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Car industry in spin as Covid-19 and Brexit bite

In the first of a two-part series on the UK’s £82bn automotive sector, Mark Taylor surveys the economic wreckage experienced during the first half of 2020.

5th Aug 2020
Journalist
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Automotive sector reels from the impact of Covid-19
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Warning lights are flashing in the UK automotive sector, as the industry recorded its worst six-month performance since the end of World War Two.

Manufacturing is down 43%, more than 11,000 jobs have been lost, and not since 1954 has the UK built so few cars, with only 5,511 rolling off production lines in April and May combined.

Just 381,357 cars were built between January and July, representing a drop of 42.8% and a loss of 285,164 units, according to the Society of Motor Manufacturers and Traders (SMMT), which said year-to-date sales are almost half of last year’s levels.

The sector, worth £82bn, is one of the nation’s most valuable economic assets, sustaining more than 820,000 jobs with 168,000 directly in manufacturing.

“The strategically important automotive industry has been badly affected by Covid-19 with showrooms only just opening and vehicle production severely impacted,” said Julie Palmer, partner at insolvency firm Begbies Traynor.

Factories are gradually re-opening and consumers returning to forecourts, Palmer said, but the wider slowdown affecting the market before the pandemic struck “will be even more pronounced as the rest of the year unfolds” due to weak consumer confidence and the lingering effects of the coronavirus.

In March, sales across every other region of the world outside China flattened due to the pandemic, with no indication of a rebound in sight, said Phil Dakin, managing director, restructuring advisory at Duff & Phelps.

“While some manufacturers have begun to reopen and begin production again, job losses have not been ruled out,” he said. “That will have a direct impact on the supply chain and put considerable pressure on a sector already reeling from not only the pandemic but the challenges of Brexit uncertainty, the drive from diesel and the rise of electric.”

Double whammy

The SMMT has warned cuts across production and sales during the pandemic could be amplified without dedicated restart support. The industry is also apprehensive about the potential of Brexit-related tariffs should no deal be reached.

Significant questions remain about the nature of trading conditions from January 2021, the group said, with uncertainty about customs procedures, regulation and tariffs causing real concern. According to its latest survey, this lack of clarity is now severely hampering nine in 10 companies’ ability to prepare for the end of the transition period.

“If the industry has to fall back to standard World Trade Organization (WTO) rules, then annual output may not increase in any meaningful way for a few years to come,” said Rick Smith, managing director of business recovery consultancy Forbes Burton.

An independent production outlook commissioned by SMMT expected just over 880,000 cars to be produced in the UK this year, down 32% on 2019 and the lowest annual total since 1957. Should the UK trade on WTO terms that carry a 10% tariff, output could stay around the 800,000 mark, or less, to 2025, the group said.

“A landmark in this process will be September, as this will be an indicator as to whether consumer confidence has returned post-Covid and sales pick up,” said Smith.

“The expected rise in unemployment will likely reduce the number of cars sold, unfortunately, so there is a very real fear in the air.”

Debt levels rising

Corporate distress analysts Red Flag Alert highlighted abnormal debt levels in the automotive sector as a major cause for concern.

“Our data shows the automotive sector has seen a sharp rise in levels of insolvent corporate debt during the past 12 months,” said Red Flag Alert partner Mark Halstead. “At the end of June, the sector’s insolvent debt stood at over £26.2m, which was up 42% in the past 12 months.”

By contrast, the total insolvent corporate debt in the UK actually declined by 11.5% during the same period, he said. The full effect of Covid-19 on these debt figures will be delayed by government support measures and a lack of formal action in delaying company failures and insolvencies, he added.

“This is the most concerning thing for the automotive sector,” Halstead said. “It is already contending with fast rising debt, which will accelerate further as the sector’s supply chain starts to feel the squeeze from the pandemic. It’ll take some very robust scrappage and sales incentive schemes to help the sector bounce back.”

Outside of financial support packages, the government has fast-tracked the Corporate Insolvency and Governance Act (CIGA) through Parliament with a number of temporary and permanent provisions, including the company moratorium measure, to assist companies through the Covid-19 crisis and help them avoid insolvency and preserve employment and potential enterprise value.

“For any business that might be experiencing cashflow problems right now in the wake of the pandemic, the CIGA could give firms the breathing space they need to survive and maybe restructure and emerge the other side when the economy picks up,” said John Bell, senior partner and founder of insolvency firm Clarke Bell. 

“I fear that the new Act will still not work to save the ‘zombie’ companies, however, who are only surviving because of low interest rates and financial support from the government,” he said.

Next: The second article in this series will delve more deeply into the impacts felt by some of the industry's well-known names. 

Replies (5)

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By weeton1
06th Aug 2020 10:35

Just looking at the Brexit angle do these predictions suggest that pricing issues alone will account for the devastating impact on sales / exports?

If so, isn't there a huge opportunity for the UK manufacturers in the UK market where they will be trading at a 10% price premium? In 2019 the UK produced 1.3m cars of which 1.05m (81%) were exported (so 0.25m sold in the UK). New cars registered were 2.3m so that suggests 2.05m were imported. So that's 2m cars in the UK which will now cost 10% more due to import tariffs so 2m UK customers face a price differential decision on imported cars compared to 1m overseas customers facing that decision on UK cars. I appreciate there are model mix factors etc. due to the limited range of models produced in the UK but is it really as dire as is being suggested?

Just musing so I may be overlooking something obvious or not grasping the complexity.

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Replying to weeton1:
Hallerud at Easter
By DJKL
07th Aug 2020 10:22

You are partly missing the component sourcing, engines, gearboxes and other components currently whizz back and forward across the channel, so these will likely pick up tariffs and compliance costs during their travels - for some cars there is not a solely UK or EU supply chain but a cross channel supply chain.

In addition any JIT interuptions through Dover/Calais will significantly reduce productivity and profitability e.g. wing mrrors are attached at X stage on production line, if wing mirrors are not here as they are snagged on /beside the RoRo at Calais that will also be a cost.

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By optimist
06th Aug 2020 12:10

Summary:
People stuck in house not using cars and not buying cars.
People stuck in house not making cars.
Showrooms shut so cars not sold.
People made redundant have no money for cars.

If anyone is willing to pay me, I'll write a similar article for most industries - I'm losing track of these fairly pointless "poorest retail results in Q2 ever" and "hotel room sales low in April" articles.

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Replying to optimist:
By k743snx
06th Aug 2020 12:49

Yes, Basil Fawlty had his own phrase for it.

I think I'll join you in the "we missed our true vocation" club.

Give the writer his due though. He doesn't once mention "leveraging" which just about every other business/accountancy writer appears to be doing right now, or committing linguistic outrages such as "impactful" or "insightful" (listening, CIMA)?

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Replying to k743snx:
By Nick Graves
07th Aug 2020 11:14

Or 'reaching round' (sic) which seems to be the synergy du jour for 'contact us'.

The motor industry typically has a BEP ~80% capacity, so the global industry is haemorrhaging capital ATM.

The transition end thing is nothing to do with tariffs - it's non-tariff barriers (triplicated bureaucracy and customs delays) that will kill the JIT system unless a sensible arrangement is put in place.

But whenever have politics and sensible arrangements ever been applicable to the same sentence? Oh, now, apparently...

Nissan & Toyota seem to be intent on hanging on in there, although Nissan (like MINI & JLR) have other business problems to address.

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