore uniquely link the world’s largest lithium producers in Western Australia with the world’s fastest growing EV markets in the UK and Europe."
"TVL continues to move at pace to meet the burgeoning demand for EV’s across the UK and wider Europe. Within less than two years, TVL has, among other things:
- Secured a world-class ‘plug-and-play’ site at the Wilton International Chemicals Park
- Delivered strong economics and engineering in its Class 4 Feasibility Study
- Received CAM-verified approval for its product
- Signed MoUs with global trading house Traxys, Weardale Lithium, bp and Altilium Metals
- Received full planning approval from Redcar and Cleveland council, upgrading the site to shovel-ready status
- Appointed Wave International as lead engineering and technology partner
- Agreed the terms of a 30 years lease at the Wilton International Chemicals Park
- Identified multiple potential sources of feedstock with late-stage discussions progressing well
As the demand for lithium in the UK continues to rise, TVL will be the largest producing lithium hydroxide refinery, producing 96,000 tpa of battery-grade lithium hydroxide."
"In the near term, we're looking to conclude conversations with feedstock providers, which will then lead to financing, development and construction, with initial production scheduled for 2025.
Looking further ahead, we've capacity for expansion at the Wilton International Chemicals Park and the opportunity to replicate the business model across other critical minerals."
"In our view, the UK has the capability to become a lithium-refining powerhouse.
Across the UK, there are several plug-and-play chemical parks located on world-class freeports, over 50GW of offshore wind power being installed, a highly skilled ex-steel and chemicals industry workforce, and direct access to EV customers throughout Europe.
For us, establishing the complex chemical refining part of the lithium supply chain in the UK makes enormous sense.
Additionally, a number of other nations require lengthy regulation processes or suffer from geographical restrictions (or both). The UK has the benefit of fast-moving approval process and a government with an appetite to grow new enterprise.
As the world diversifies away from China, the UK has the opportunity to become the new lithium refining hub to supply battery-grade product to Europe and beyond."
For more insight and guidance, get in touch with Owen Edwards.
There continues to be major supply chain challenges across the automotive sector because of an unexpected increase in demand for new vehicles, with the pandemic and the war in Ukraine continuing to disrupt global trade, and create shortages in certain raw materials. OEMs are starting to increase production volumes in order to better utilise their production capacity and meet this increase in demand, which is in turn putting pressure on the tier one to four parts suppliers.
Furthermore, the introduction of new technology is also causing disruption as OEMs need to “keep up” with consumer demand and gain access to the required technology advancements. Tech skills and capabilities are likely to be in short supply as the automotive sector will struggle to meet the salary packages available in the tech sector. OEMs will need to consider partnerships with established technology providers as battery electric vehicles gain in popularity and there's increased demand for connected autonomous vehicle technology (automotive upstream).
At the same time a number of OEMs are also impacting dealers (automotive downstream) with the introduction of the agency model and in time we expect an oversupply of new vehicles moving back to the pre-COVID days of tactical pre-registrations and lower gross profit margins.
In addition, both upstream and downstream automotive companies are having to manage the ever-rising energy costs and mounting pressure to define clear actions to improve long-term sustainability. It's likely that emissions legislation will continue to develop in the UK and globally, putting additional pressure on businesses to increase monitoring and improve reporting. A notable regulation is the Climate Related Financial Disclosures (CRFD) regime, which requires covered businesses to include eight sustainability-related disclosures within their annual reports. It's already a requirement of such businesses to report Scope 1 and 2 emissions under the Streamlined Energy and Carbon Reporting (SECR) scheme, but it's now best practice to begin measuring and including Scope 3 emissions.
But what's really keeping everyone awake at night? In the immediate short term, it continues to be the UK’s plan to require by law that car manufacturers meet sales targets for zero-emissions vehicles (ZEV) and the potential impact of rising inflation and interest rates.
Although still under consultation, the new government ZEV mandate, proposes targets on OEMs for the sale of zero-tail pipe emissions vehicles in the UK:
And with the potential to act against this mandate, the looming changes to the EU rules of origin and accompanying 10% tariff (currently expected in 2024) could potentially make electric vehicles more expensive and lead to more consumers considering ICE vehicles.
Against this backdrop, and as debt is becoming more and more expensive, businesses are rethinking future direction, in particular the approach / access to funding and target markets. We've seen a rise in the number of automotive businesses that are seeking government funding. With the ATF and eRGF funds being the most prevalent, companies are relying on this grant funding not only to relieve some of the financial burden of their growth plans, but also open the door to other forms of financing that would be inaccessible.
With this in mind, there's more pressure on automotive businesses of varying shapes and sizes, up and down the value chain, to develop a robust business plan to support them in securing investment, to formalise their transformation plan ahead of a sale or to communicate the cost-cutting activity needed and ensure the business has sufficient cashflow to survive the challenging economic environment to come. In this regard, you need a business plan that sells the strategic vision and future value potential of your business, as well as communicating its financial and non-financial goals, while also being able to stand up to any detailed third-party due diligence (for example by banks, shareholders/ investors, the government etc).
While every business plan will necessarily be different, some of the challenges are relatively consistent. Here are eight tips we have collated from our experience of supporting the preparation of robust and credible business plans:
1 Have a clear timeline
Consider a meaningful timeframe that aligns to your commercial strategy (three to five years is common).
2 Align your forecasts to your story
Develop integrated financial forecasts (not just a profit and loss account) that align with your story and can help you to identify where actions need to be taken within your plan, to prove your direction and purpose to key stakeholders: OEMs, National Sales Companies (NSC) banks etc
3 Explain your assumptions
Provide context to your robust revenue and cost assumptions through market and operational insight. For example, the size of the global market demand, your competitive position within that market, your global footprint, and your available capacity to facilitate growth.
4 Position yourself in the macroeconomic environment
Reference macroeconomic changes to the extent that they may impact your business. As an example, a business plan that doesn't mention inflation or relevant new legislation will lose credibility on first impression, OEMs and NSC will be considering these points when setting vehicle volume and parts supply targets.
5 Showcase your management
Highlighting what makes them effective in their leadership will give readers more faith that the plan will be executed.
6 Identify opportunities in ESG
Consider the wider ESG impact of your business, such as how your approach may give you a competitive advantage, open up new investment channels or more generally show credibility through awareness of future requirements on your industry (for example, green borrowing for wholesale vehicle stocking plans, potentially making your borrowing cheaper).
7 Leverage support
Utilise third-party independent support where you do not have a proven track record, where you need external data as proof points, or when you want to test the plan.
8 Make it user-friendly
Think about the aesthetics as this document should sell the strategy, future direction of the business and management’s ability to deliver. Substance is better than style of course but the communication of your plan needs to be digestible and impactful.
Maximising future efficiency and being due diligence ready through complete and effective referencing and sourcing of all information. Where possible, build an agile financial forecast model with integrated balance sheet, profit and loss and cashflow, that allows you to easily adjust and update assumptions, and undertake sensitivity analysis and scenario modelling.
There's no single way to collate a business plan, but the biggest factor in success will be it's cohesiveness. Committing your vision, financial performance targets, and the plan for execution in a coherent document can be a complex task, but the above guidance can help you get it right.
For more insight and guidance, get in touch with Natasha Teeling.
