The growth of automotive supply chain companies is being constrained by restricted access to finance according to a new report published today by the Smith Institute, commissioned by the Society of Motor Manufacturers and Traders (SMMT).
“With over £5.6 billion 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,” said Paul Everitt, SMMT Chief Executive.
“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 over 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 that 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 made key recommendations to improve access to finance and support longer-term economic growth:
- Banks must move quickly to build local automotive expertise and relationships with individual companies seeking finance for growth, particularly in the main areas of the UK where there are clusters of automotive (eg West Midlands, North West, North East and Wales).
- Banks and vehicle manufacturers should work collaboratively to address the challenges in accessing finance for tooling.
- Banks need to develop of a specialised product and support packages for the automotive sector, based on a better understanding of the growth opportunities.
- A series of ‘meet the funder’ events should be arranged to allow banks and non-bank lenders that are interested in automotive investment, to meet companies seeking finance to discuss growth opportunities.
- A cross-industry automotive ‘Tooling for Growth Taskforce’ should be established, which provides a platform for banks and vehicle manufacturers to explore more innovative solutions that would allow SMEs to access more finance, particularly for tooling.
- Government should create a more enduring framework of support that encourages greater investment and finance availability for business seeking to grow.
Companies reported that many financial institutions remained wary of the industry as a lending opportunity, despite the UK manufacturing sector performing strongly, exports achieving record levels and recently pledged investment confirming the long-term plans to base operations in the country.
Building on a separate Smith Institute report released last year, the study highlights how improved dialogue between automotive companies and financial institutions could help to boost economic growth and rebalance the economy, if the two sectors work together to address the type of finance offered to businesses. Identifying SMEs in particular, 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 that is 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.
The Smith Institute Report will be launched at an event in central London this morning attended by the representatives from banking and automotive sectors, government officials and industry stakeholders. A second launch event will take place on 20 June 2012 in the West Midlands attended by a wider audience of over 80 industry representatives including UK-based vehicle manufacturers and supply companies from all tiers, regional representatives from the financial sector and local political decision makers.