Prioritising finance in the auto supply chain

Posted on 6 May 2015 by Victoria Fitzgerald

By Lindsay Whitelaw, Partner, URICA

The automotive industry has three characteristics that make it of special importance to the UK. It shows promising opportunities for exports, for raising worker productivity, and at the same time increasing employment.

The industry is forecast to reach its all-time peak again, in terms of number of vehicles, by around 2017. The hopes are it will then surpass that 1972 peak and go on to create new highs, eradicating fully the image of the UK as a maker of shoddy vehicles. We are already a long way away from those days.

Lindsay is a Scottish businessman who co-founded Artemis, a UK-based fund manager that manages an asset base of more than £19bn.

The brands being made in the UK today are generally of a luxury timbre, with great potential for sales in emerging markets where consumer demand is rising, along with aspirations.

Looking at the data, though, the UK still runs a trade deficit in automobiles. There is a need for patience, however, because a lot of the development happening this year (such as new models coming to market) will not feed through into an improved balance of trade immediately.

With that said, one area currently adding to the deficit is supply parts, to the tune of around £12bn of imports. The UK notoriously does worse at using its own auto suppliers than peers such as Germany.

A lot of work is being done by bodies such as the Automotive Council to measure – and hopefully capture – the reshoring opportunities. It is estimated at £3bn for tier-one suppliers, and it is thought there is upstream potential of around £2 bn on top of that.

When asked why they import supplies, most carmakers cite a lack of availability of certain parts in the UK or a lack of capacity at suppliers here; quality and cost are also reasons producers look abroad. What is clear though is that the UK automotive supply chain needs regenerating to fully capture the benefits of the boom in automobile production underway.

There are of course various aspects to helping those suppliers – many of which are SMEs – but not least of them is finance. The banking industry in the UK does not cater properly for SMEs, as evidenced by the lack of lending in this area, and the fact the government has felt the need to step in and encourage lending to SMEs. At the same time, there is a culture of late payment among large corporations globally that has proved resistant to change despite efforts by the government and European Union.

The automobile industry developing in the UK today is one built on complex technology systems. For the SMEs supplying the industry, that can often mean delivering capital-intensive projects over multiple quarters – and then waiting for payment after delivery. That could mean a six-month lag between upfront costs and payment for an SME. And these costs can be substantial given the high value of products involved.

URICA is a business backed by the British Business Bank as an alternative financing mechanism for SMEs, and we are working with clients in the automotive industry on speeding up cash flow down the supply chain. The intention is to increase capacity in the UK supply chain, and also to strengthen it.

One of our clients, PR Automation, a systems integrator supplying the auto industry, highlighted to us that the current growth is a challenge for auto suppliers.

“Without a doubt, we have actually turned down work that we were quite capable of doing but were unable to fund,” according to Steven Robbie, the firm’s operations director.

“The business felt uncomfortable exposing itself to over-demand and where that would put us from a capital point of view.”

Tight cash flow in the supply chain also makes the system fragile. A late payment at the top can send shockwaves down the supply chain – and actually cause valued suppliers to fold. This has a knock-on effect on the other clients of that supplier.

“The payment fluctuations from the very big companies go all the way through the supply chain – some suppliers have even left the industry,” Robbie said.

Our idea, which has been supported by the British Business Bank, was to create a payment network based on the technology available today combined with the wealth of information on individual companies held by Euler Hermes, the world’s largest trade credit insurer.

That database allows us to properly assess the risk of paying an SME early on behalf of a larger business. In many cases, the risk is much lower than a cruder system would estimate. We can then make early payment to SMEs. The key is that we pay upfront cash; it is not debt. URICA takes on the risk that the supplier’s client will pay us back. We’re willing to take that risk for a competitive fee, because we’re confident in the information sitting behind our risk assessment.

Getting the finance in place to support the auto supply chain is not a panacea.

However, it will put UK suppliers on the best footing to compete with international suppliers, and there is no reason – given the innovative nature of British business – to think they won’t capitalise on that.