SME Strategies was commissioned to write this article on SMEs in the automotive supply chain facing the downturn in the global car market by the Birmingham Business Post who specifically want to support the automotive sector in the Midlands which is being hit hard. The ongoing delay over Brexit is also creating uncertainty which is bad for business confidence. As the subject is so large, the article is also being published as two separate shorter articles by the Post.
What’s the problem?
- The dramatic fall in the popularity of diesel cars caused by the emissions scandal of 2015 and the wave of diesel bans around the world.
- The fast growing popularity of electric cars, and interest in autonomous vehicles, generating new investment challenges for the industry.
- The rise in popularity of ride-sharing (through apps like Uber and Lyft).
- The uncertainty around Brexit is obviously not helping.
The result of this perfect storm we see in the decisions of Nissan in Sunderland, Honda in Swindon, Ford in Bridgend to cut back production, and of JLR to cut management jobs in the Midlands. Whilst job losses at the big name companies hit the headlines, the knock on impact down the supply channel for SMEs can be equally massive, if not potentially catastrophic. In the automotive sector, the UK has about 2,600 component manufacturers and suppliers, employing over 115,000 people, about 90% of automotive component suppliers are SMEs, employing less than 200 workers.
The Society of Motor Manufacturers and Traders (SMMT) warn that in the event of a no deal Brexit, if all 1,100 trucks that bring parts in from abroad each day were held up for 24 hours – production stoppages would cost the industry £70m a day. Customs checks would upset the industry’s ‘just in time’ model, where regular deliveries of components are required as factories hold just a small number of parts on site.
Other challenges in the automotive supply chain include:
- Many SMEs are working for just one manufacturer eg JLR in the Midlands.
- The market has driven down prices so cutting margins.
- Too many SMEs find themselves firefighting and so directors don’t have the time and emotional energy to think creatively about their businesses.
- New technologies do offer opportunities but whilst the average car today has about 35,000 parts, in the future, cars may have as little as 3,500 parts.
- Major investment is happening but will it happen in the UK? There is a serious risk that the UK may lose out to other jurisdictions who are seen to be more favourable places for investment.
So how can SMEs in the automotive sector respond?
First don’t panic, second don’t put your head in the sand, third don’t give up. Painful as it may be, see the changes in the sector as an opportunity.
Do you have a business plan?
Review your business plan and if you don’t have one, get some advice and write one now. It doesn’t have to be long and these days the one page business plans are popular and effective. We use them a lot in SME Strategies. To quote Benjamin Franklin, “If you fail to plan, you are planning to fail.” The classic SWOT analysis remains invaluable. Gazing into the crystal ball of the future can pay handsome dividends.
What is the real issue for you?
Identify your underlying key question/business issue by using a tool like ‘The five whys’ to dig deep to find your real underlying question, not the immediate presenting one. Eg if you have no money, why not? If you have no customers, why not? If you have poor relationships with your supply chain, why?
What is/could be your unique selling proposition (USP)?
Identify your USP. This may be much harder than you think. Being niche in your offering is often better than being too widely spread in your product/services. Delivering something different/better than everyone else can allow you to have a higher margin. Broaden your thinking, using techniques such as reverse brainstorming as you work on your USP.
What are you doing now that could be successfully transferred into a new market? A hotel chain appointed as CEO a former airline boss. Sounds strange, so why? Because both sold time limited ‘space’.
Whilst SMEs may be only serving the automotive sector today, what about other sectors? Could the parts be used in the aerospace, marine or rail sectors? What about other geographical markets?
Be innovative and invest
Our changing world offers new opportunities but we need to have creativity and an open mind to see and grasp them. Battery power, automated navigation and electricity supply and distribution systems to power electric vehicles are some current key areas in the automotive sector. Electric cars offer huge potential. Whereas cars have traditionally been made of metal, now plastics and carbon fibre are used extensively and this trend will continue. The Government is committed to cutting greenhouse gas emissions in the UK to almost zero by 2050 to tackle climate change – this offers opportunity.
There are 38 million cars registered in the UK and the average age is 8.1 years (up from 6.6 years in 2005). This is partly due to changes in Vehicle Excise Duty on new cars, the demonisation of diesel and the slow uptake of electric cars. It does though point to a potential future increase in demand.
The lay person may think that the car manufacturer actually ‘makes’ the car but the manufacturer doesn’t really. Instead they often assemble the car from the parts that are ‘made’ by the supply chain who can, or could, supply parts to different manufacturers thus spreading their risk.
The car manufacturers don’t have all the answers and the scope for the supply chain to be innovative and cutting edge in its offering is massive.
‘Mittlelstand’ firms in Germany (some of which are family owned SMEs) are world players because they innovate and invest in new, often environmentally friendly, technology. This helps them stay ahead of the competition and also gives them a premium position in the market. In contrast many UK firms are comparatively short-term focused, with owners focussing more on funding a lifestyle business (which is perfectly reasonable) than seeing the potential of the bigger picture.
R&D tax credits are a great government incentive to help you. The risk mentioned earlier of the UK losing out to other jurisdictions is all too real. SMEs need to take full advantage of tax reliefs, local grants/funding (such as the Midlands Engine Investment Fund). Engaging with your Local Enterprise Partnership can be very worthwhile (see also the West Midlands Combined Authority). Identify staff that have a creative edge and get those fresh ideas flowing into investment for innovation.
Firefighting for SMEs is all too often the norm and so appointing a key member of the team to be the ‘innovation champion’ can be a very effective counter to the culture of firefighting. Many firms have been amazed at the energy this approach can release. We are all aware that the ‘urgent’ crowds out the ‘important’ – this is one way of fighting back.
Do you have the right workforce?
We know there is a skills shortage so finding the right people and then keeping them is key. The adage ‘hire for attitude and train for skill’ has much truth in it. Are you sufficiently secure as business owners/managers to look for senior people who are better than you? What is the risk of losing key staff? Having got the right workforce, does your company have the right culture to encourage creativity and innovation?
Review your funding and cash needs
Have you reviewed profitability and cash flow? How is your working capital management? What about cash flow pressures such as payment terms, debtor recoverability, investment, cyclical activity. Have you reviewed your currency and liquidity risks?
Have you thought through the appropriate finance your business needs? For example, debt vs equity, short or long term? Sometimes, for various good reasons, the banks are not the best place for finance. Some SMEs experience the banks as sunshine banks – ready to lend when the sun is shining and everything in the garden is rosy but shutting off finance the moment the weather turns. A survey by the British Business Bank (which is a great resource) found that 100,000 small businesses were rejected for loans by mainstream lenders – equating to £4bn of missed opportunity finance.
Non-bank and direct lending options can provide more specialist finance solutions more quickly and with better service. These platforms are small and nimble making them much more flexible, reducing costs and making the process faster and simpler. A bespoke finance broker such as Ludgate Finance in Birmingham can help find the appropriate non-bank finance you need. They have access to over 30 platforms and can finance deals from £250k to £5m.
One of the often overlooked areas in successfully obtaining business finance is to present your business to funders with a concise, well thought through plan. The clearer you are as to why you need the finance the higher the chances you have of getting it.
Review your other operating risks
These include regulatory (including tax), compliance, supplier, customer, product, staff, contractual and legal risks.
What about your external factors?
We know there is a downturn in car production. How is your market changing? What are your competitors doing? Who are the disrupters? What is the impact of Brexit on your business?
Do you have sound marketing, selling & branding strategies?
Remember that the trick is to get the customer to want to buy from you, rather than you trying to sell to them. Identify why customers buy from you – if you are unsure, ask them. It may not always be for the reasons you think.
Review your marketing plan and selling strategy and if you don’t have these, again get them. (We work with the marketing plan template from The Marketing Compass). Spend some serious effort on this – what are your market segments? What are some other markets into which you can sell? Ensure that you are not putting all your eggs in one basket but selling into different markets, different regions and to multiple customers.
Develop your brand – this is not free pens and beer mats! Your brand is what your customers say about you when you are not in the room. Invest some time and effort in a smart logo and a thought through strap line. Ensure your brand message is consistent.
Do you have great management and excellent advisers?
- Does your business have the right top management with the right blend of skills? Is there enough challenge and questioning?
- Do you have an effective yet simple governance structure?
- Does the business have a mentor or outside adviser (such as from WealthBeing)? Someone with experience of SMEs who has been where you are can add so much value.
- Find and use excellent advisers.
Dream of where you want to be in five years’ time and then plan your journey into that future.
SME Strategies is a group of ‘partner-only’ Business Advisers and Chartered Accountants. We work with SMEs in the Midlands, Thames Corridor & East Anglia. So ‘who you see’ is ‘who you get’. Our clients use our financial perspective to solve their business challenges, and for tax and accountancy services.
Our project experience includes negotiating with HMRC to halve a tax bill, advising on disruptive new technology, turning around several businesses, setting up others for growth, generating concise management reporting, mentoring business owners and pursuing recovery for incorrect tax advice. If you have a pressing issue or need help finding the best direction for the business then email us to receive our one page kick-start business plan or a complementary business review meeting.
David Eaton, SME Strategies