With sales forecast to remain low for the rest of the calendar year finance departments across the automotive supply chain are being urged to explore accessible and trustworthy cashflow options.
“There’s going to be pressure with revenues being down and suppliers’ suppliers needing some elements of cash being introduced into them,” says KPMG’s head of automotive UK, Andrew Burn. “Otherwise, what we’ll see is a ripple effect of businesses failing or being unable to deliver.”
UK manufacturing exports fell to an all-time low in the second quarter, heavily spurred by automotive plant closures, according to Lloyds Bank’s UK International Trade Index.
Accenture has found that the standard industry ‘cash burn’ rate is less two months, indicating that the market will need several years to return to pre-pandemic levels.
“Clearly, one of the issues [impacting cashflow] is invoice discounting, because as your revenue is dropping, that causes some issues in terms of cash generation for suppliers,” Burn says. “And sustained levels of lower volumes raises the question as to how profitable some of these organisations are.”
In the meantime, Burn says that most, if not all, original equipment manufacturers (OEMs) have moved into a demand-led model, particularly as that demand is highly uncertain at the moment for new car models.
“You’ve got some organisations that have gone full throttle to bring most [services] back online, and other organisations have come back one step at a time,” he says. “The SMMT data in the UK clearly is showing that we are coming back, but clearly not incredibly quickly.”
The Society for Motor Manufacturers and Traders (SMMT) found that market demand fell by a whopping 99.7 percent in April, dealing a heavy blow to the £82bn turnover the UK automotive industry provides to the UK economy.
Supply chain disruptions should be evaluated, both from during lockdown and for future transactions, but Burn adds that teams should discuss their options with both suppliers and banks to stem cash bleed.
These considerations are especially pertinent to UK and European auto suppliers, who have the highest levels of cash-to-cash (C2C) at 61 days, in contrast to North America’s 35 days, according to EY.
“Yes, the manufacturers are making cars again, the dealers are back working again – but they’ve got a hell of a lot of catching up to do,” says Steve Nash, chief executive officer of the Institute of the Motor Industry (IMI).
“Some of them were so close to the edge when [lockdown] happened, and money was running incredibly short for a lot of businesses. Some of them had little more than a week or so’s cashflow left.”
Between government assistance and survival plans, Nash says the industry has entered a preliminary recovery, but emphasises that it is important to continue strengthening the supply chain.
In the medium-term, he says this may include reshoring the supply chain, which in turn makes the chain less vulnerable to international disruption by pulling production back into the UK. However, Nash warns that this is not a one-size-fits-all solution, particularly with Brexit on the horizon.
“What the industry has said about the possible effects of a no-deal Brexit and the need to actually stock up on enough parts to keep the production lines running, some of them would need warehouses that are bigger than anything that exists in the country today,” Nash says.
Beyond this, he says the improvement of inventory management can further support cashflow, particularly if the organisation is still sitting on unused materials or waiting for delayed products.
“Manufacturers tend to look to suppliers who are, in their eyes, the most cost-effective,” Nash says, “but they’ve been caught out by that, where a single-supplier can get into trouble and then you find that your entire production is threatened.”