Restructuring in the automotive sector: what does the future hold?
Restructuring in the automotive sector
How is the automotive supply chain impacted?What challenges are facing the supply chain? Very few people before the pandemic would have anticipated that suppliers would have had widespread issues securing funding and trade credit insurance. However, there’s a nervousness among the lending community that many suppliers are heavily exposed to just one or two motor manufacturers. A drop in a large manufacturer’s demand could have a significant knock-on effect. This has also been a problem for spare part suppliers, who saw their sales reduce substantially as an unintended consequence of the government putting off the requirement to MOT cars for six months. Diversifying and reducing dependence may therefore be a trend among suppliers in the coming months to better enable them to access the funding they need to make their products. Generally, firms have found that the banks, other funders, HMRC, customers and suppliers have been incredibly supportive through the pandemic but, as things start moving again, attitudes may change and favour those better placed to recover. Howwill the challenges facing the sector impact restructuring activity in the market? Restructuring has always been prevalent in automotive supply chain. It’s a constant cycle that would have continued with or without COVID-19. However, some businesses will undoubtedly find that their current model is no longer fit for purpose beyond the short-term and they will ultimately struggle to access the capital they need to modernise. There are options open to businesses in this position, including consolidation with a competitor or a sale to private equity. There is a lot of private capital waiting to be deployed but firms need to make these decisions early so they can prepare for sale before falling out of their supply chain.
The continued drive towards a more sustainable future has gathered pace as a result of COVID-19, and the government’s ban on petrol and diesel car sales from 2030 will dominate the landscape for the next five years at least, as manufacturers try to make electric vehicle production more affordable. The Government recently announced its Green Industrial Revolution 10 point plan, which included £2.4 billion to accelerate the roll out of charging points, grants for customers to buy electric vehicles and support for the development of mass-scale battery manufacturing capabilities. Although this will help, given the transformation required to ensure the UK automotive sector is competitive and sustainable in the global market, more support from the Original Equipment Manufacturers (OEMs), Government and other stakeholders will be required. What trends do we anticipate seeing across the sector over the next 12 months and beyond?
To plan for this transformation, we would advise that businesses in the sector consider the following:
Cashflow - a rolling 13-week short term cashflow forecast will be a key management tool as businesses start to emerge from the COVID-19 crisis to assist in managing the increasing working capital requirements. If a cash requirement can’t be managed internally, businesses should consider approaching their funders and also the OEMs for support where they have leverage. Businesses are often concerned about approaching OEMs for support as it could impact the future trading relationship, but this can be managed if done in the right way with robust forecasts to demonstrate future viability. Stakeholder management - key stakeholders include employees, suppliers, customers, shareholders, funders, landlords and pension trustees. Management will need to proactively engage with these groups to understand their agendas, information requirements and build trust to support the business’s future plans. Management should consider the most appropriate finance structure for the business, particularly if further funding is required, as there are still a number of funding options available in the market, including asset based lending. Scenario planning - prepare sensitised forecasts for different levels of demand and the transition to new products/customers, incorporating a proper assessment of capital expenditure requirements to consider the impact on trading and funding needs. The forecasts should also include potential performance improvements from taking the opportunity to ‘right size’ the business. During the pandemic, management will have identified staffing efficiencies, areas to continue to cut costs, such as travel, and unprofitable customers/products. Reviewing these factors will highlight whether there is an opportunity to negotiate price increases or seek to exit those customers/ products that do not contribute. This scenario planning will help management in considering its alternative strategic options, including a sale of part or all of the business, and other contingency plans, together with supporting discussions with key stakeholders. As a result of the transformation required and need to cut costs, we anticipate that there will be consolidation in the sector and are aware of a number of Private Equity backed businesses looking to acquire bolt-on opportunities for their existing investments.
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Billion pounds in revenue generated in 2019 by the UK’s automotive industry 2.4 Billion pounds to accelerate roll out of charging points Jobs supported by the UK’s automotive industry in 2019 864,000
Restructuring has always been prevalent in automotive supply chain. It’s a constant cycle that would have continued with or without COVID-19. Raj Mittal Restructuring Advisory
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