Automotive has made it through the last 12 month and come out bruised, but in-tact.
However, only now are we starting to see the real impacts on the automotive sector. With the threat of rising inflation, cost of raw materials and creditors looking to call in unpaid debts this industry has a lot of obstacles to overcome as it picks its way through the darkness of the route out of the pandemic.
Despite this, automotive can have a strong future ahead but leaders need to consult on a number of fronts.
The first task will be to realise the scale of the issue.
According to our own Red Flag Alert in the 12 months following the first lockdown more than 21,000 automotive businesses were considered in significant distress – an increase of 39% in just 12 months. The sector is now at the highest number of businesses in distress since before 2014. The vast majority of these companies are SMEs, placing more than 93,000 jobs in danger – that’s roughly 11% of the estimated 864,000 employed in the sector.
With this many businesses and jobs under threat there is usually a reason, but in this case the pressures have often been from outside of the industry. Businesses that were viable before the pandemic have been shunted into significant financial difficulties by and because of the baggage that comes with a pandemic.
Rising inflation and costs
A much faster rise in inflation than the Bank of England (BoE) expected at the start of this year has caused jitters not seen since the financial crisis.
In May 2021, UK inflation jumped to 2.1% – breaching the Bank of England’s target for the first time in two years. One of the reasons attributed to this increase has been the easing of lockdown restrictions unleashing the pent-up consumer demand for goods too quickly.
With consumers having saved up an estimate £160bn over the last year they are now spending freely and hoovering up products forcing a rapid shortfall in the face of demand. Shortages of raw materials are not helping either.
Rising prices of raw materials
The cost of oil used to create plastics used to build roughly 50% of cars manufactured has soared and manufacturing components as well as computer chips have also been in shorter supply in recent times. These items that are key to the production of vehicles will make it harder to maintain profits, while still pricing automotive products at a level attractive to consumers.
Even with the estimated £160bn of savings, there will be many that have changed the way they spend and move around during the last year. Consumers may not want to spend money on a second car when life has been supported from the comfort of their sofa for so long. These changes will be crucial in the flow of customers attracted to the automotive sector.
The price of people
Figures released in 2017 by ONS found that 11% of the manufacturing sector were EU workers. With almost 250,000 manufacturing workers still on furlough at the end of April 2021 and Reed Recruitment tracking the number of automotive jobs falling by as much as 95% from January 2020 to April 2020 many talented individuals have left the UK to return overseas. It’s a recipe for thinning the talent in the market.
This has had a positive reaction for employees, but not for the finances of the businesses. While the salary for manufacturing workers has stayed largely the same since January 2020, automotive salaries have increased by 13%. With employers already facing repayment of loans from the government as well as private lenders this adds to the pressure.
Moratorium on court action ending
The reprieve for the many distressed businesses has been the current moratorium on court action in relation to Covid debts. This is the main reason that we have seen low insolvency numbers, but in September this moratorium is due to end and following this we may see an acceleration in formal insolvencies as debt becomes unsustainable.
In addition, the impact of rising inflation on debt-laden UK would be considerable and there would be a real risk that zombie businesses in many of these sectors become financially unviable with insolvency numbers spiralling.
The end of the combustion engine
But despite this negativity there are numerous lights along the way out of the darkness of the pandemic that can be picked up and used to find a way out of trouble by good, well-run businesses.
Firstly, we have to remember that automotive and other industries are ‘needs’ industries which have the great advantage of being essential to personal and public finances. People will always need to keep moving and the automotive sector with its innovation-driven businesses will be at the centre of that. Thriving in this climate is a question of correct positioning and adaptation, but this means that finance and investment will always be on the cards for those that can meet these criteria and demonstrate viability.
The automotive wing of finance broker MAF is seeing that the sector is in a strong position to attract finance. In the past 18 months many new lenders have entered the market. Challenger lenders as well as more traditional high street lenders can offer a range of financial aid packages, but major opportunities will present themselves to companies that can assess what the finance is needed for and see all the options to them.
Finance is available with low interest still, but it will take more time and involve more hoops to jump through to access it. Quick finance with high interest still has its place if a business needs to move rapidly on an opportunity. And in this fast-moving market we are often seeing that this is the case.
The mergers and acquisitions market is also picking up pace again with $51.5bn spend globally on automotive deals in 2021. Investors and businesses are interested in growing their market share or even entering new ones. This is exacerbated by a higher-than-average number of smaller, talented business owners looking to retire earlier than planned following the past year meaning there are many good deals to be struck. This means that money is being passed around the market and there is clear opportunity to save, grow or sell a business, even in this difficult time.
The projected end of the internal combustion engine (ICE) in 2030 is also driving positive change for the industry.
Electrification is the new buzz word as manufacturers look for early adopters of EVs. A challenge for many businesses due to infrastructure gaps and operational challenges relating to mileage constraints before a recharge is required.
Manufacturers such as Nissan and Vauxhall are investing in giga factories for battery manufacture and the building of EVs within the UK. Many other manufacturers such as BMW have a new line up of EVs to lead the transition. This includes some which have already stopped building specific diesel variants to drive end users into the uncharted waters of Electric and plug in hybrid vehicles.
At first glance the automotive sector may appear to be in peril, but there is a reason there are many historic brands still in the sector. The industry is resilient and it has historically found ways to adapt and evolve and it will do it again. The industry is facing financial distress, inflation, squeezed supply chains, rising material costs and the threat of creditors calling in their debts when the courts reopen, but in the face of all this there is still good cause for optimism and hope as the sector resets to innovate and grow once more.