The automotive funding shortfall

Posted on 29 Apr 2014 by The Manufacturer

The struggle for automotive SMEs to get financed

Guy Walsh, regional director at ABN AMRO Commercial Finance PLC highlights the need for better access to funding for SMEs in the automotive sector.

The automotive industry is the UK’s largest sector in terms of exports, generating around £30bn of annual revenue.

According to statistics from the Society of Motor Manufacturers and Traders (SMMT), the UK automotive industry has an approximately £55 billion annual turnover, employing over 700,000 people. The sector now manufactures 1.6 million cars and commercial vehicles and over 2.5 million engines annually – making the UK Europe’s second largest new car market, ahead of France. The UK is home to 7 volume car manufacturers, 8 commercial vehicle, 11 bus & coach, more than 10 major premium & sports vehicle manufacturers and over 2,350 component manufacturers. Global vehicle manufacturers have invested more than £6bn in the UK automotive sector in the last two years.

However, this impressive track record masks the fact that many smaller players in the sector languish due to a lack of funding and access to the right information on funding options.

Funding is “thorn in the side” for SMEs

Access to funding and financing long-term growth remains a critical issue for UK automotive companies seeking to invest for growth. This is especially true for smaller companies in the supply chain. Government officials, accustomed to dealing with large Plcs, have often failed to appreciate the particular needs of small and medium sized businesses especially with regard to issues such as tooling finance, which requires a considerable capital outlay at a time when many SMEs are struggling to maintain their cash flow.

Production tools come at a high price, with SMEs expected to front the initial investment but often not recouping their costs until many months down the production cycle. Both the government and financial institutions need to understand how critical production tools are to the industry and the need for companies to keep up with the latest models and designs.

Another stumbling block is access to information about funding. While information about funding does exist across an array of government websites, access to that information in many cases is opaque and fragmented, with companies struggling to find the right information on funding options that are appropriate for their business.

In a similar vein, while a number of CBI members have been successful at winning Regional Growth Fund bids, the time it has taken to bid and the bureaucracy involved in accessing funds has been excessive, sometimes taking up to 12-18 months. Another challenge is presented by the reluctance of banks to lend to suppliers due to the perceived risk involved in an industry where lead times for new products can often be 5-7 years or more.

Lack of funding is exacerbated by the fact that in the near-term, purely petrol or diesel vehicles are unlikely to exist, which means that future growth will have to be driven by innovation and technology, which will require additional financial support.

UK Government takes steps to address funding issues—but is it enough?
Last summer, a joint initiative on the part of the UK government and the UK motor industry was announced, which will invest £1bn over the next 10 years to secure the growth and development of the UK’s vehicle and component manufacturing sector. Developed under Automotive Council guidance, industry and government will fund and resource investments in a range of projects including the creation of an Advanced Propulsion Centre, thousands of new motor industry apprenticeships and the creation of an Automotive Investment Organisation.

The development of the strategy also sees the provision of finance for tooling investments in the supply chain, and a renewed commitment to encourage the UK as a lead market in the production and sale of low emission vehicles.

Government initiatives to address the funding dilemma are welcomed by many SMEs in the automotive sector. However, others who have become discouraged by lack of access to capital have looked at new models such as crowd funding, a method of raising capital in small amounts from a large group of people using the Internet and social media. Unlike funds from venture capitalists or angel investors, the money raised through crowdfunding doesn’t necessarily buy the lender a share, and there is no guarantee that it will be repaid if the venture is successful. Instead, individuals are asked to make microinvestments or donations to causes and ventures they believe in, thus allowing the work to be completed.

If SMEs in the automotive sector are to survive and be able to grow their businesses, there is no doubt that additional financing must be made available. Although there are numerous government programmes available in the form of loans and equity funding, there is simply not enough funding to meet current needs. In addition, banks must learn to invest for the long-term and form strategic partnerships with SMEs, thereby allowing them to invest in more plants, equipment and stock.

Manufacturing can only be sustained if the manufacturer and supply chain work more closely with each other. Given the automotive industry’s importance to the UK, coupled with the fact that, with rising labour costs in countries such as China and India, manufacturing is starting to return to the UK, especially in areas requiring specialist engineering skills, this sector is well worth investing in for the long-haul—but investment needs to benefit small companies as well as large ones.