Distressed automotive sector must adapt

The automotive sector will need to evolve alongside other industries to adapt to the 'new normal' that is emerging. Automotive manufacturers need to be prepared for that change to address the financial and operational challenges they face and flourish in the medium to longer term.

This is part of a series, find out more about how to manage supply chain distress in the manufacturing sector.

Challenges facing the UK automotive sector

The UK automotive industry, despite a collective annual turnover of more than £80 billion, will not escape Covid-19 unscathed. According to The Society of Motor Manufacturers and Traders (SMMT), more than 800,000 people are employed across the UK with more than 2,500 automotive component providers having a presence in the UK. Indirect benefits for the economy and jobs also stem from the automotive industry's links to other industries, such as logistics, freight, telecoms and motorsport to name a few.

The automotive industry is truly global with interlinked relationships across the world. This has had implications for the sector in addressing the Covid-19 outbreak and the resultant lockdown measures imposed by global leaders. What started with early disruption in the Chinese export markets has spread into delays across manufacturing lines worldwide. Lockdown has not only suspended production lines and significantly interrupted global supply chains, but it has also reduced consumption and increased working capital pressure. A combination of closed showrooms and fall in consumer confidence led the SMMT to report that only 20,000 new cars were sold in the whole of the UK in May 2020 which is 163,000 units behind the same month last year.

Attracting inward investment to the UK has been a high priority for both industry and the UK government over the last few years and it must remain so as we begin to come out of the Covid-19 lockdown.

Even before the Covid-19 pandemic, the automotive community was in a period of challenge and grappling to come to terms with an evolving industry. Lockdown saw a number of supplier administrations (with a number resulting in ultimate closure) or restructures. In 2019, total sales of cars declined for the third year in a row. Rising costs and falling short term demand have meant incorporating new ways of doing things to remain viable whilst continuing to operate in a challenging macroeconomic environment and balancing geo-political uncertainty.

Digitalisation of automotive manufacturing has brought increased flexibility and productivity which, when coupled with a reduction in machine downtime, speeds up the lead-times of getting products to market. Yet, alongside tightening regulatory pressure on new technologies, prices in established markets are likely to be flat.

Challenges facing dealerships

The challenges and issues facing car dealerships are also acute, from significant rental costs, depreciating stock and the realistic prospect of continued revenue losses. Even with showrooms having reopened, there remains a question over consumers' appetite to make big-ticket purchases in a time of continued uncertainty.

In addition to managing the challenges thrown at them by the coronavirus crisis, automotive dealerships are facing up to pre-existing pressures too, from declining margins to new digital players and increased price transparency. This had already prompted some market consolidation.

The mandatory social distancing and extended periods of working from home has caused a shift in consumer habits and the industry is now encountering a widespread loss of consumer confidence. Consumers are increasingly better informed, looking to online sources of research before making purchasing decisions. Digital buying through virtual showrooms is challenging the traditional forecourt dealerships as consumers compare and contrast online without ever stepping foot onto business premises. OEMs are launching their own digital sales channels with increasingly sophisticated services on those sites. Dealerships and OEMs therefore need to adopt a consistent digital strategy with a seamless flow between the pre- and post-sale experience to embed convenient collection with recommended social distancing procedures.

Automotive market expectations in future

Consolidation is nothing new in the automotive industry, but as Covid-19 restrictions ease, it is likely that we will see continued strategic partnership and collaboration across the industry as management teams look to recalibrate business models to meet the lower demand for existing products. For businesses or private equity funders with liquidity, the fallout of the pandemic provides an opportunity for rapid acquisition – bringing with it improved competitive position.

Collaboration and licensing agreements between original equipment manufacturers (OEMs) at the head of their respective supply chains could also deliver cost-effective benefits. It would allow OEMs to share the cost burden associated with developing technology and provide them with access to new and innovative technologies they might not otherwise be able to afford or develop on their own as efficiently or effectively.

There is likely to be an increase in acquisitions of distressed automotive businesses by larger liquid competitors. They will view stressed rivals as ripe opportunities for strategic acquisition. Acquisitions will be driven by access to funding. This has always been challenging but it is only going to be more so after lockdown because of the lack of traditional security many would-be acquirers will be able to offer lenders.

After some set-up difficulties and an initially slow approval rate, there has been some improvement to the UK government's large business and business interruption loan schemes. However, both schemes have some way to go to making a deep impact on the financial viability of UK businesses across the board.

As management teams look to re-shape and re-size businesses and their personnel in line with more streamlined strategies, it is important not to overlook the potentially disruptive power held by trade unions, which are usually represented within a significant proportion of the workforce in UK automotive manufacturers.