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RoO means that a certain percentage of an Internal Combustion Engine (ICE) vehicle’s value must be made from locally sourced components. If the vehicle is built in the UK, 55% of parts must come from the UK and vice versa for EU vehicles. If the figure is less than 55% of the total, a 10% import tariff per vehicle will be applied. This section of the regulations is particularly significant following Brexit, as EU parts in a British-built car do not count.

RoO has applied to ICE vehicles since 2021 and manufacturers in the UK and EU have complied quite well thanks to their well-established, localised supply chains.

EVs are a different matter altogether. As a technology and associated supply chain that’s still developing, manufacturers source components wherever they can be found. Local supply sources for the materials and components required to build an EV are generally thin on the ground.

The new phase of RoO is due to come into force on 1 January 2024. It will mean that 45% (versus 40% as it is currently with this number increasing to 55% in 2027) of an EV needs to originate in the country of origin to remain tariff-free for export, while 60% of the battery pack will also need to come from the UK or EU. Those who will be most affected are firms exporting to Europe and those importing to the UK. The fact is EV batteries are expensive to make and so represent a high parts-value percentage. For example, it’s estimated that the 62kWh pack fitted to the UK-built Nissan Leaf costs more than £7500 to build¹. In summary, the RoO changes will add, potentially, an additional 10% to the cost of manufacture, in an industry already facing numerous challenges.

These rules have caused much disquiet among manufacturers and their associations, several of whom, including the Society of Motor Manufacturers and Traders (SMMT) and the European Automobile Manufacturers’ Association (ACEA), are lobbying alongside EU bodies and OEMs to keep aligned and push the legislation back to 2027².

Localised supply chains needed to meet the legislation do not yet exist. Many of the raw materials come from outside the UK and EU. Battery manufacturing in the UK is still in its infancy in both areas. It’s thought that up to five years is needed to construct the gigafactories needed, as well as a fully functioning distribution and supply chain to meet the RoO.

The RoO changes run the risk of adjusting both the distribution and cost of new vehicles, as the rules will influence tariff costs, and therefore, distribution decisions. Some manufacturers may be forced to exclude certain models from specific markets. The tariff issue was not as problematic before the UK left the EU. However, with large manufacturers currently seeking to stall the costly implications of RoO, their changes will have weighty implications for automotive.

Staying compliant will be costly but the scale of the penalties means it will be less financially damaging in the long run.

The ZEV mandate and CAFE culture

Government statistics say cars and vans were responsible for 18% of the UK’s total domestic greenhouse gas (GHGs) emissions in 2021³. By way of comparison, the EU figure in 2020 was around 15%⁴ and in the US, it was 29%⁵. For those in power, Zero-Emission Vehicles (ZEVs) are the most foolproof way to decarbonise road transport in line with net-zero legislation. Therefore, the UK’s ZEV mandate, a new mandatory framework coming into force in 2024, requires manufacturers to ensure a certain percentage of their overall annual sales (22% for cars and 10% for LCVs) are BEVs. It is designed to accelerate the transition to electric motoring while cutting greenhouse gases.

In terms of EVs built, getting the percentage right may mean that some manufacturers hold back sales of ICE vehicles. But what choice do they have?

While European manufacturers contend with ZEV, US counterparts continue to adhere to Corporate Average Fuel Economy (CAFE) regulations which have, in recent years, become a key part of the current US administration's plans to meet its net-zero targets. There are numerous pieces of legislation regarding net zero throughout the world, but as yet there is no global standardisation. Going forward, surely there’s room for a universal set of guiding principles?

All of this suggests that manufacturers and car owners alike are battling on numerous fronts, at great cost, to meet stringent regulations.

As we edge closer to the ZEV mandate’s introduction next year, more needs to be done for EVs to truly become the dominant mode of transport. Significant investment is still needed in charging infrastructure to support a growing EV parc. The cost of EVs remains a barrier to entry for many people despite the price of both new and used vehicles softening.

Is the government going to roll back on the collective legislation? As of the time of writing, it appears not. Will there be some give or take around specific deadlines? Possibly.

Putting the politics to one side, the fact is that everyone needs to do something on the environmental front. Despite being beaten with a bigger stick than it deserves, road transport nonetheless has to see change. The path has been set and manufacturers have built their own roads to net zero accordingly.

The bigger issue may be around the fact that manufacturers must sell the EVs they are so proudly marketing. They’ve simply no choice. They’ve made the investment and shareholders will expect them to show that they are getting a return on that investment.

Fleet impact

New vehicle shortage has significantly impacted the fleet sector, forcing many fleet managers to change both how they operate and the age and mileage profile of their vehicles. EV momentum has also played a huge role for fleets. They play a significant part in helping meet corporate sustainability goals, plus employees gain from the various taxation incentives (benefit in kind). It’s for this reason that fleets are responsible for the majority of EV registrations. Buoyed by government incentives, many manufacturers, in partnership with fleets, have vowed to electrify their vehicles to meet the ZEV mandate and new 2035 deadline.

One thing is certain and that is that the ICE in its current form clearly does not have a long-term future in many markets. It’s notable that some manufacturers are investing heavily in e-fuel development, a move that could one day lead to wider usage and offer ICE vehicles something of a reprieve. It also offers a lifeline to low-volume, niche-interest manufacturers, especially if high manufacturing costs can be tempered. Additionally, it’s worth considering that manufacturers may decide to serve certain established new and used markets with ICE and hybrid vehicles.

Retail tactics

Manufacturers may have strategies in place to absorb the numerous hits they are taking in the modern world economy, but franchised and independent dealers also need to prepare. For those in the automotive retail sector, the most ubiquitous buzzword is currently ‘omnichannel’, but what does it mean in practice and, more importantly, what should it mean?

We know that it refers to an overarching business strategy that integrates all customer routes to the retailer. These could be dealerships, websites, social media channels and apps. The most significant benefit of omnichannel, for customers, is them being able to interact with a retailer with ease, whatever the mix of channels they use along their journey. For the retailer, in the long term, it should mean lower costs and the opportunity to use customer data to reinforce customer retention.

Recent research suggests that the majority of consumers, more than 80%, want to combine online steps in the buying journey with those taken at a physical outlet. The same study suggests that not all buyers share the same view as to which stages should be online and which face-to-face. So, flexibility, when it comes to implementing omnichannel, is particularly important.

A quality website, including video walkarounds, quality photography and part-exchange functionality are necessary in order to do omnichannel properly. But the customer must also have the tools to conduct almost every part of their buying journey from the comfort of their sofa. These could include a personalised section of the site where progress can be saved or semi-regular updates about the latest stock.

Omnichannel and EVs

With brand and customer loyalty at a historic low and cars increasingly being regarded by many as “white goods”, there’s never been a better time to exploit the full potential of omnichannel, especially where EVs are concerned.

Cox Automotive has often spoken of the need for greater education when it comes to electric vehicles – and with good reason. We think there’s an opportunity to do more than simply improve the look and feel of a dealership’s website or offer a part-exchange online as well as arrange the finance with a mouse click.

What is less evident in the omnichannel approach is content and tools that are focused on the customer of tomorrow, as opposed to today. Many opinions on omnichannel appear to be weighed heavily in favour of mere selling. But with all the negative media attention faced by EVs, whether it’s coverage that’s likely to fuel range anxiety or stoke fears about charging infrastructure inadequacy, surely there’s a case for greater nurturing of the potential EV customer. Omnichannel should gently guide customers along the path of EV enlightenment by hosting content that carefully demystifies perceived jargon about twin motors and Level 3 charging. The content should be coupled with advice about whether an EV is even the right move, maybe a hybrid would be more suitable?

Upping the amount of information available could be supported by dealership events designed to entertain and entice potential buyers.

Let's consider the dizzying choice that will soon be on offer when new entrants get a firm footing in the EV-selling arena, and bear in mind the fact that brand loyalty, for increasing numbers, is an anachronism. The case for nurturing makes a lot of economic sense. The time for dealers to become an authoritative voice in the EV space – experts essentially – is right now.

Better technology

In the past year, the unstoppable rise of large language (AI) models, including ChatGPT and Google’s Bard, has demonstrated the sheer power of emerging AI technologies – tools that will certainly shape the future of car retail. Advancements in AI, machine learning, Virtual Reality and Augmented Reality are already being used by dealers to enhance customer experiences, optimise operations and drive innovation.

Consider too the amount of information being generated by dealerships and how data analytics presents greater opportunities to further personalise targeted marketing or make their business run more smoothly, whether through better inventory management or data-based decision-making.

Successful dealerships of the future that embrace these technologies and adapt to changing customer expectations will be better placed to offer attractive and engaging experiences at every touchpoint.

Other tactics

The changing retail landscape is making new ways of selling cars obligatory; however, many dealers have dealt with the challenging circumstances by venturing into new areas.

Some have moved into ancillary areas such as online parts sales and distribution as well as subscription – with varying degrees of success. The shift to agency, the unavoidable rise of EVs and the growing importance of building and maintaining a digital presence could force even more dealers try something new.

Throughout this transformational era, the automotive sector has faced various challenges. The changing landscape has seen casualties and with further consolidation, we will likely see more. Technology is fundamentally altering how business is done and it will continue to reshape consumer behaviour too. Savvy retailers, those who see what’s already here, whether that’s agency, the era-defining shift to zero emissions, or greater opportunities in the digital space, are best positioned to adapt, survive and thrive.

PERSPECTIVES