Automotive supply chain ‘held back by lack of funding’

THE growth of automotive supply chain companies is being constrained by restricted access to finance according to a new report.

 

The report, completed by the Smith Institute and commissioned by the Society of Motor Manufacturers and Traders, concludes it is vital for the recovery of the UK’s economy that the sector receives the funding it needs in order to capitalise on the global opportunities now emerging.

 

The SMMT has flagged a lack of automotive expertise within the financial sector as one of the main reasons for the restrictive funding.

 

Paul Everitt, SMMT Chief Executive, said: “With over £5.6bn pledged to the UK during the last 18 months, there is a ‘window of opportunity’ to strengthen the UK supply chain, creating jobs and prosperity for the long-term.

 

“A lack of expertise within the finance sector is holding back growth in the UK automotive industry. Vital opportunities for companies to grow and develop their businesses are being hampered, because banks have not responded quickly enough to the need for local knowledge and sector expertise.

 

“There is a unique opportunity to re-build manufacturing capability and capacity in the UK, but it requires industry, finance and government to shift gear and ensure growth businesses get the financial support they need.”

 

Offering a unique insight into the relationship between the domestic supply base and the availability of suitable finance products, the report represents the views of more than 80 automotive firms operating at every level of the supply chain, as well a range of financial and lending institutions.

 

The findings of the report draw upon comprehensive survey results and detailed case studies compiled from one-to-one interviews with owners and senior managers of automotive firms, including three UK-based vehicle manufacturers and financial experts from some of the largest business banks in the UK.

 

The report identified five barriers to growth:

 

•           A lack of understanding of the automotive sector, within the banks, particularly at a local level and in regions with a number of automotive companies in operation.

•           Funding gaps due to how banks evaluate the total assets owned by a company resulting in suppliers often missing out on the full amount of funding applied for, specifically in relation to finance tooling and capital equipment.

•           Securing finance for tooling development costs due to a focus on the residual value of the machine tool over the long-term asset value it will produce.

•           Reluctance of SMEs, particularly the 37% of which are family run, to seek external equity over internal cash flow and loan financing.

•           Favourable payment terms offered by vehicle manufacturers to supply companies are often not reflected further down the chain.

 

The report also makes key recommendations to improve access to finance and support longer-term economic growth.

 

These include ensuring banks move more quickly to build local automotive expertise and relationships with individual companies seeking finance for growth. This is a priority in areas of the UK where there are strong automotive clusters – the West Midlands, North West, North East and Wales.

 

In addition, the SMMT said banks and vehicle manufacturers should work collaboratively to address the challenges in accessing finance for tooling, while banks also need to develop a specialised product and support packages specifically for the automotive sector. These should be based on a better understanding of the growth opportunities.

 

Closer links should also mean a series of face-to-face events where bankers and fund managers can meet with suppliers to get a better understanding of their needs.

 

The SMMT has also called for a cross-industry automotive ‘Tooling for Growth Taskforce’, which would provide a platform for banks and vehicle manufacturers to explore more innovative solutions to tooling finance.

 

It also states that the Government should create a more enduring support framework to provide firms with the investment they need for growth.

 

Companies participating in the report said many financial institutions remained wary of the industry as a lending opportunity; this was despite UK manufacturing performing strongly, exports achieving record levels and recently pledged investment confirming the long-term plans to base operations in the country – such as Jaguar Land Rover’s decision to build its new £355m engine plant in the Midlands.

 

Building on a separate Smith Institute report released last year, the study also highlights how improved dialogue between automotive companies and financial institutions could help to boost economic growth and rebalance the economy – provided the two sectors work together to address the type of finance offered to businesses.

 

The report reveals how smaller companies find it difficult to target banks for their lending needs as many institutions were unclear about the key sectors they support and often decisions take far too long.

 

The recommended cross-industry ‘Tooling for Growth Taskforce’ would form the two-way relationship needed to drive progress in the sector. The taskforce would consist of banks and supplier companies representing all tiers of the supply chain (including OEMs), providing a platform to explore more innovative solutions to funding growth, specifically for SMEs in relation to finance packages for tooling-up facilities to meet demand.

 

Rachel Eade, Supply Chain Specialist at the Manufacturing Advisory Service (MAS), said: “This is an excellent report and articulates that complex issues the automotive industry faces with both day-to-day finance, tooling costs and funds for growth.

 

“I hope that the interest from banks to this report, and in working with both intermediaries like SMMT and MAS, translates to them helping companies understand the barriers more and subsequently working with them to develop strategies that will see them gain appropriate finance.

 

“MAS works to support SMEs to develop. We also work with vehicle manufacturers and tier ones to understand and cascade their requirements down to smaller companies.

 

“If the supply chain is to fully maximise the massive investment opportunities coming into the UK, they need to be able to access the funding they need to ramp up capacity, purchase new machinery and take on staff.”