The access to finance debate is over-concerned with channels of finance, not with payment terms. Big OEMs are essentially banking with their supply chain, which is eroding the competitiveness of UK plc, says one engineering SME.
“As concerning as the availability, cost and timeliness of access to finance for the SME manufacturer is, the focus seems somewhat one-sided.
Attention tends to be drawn towards those factors directly affecting the choice of channels for growth capital, and is less likely to be focused on the linkage with working capital management and the external considerations affecting it. This is troubling on a number of fronts.
“Firstly, in all businesses, cash is king and beyond providing the necessary liquidity to run on-going operations, it also directly impacts the funds available for capital re-investment, innovation and growth. Money tied-up in extended customer payments is not available for investment elsewhere in the business and the more that is tied-up, the greater the reliance on other, external growth capital instruments.
“Secondly, the demands on working capital increase markedly as an economy moves from recession / stagnation to growth and the acuteness of this increase is in proportion to the difference between receivables and payables terms.
“To attempt to match terms in either direction either loses the SME a customer, or a supplier.”
“This concern would be reduced if these payment terms balance, but for many SMEs they are stuck between a “rock and a hard place”. That is: large OEM customers unilaterally demanding extended payment terms (typically 75-days to 120-days) while second and third-tier suppliers into the SME can only trade if they are paid quickly, typically 30-days. To attempt to match terms in either direction either loses the SME a customer, or a supplier.
“This conundrum is hidden from most open dialogue and debate, as to name and shame the global OEMs concerned would inevitably risk winning the battle but losing the war (along with the customer!). However, the fact there is a wall of silence doesn’t obviate the point that for the purposes of short-term, share price management some of our best-known OEMs are essentially banking with their supply chain, substantially improving their cash position at the expense of thousands of our SMEs – the group probably least able to fund the timing gap.
This matters for two reasons:
• The UK manufacturing economy has a greater proportion of SMEs – as compared to mid-cap and large enterprises – than any of our competing developed economies, but more importantly…
• We are a high labour cost economy, therefore if we wish to continue to compete on the global stage, innovation and levels of capital re-investment to support the necessary relentless productivity drive, are critical.
“Some of our best-known OEMs are essentially banking with their supply chain, substantially improving their cash position at the expense of thousands of our SMEs”
“We are therefore heading for an entirely avoidable ‘perfect storm’:
• A number of massive manufacturing programmes (e.g. the Airbus A350) are moving into production requiring substantial investment by the supply chain in new capacity.
• Outsourcing rising: The proportion of external sourcing from outside of the OEM is tending to increase, with the end-customer directing an increasing proportion of their resources to final assembly.
• There is a more prudent approach by banks towards lending and the funding constraints that can ensue.
• Growth will inevitably return to the economy – with the resulting increased demands on cash.
• All this, when the UK manufacturing investment levels are already only about half those of Germany as a proportion of manufacturing GDP.
“Although sitting on their suppliers’ cash looks great for the OEMs’ investors, I would argue that apart from most obviously hurting the supply chain, by constraining suppliers’ wherewithal to invest in innovation, capacity and competitiveness, in the medium term it’s demonstrably bad for the OEMs and bad for UK manufacturing as a whole.
“The growing payments gap leaves SMEs looking to banks to help fund the shortfall at inevitably higher costs of borrowing than for the OEM. “
“Banks and the mechanisms for small companies to borrow affordably, matter. However, the role, impact and responsibilities of our own OEMs and primes cannot be overlooked simply because there’s too great a risk to air the concerns. The growing payments gap leaves SMEs looking to banks to help fund the shortfall at inevitably higher costs of borrowing than for the OEM.
“The total end-to-end cost of the supply chain is thus increased, and through under-investment, is less competitive than it could be.”
The author runs an SME engineering company supplying to the aerospace and other sectors.