Restructuring in the automotive sector: what does the future hold?
What is the current state of play in the UK automotive sector?
What issues are businesses in the sector facing?
Even before COVID-19, the automotive sector was already in a state of flux, with the industry shifting away from petrol and diesel vehicles to more eco-friendly electric models. Alongside the challenges of reduced consumer travel, firms are now also facing the immediate challenges created by Brexit, which include subdued customer demand and volatile import prices. This perfect storm of consumer and price pressure is also seen within supply chains, where component suppliers have long felt pressure on their margins. As such, investment in plant and machinery has fallen behind the R&D curve, leading many automotive manufacturers to question the future viability of those they work with. All this makes for a difficult market to operate in. However, with challenge also comes opportunity and, for those willing to pioneer a new way forward, accelerating the transition to a low-carbon economy presents a chance to reimagine the shape of the sector in the next decade.
Working capital will be the most immediate issue facing manufacturers. As customer demand returns, plants come back online and staff return from furlough to meet the uptick in production, businesses will need to support their fast-increasing working capital requirements. In previous recessions, we’ve seen that the most dangerous time for businesses is at the point of upturn. As well as managing their supply of raw materials – something that was beholden to border restrictions at the start of the pandemic – suppliers will need to engage with their key customers as early as possible and the big car manufacturers will need to support their supply chains by offering lifelines such as improved payment terms. Firms will also need to engage with their lenders, particularly as more and more businesses are using asset-based lending than in previous downturns. Through open and honest dialogue, many short-term financial challenges can be overcome to avoid more significant ones down the line. This poor cash position is also likely to impact on the industry’s R&D investment at a time when it is needed more than ever before. Larger manufacturers will be best positioned to support the shift towards green technology. As such, we may see them helping certain suppliers to fund new product development alongside their own. At the retail end of the market, the industry has responded to concerns about weaker consumer confidence by accelerating the shift towards more flexible subscription models – particularly rolling monthly models where consumers aren’t bound by long-term commitments. We had already seen an increase in contract leasing agreements before the pandemic, but subscriptions take this a step further and should help the market become increasingly resilient.
With challenge also comes opportunity and, for those willing to pioneer a new way forward, celerating the transition to a low-carbon economy presents a chance to reimagine the shape of the automotive sector in the next decade. Tony Barrell Restructuring Advisory
How has the COVID-19 pandemic impacted the sector?
While recent Society of Motor Manufacturers and Traders (SMMT) figures have shown some signs of improvement – influenced by the declining use of public transport and increased disposable income during the pandemic – the underlying market position has been concerning since the start of COVID-19. Having shut their doors for long periods and returned to lower consumer demand, automotive manufacturers are taking this opportunity to reorganise their portfolios while realising that they can operate in a leaner way. We’d hope this will stimulate more investment in green technology and innovation as they work to become more productive and sustainable in the next 10 years. This will be increasingly important as petrol and diesel vehicles will now be phased out of the retail market by 2030 – creating an increasingly competitive market where technology and quality of production will be of major importance.
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