Further working capital challenges on the horizon for the automotive industry

In recent months there has been increased debate around the challenges for the automotive industry, in both the short and long term. The industry is facing the prospect of increased regulation around fossil fuel powered vehicles, growth of the sharing economy and self-driving cars, evolution of AI and a slowdown of demand in its largest markets.

These challenges add further pressure to the working capital performance across the automotive industry, which has already seen an increase of nearly 10% Net Working Capital Days over the last few years resulting in an extra ~ €20bn of cash tied up in companies’ operations.

Additionally, the change in the customer demand also leads to a wider capital challenge, as manufacturing functions will look to utilise capacity from existing production assets, which could lead to unnecessary stock, while investment for new technology will require increased investment.

There are also some short term challenges that require more immediate focus. 8 out of 10 cars produced in the UK are exported and of these more than 50% go to the EU¹. Brexit will not only impact the UK’s relationship with the EU, but also these other strategic partners as new trade deals will need to be agreed.

Therefore the type of future relationship with the EU has a key factor. To put the scale of the UK's automotive relationship with the EU into context of the total economy, exports of vehicles and parts have accounted for 10.8% of the UK's exports in 2018 to the end of August (£12.2bn²), making them the country’s third largest export category to the EU. Furthermore, the EU is a key supplier base for the industry, with automotive imports accounting for 18.1% of all EU imports (£31.7bn - 2018 to end of August³), making it the industry with the highest share of trade with the EU. If frictionless movement of goods cease it would have a material effect on the supply chain, which is heavily reliant on just-in-time operations.

Protecting production efficiency is critical to OEM performance and one possible outcome is a requirement to carry more inventory. OEMs are likely to force this down the supply chain leading to both a cash and cost impact for suppliers. Two key issues are:

• inventory funding: Increased inventory to ensure production continuity is going to lead to a significant working capital requirement and thus funding
• warehousing capacity: increased stock cover also requires increased warehouse capacity. For example, in their warehouses in Swindon, Honda hold stock to keep production running for 36 hours. With border checks there is a fear this could end up as high as nine days. In addition to the significant cash requirement, there would be a considerable cost and challenge around securing buildings and the required floor space, which could be as large as 42 football pitches (300,000 sq m), if and where this is available⁴.

Brexit poses a very real challenge on top of an already deteriorating working capital performance across the industry, with end to end supply chain times expected to lengthen. 

There are five practical things that business can do to understand and manage the impact whilst ensuring business continuity in this climate of change:

• diagnose lead time considerations and adjust short term safety stock levels
• eliminate excess stock to counterbalance any extra safety stock
• increase demand forecasting alignment with customers and adjust forecast model
• review alternative sourcing options and markets
• take advantage of supply chain financing or consider asset based finance.

Companies need to act quickly to mitigate the potential impact on their working capital.

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Sources:
1. SMMT Motor Industry Facts 2018
2. EU and Non-EU exports Monthly Early Publication of Overseas Trade Statistics, HM Revenue & Customs, 10 October 2018 
3. Imports Monthly Early Publication of Overseas Trade Statistics - HM Revenue & Customs, 10 October 2018
4. FT 25 June 2018