Navigating the Challenging Road Ahead for the Automotive Industry

Falling consumer demand, combined with supply chain and manufacturing disruption as a result of COVID-19, all mean considerable challenges lie ahead for the automotive industry. In our view, it is the smaller players in the supply chain that are potentially the most vulnerable. They need to ensure they’re properly funded, they’re able to react quickly to fluctuating supply and demand, and in good operational shape for what lies ahead.

Recent research from The Society of Motor Manufacturers and Traders (SMMT) has uncovered the true impact of the pandemic on the automotive sector. UK car production declined 35.9% year-to-date compared with the same period from January to September 2019.1 Despite the unprecedented support from the government in the form of the furlough scheme, 14,000 job cuts had been made across the industry, including manufacturing, supply chain and retail by September.2

Our research into the automotive sector indicates that while the beginning of the year appeared to be holding up globally, there had been a sustained period prior to the pandemic where auto demand was looking weaker. This meant that by the time the pandemic hit, the sector was already in a vulnerable position and by March, when the pandemic escalated out of China, sales across the world quickly flattened.

But it was the impact of the economic shutdown and the shuddering halt in car manufacturing that had the most damaging impact on the automotive supply chain both in the UK and globally. Supply chains have to be restarted and the working capital cycle has to be re-established but all this in a new operating environment where nobody really knows who now poses a credit risk. Post-lockdown manufacturing is gradually recovering, but what we don’t know is how much of this is true underlying demand; and how much is a catch-up of pent-up demand from during lockdown. Smaller manufacturers are expected to react to this new volatility in demand and, if not careful, they could find themselves committed to meeting customer orders, but having to trade at a loss to do so.

To support the economy, the government introduced the Coronavirus Business Interruption Loan Scheme (CBILS) and Coronavirus Corporate Financing Facility (CCFF), and the furlough scheme to help save jobs. Further, the Corporate Insolvency and Governance Act 2020 contains several temporary and permanent provisions to assist companies through COVID-19 and help them avoid insolvency.

While the government-provided stimulus will go some way in supporting businesses in trouble across the automotive value chain, it is unlikely to be enough to prevent many suppliers and parts manufacturers from facing significant challenges. The automotive supply chain is incredibly long and complex, with thousands of small suppliers feeding mid-sized suppliers, which, in turn, feed large global manufacturers. The current crisis is not yet over and even with a gradual, recommencement of production, hundreds of businesses across this extended supply chain are now being asked to operate at sub-optimal efficiencies. With limited room to cut fixed costs, many will have low liquidity to power through an extended period of missing revenues.

The challenge of COVID-19 came against the backdrop of wider changes taking place in the automotive sector. Most notably, ambiguity around tariffs and a no-deal Brexit led to a number of manufacturers announcing the transfer of production away from the UK before the pandemic. Adding further pressure has been the shift in sentiment amongst consumers away from “dirty diesel” and towards electric vehicles, leading many to delay the purchasing of new vehicles. As these pressures continue to mount, investor appetite will likely diminish and debt capacity will reduce, meaning that financing for the sector will likely become more difficult.

Looking ahead, the industry faces many challenges. For larger manufacturers, replacing a single supplier could delay the reopening of a plant for weeks, while a new provider is identified. If a wave of insolvencies hit the supplier and parts market, larger players higher up in the value chain could really suffer financially. This may lead to OEMs taking greater control of the supply chain in the short term by pushing for larger, more stable supplier groups.

There is no doubt that it is a difficult operating environment for the automotive supply chain, but vehicles will need to be produced and after a period of consolidation and stabilization there will likely be good opportunities for those remaining. Duff & Phelps’ experts can work with you to ensure that your business has the right funding and operational structure for now and into the future.

 

Sources
1 https://www.smmt.co.uk/2020/10/uk-car-production-falls-5-0-in-worst-september-since-1995-as-industry-issues-plea-for-vital-brexit-deal/ 
2 https://www.autocar.co.uk/car-news/new-cars/car-industry-body-smmt-launches-job-saving-scheme

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