Outlook deteriorating for UK automotive sector

The credit risk in the UK automotive industry is set to deteriorate.

In its in-depth report on the automotive sector, trade credit insurer Atradius reveals several challenges facing the industry which stem from supply issues, decreased consumer demand and rising costs.  Combined, these have led to Atradius rating UK automotive with a ‘poor’ performance outlook.

In addition to the pandemic hampering new car sales this year, with new car registrations down 34% year on year in September, the current semiconductor shortage is severely affecting production. As a result, British automotive output is forecast to rebound by only 8.5% in 2021 after contracting 25.6% in 2020.

Positively, Atradius highlights that concerns over severe repercussions caused by Brexit such as tariff price hikes and trade frictions have eased thanks to the allowance for tariff and quota-free trade between the UK and EU. However, costs associated with customs declarations, local content audits and delays in just-in-time systems remain issues for some Original Equipment Manufacturers (OEMs) and suppliers.

According to the report, profit margins of UK automotive businesses are under strain due to ongoing production cuts and higher prices for steels/metals and energy. Atradius warns margins will deteriorate further, driven by continued disruptions in vehicle production. To combat this and control costs, suppliers will have to cut back their output, often at short notice, while having to manage workforce numbers or reduce working hours.

Atradius also reports cash-flow issues are on the rise and will persist in the coming months while payment delays and insolvencies are also expected to increase over the next year, mainly affecting small suppliers. While payments in the UK industry take an average of 60 days, suppliers with low leverage have to wait as long as 150 to 180 days. After declines in insolvency rates in 2020 and H1 2021, business failures could increase by more than 50% year on year in the coming 12 months.

On a global level, Atradius points to four key growth opportunities for the automotive industry; global pent-up demand for new cars, government schemes backing the transition to lower-emission vehicles and e-mobility, a robust growth outlook for hybrid and electric vehicles as well as a low vehicle density with a growing middle-class which will provide ample room for ‘catch-up growth’ in many emerging markets. However, prolonged semiconductor shortages and another surge of the pandemic could delay vehicle production recovery in 2022 while complex global supply chains remain susceptible to disruptions triggered by protectionism and geopolitical risks.

Meanwhile, Atradius reports the shift to e-mobility poses challenges for small and medium-sized suppliers who could lack the technological or financial means to climb up the value chain. In addition, established automotive businesses also face increasing competition from large tech companies and start-ups.

Nicola Harris, Senior Underwriter at Atradius, commented: “Several different issues are amalgamating to heap pressure on the UK automotive sector, driving a deterioration in credit risk. As well as production delays, higher input prices and cost management issues, sector businesses face unwinding fiscal support, expiring bankruptcy moratoriums and repayment of loan obligations drawn at the height of the pandemic. Monitoring the financial health of buyers and their ability to pay is essential along with the flexibility and resilience to adapt to a situation which could change quickly.”