Andrew Williams and Stuart Apperley are Directors in the Global Transport, Manufacturing and Logistics team at Lloyds Bank Commercial Banking. In this piece for TM, the two discuss the future issues the UK automotive industry faces.
The automotive industry is undoubtedly a prized asset of the UK economy and one that has provided a benchmark for the rest of the country’s manufacturers. However, growth does not come without its own challenges. The sector must look to address those issues now or risk losing its place at the forefront of the economic recovery.
The UK has a rich pedigree in automotive, from racing to luxury brands, and earned a world-class reputation for quality, performance and engineering prowess. In recent years we have seen some of the world’s leading manufacturers look to the UK as a base for production, which is testament to the value that ‘Made in Britain’ still holds, providing significant investment across the regions.
According to Society of Motor Manufacturers and Traders (SMMT) statistics, the industry is the UK’s greatest contributor to exports, is responsible for over 80,000 jobs and produces 1.5 million vehicles and 2.5 million engines each year. This is thanks to the raft of volume, commercial vehicle, coach and bus, premium and sports brands that call the UK home.
In our view, Britain provides a stable and attractive climate for investment, supported by a confluence of factors from economic and social to political and geographical dynamics. The UK’s favourable tax environment and pro-business government opens the door for investment, while our flexible labour markets, free movement of labour within the EU and outstanding intellectual capital help to provide a suitable workforce and technical expertise. Meanwhile, the English language and proximity to Europe are also important criteria for multinationals.
The challenges to come
While the UK market has performed strongly in recent years and is set to exceed previous
levels of production, weak vehicle sales on the Continent are encouraging consolidation across the European sector as makers look to cut costs and drive efficiencies. UK and European automotive suppliers are heavily integrated and such significant changes in the industry will inevitably create some risk in the supply chain.
There are a number of financial solutions that can help businesses mitigate the risks of trading, one such is supply chain finance (SCF) which can provide financial security to individual firms, while also adding stability and sustainability to the wider sector. With SCF, a business can obtain early payment of their invoices with the buyer’s bank, giving them greater access to working capital, but at no extra cost or debt to the buyer.
With complex network suppliers in the UK and globally, it could be highly advantageous to have a programme like this in place to enable suppliers ‘down the chain’ to benefit from the financial strength of the industry’s biggest names. The consideration of supply chain security will be vital to the future health of the automotive sector as a whole and help large manufacturers to avoid any interruptions in production as change permeates the industry.
Further afield, demand from rapidly growing middle class populations in emerging markets is flourishing – notably for high-end continental brands and luxury British brands. With around 80 percent of automotive production sent abroad, it is more important than ever for manufacturers to ensure that they are protected sufficiently when trading with foreign parties.
Establishing trade links can have a significant impact on the time, resources and cashflow of a manufacturer. Trade finance solutions can support a business’ international trade cycle at every stage – mitigating the risks associated with exporting, such as late payments, and ensure that it can keep running its operations smoothly and profitably. Complementary products, such as foreign exchange and commodity price hedging, are becoming increasingly popular to mitigate a firm’s financial risk from the volatility of currency metal price fluctuation.
Automotive manufacturers are set to have their most productive year and smash record production levels in 2014. Firms will look to capitalise on the buoyant market, but should be aware that cashflow pressures are often their greatest when a business is expanding as funding gaps arise between supplying goods and receiving payment. With money tight, management teams could risk underfunding investment in R&D and plant and machinery, hampering any competitive advantage.
Building an industry for the future
That said, the future success of the industry is not just based on the availability of capital and finances. Possibly the greatest obstacle for the sector is in recruiting enough of the right talent. Encouragingly, the Government’s initiatives to ‘plug the skills gap’ are beginning to take shape.
We have seen greater emphasis and support for science and engineering skills, and vocational training through apprenticeships in recent years. This has been supported by the creation of dedicated further education sites, such as at the Lloyds Bank Advanced Manufacturing Training Centre, which will be operational at the Manufacturing Technology Centre in Coventry in 2015.
There is no doubt that the automotive sector has an exciting future leading our thriving manufacturing industry for decades to come. However, we must not forget to foster the development of our skills base and provide the financial support to create a stable and sustainable industry. Otherwise, we risk stalling the momentum of one of our leading jewels in the UK’s economic crown.