Peter Cooke
considers the effects the Comprehensive Spending Review could have
on the industry.
Go deeper with GlobalData
For the last few months we have
been warned about the Comprehensive Spending Review. The results
will be with us within a few weeks of this issue of Motor
Finance.
A total of £80bn in cuts is the
conventional wisdom in terms of what is expected.
Or to put it another way, about 14%
of government spending. This amounts to 25% cuts across the board
if one excludes overseas aid and the National Health Service.
The immediate fallout of the
Comprehensive Spending Review could be quick and dramatic. Some may
argue that the impact of the cuts is already rumbling in the
background.
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By GlobalDataAs far as motor finance is
concerned, the Comprehensive Spending Review is likely to make at
least three hits on business. What is your organisation doing to
minimise the immediate impact?
First will be cutbacks or
rescheduling of capital spend, which in turn may influence vehicle
requirements, new or used, and a potential extension of replacement
cycles of retained units.
If fleets are to be reduced,
disposal or mothballing of some vehicles may be the order of the
day. This is bad news if all you want to do is sell and fund new
vehicles.
Opportunities in
adversity
But does it present other
opportunities? How about service contracts for the vehicles to be
retained? This might be a super service to start if they were being
run down and replacement cycles are suddenly extended. Disposal of
any surplus vehicles may go through longer-term contracts, but it
is surprising how many might not be covered by existing
contracts.
What is the public sector business
footprint in your sales territory? Will there potentially be a lot
of direct redundancy or postponement of expenditure?
First for dealers is to dust off,
or put in place, immediate contingency plans. How many of your
finance clients, private buyers, may be made redundant? What is the
risk management on those finance deals, are there potential
repossessions or other risks?
The other side of the equation is
to ask if future requirements among those people will be for new or
used cars?
It is not a nice topic to discuss:
but someone has to look at risk and opportunity. Hope is not a
strategy. Neither is sitting on your hands hoping nothing will
happen – that’s the economics of Tigger and the Hunny Pot.
Public sector
impact
Second, some dealers may have
serious problems if they are based in an areas with a high degree
of reliance on public sector employment, whether local authorities
or central government, or in an area that relies on substantial
grants.
The Regional Development Agencies
are to be abolished and this could lead to a less vibrant small
business sector in those areas where they have had the most
impact.
Dealers need to do their homework
and to look for creative solutions.
The third leg of the triple whammy
is spin-off: the suppliers to the public sector. I am not talking
about large defence companies and outsourcing agencies, which are
able to look after themselves.
The real concern is with the second
and third tier companies which may have relatively small contracts.
But if those contracts are abolished or seriously curtailed they
could run into all sorts of cash flow and wider financial
problems.
Indeed, at the time of writing one
major support player, the social housing services operator
Connaught, was already rolling over. Take a dispassionate look
around you business and fleet clients, indeed across your total
customer base.
What might be the implications of
cuts in your sales territory?
Changes, cutbacks will be spread
over time; they will not all happen overnight so there is time –
but not much.
Planning ahead
What contingency actions might you
plan? It’s easy to sit back and wait to see what might happen but,
in the next few weeks there is still time to plan.
The immediate financial pressure is
not on you. Use it, treat it as the lull before the storm.
A first objective exercise might be
to ask what might be the impact on the business? Draw up your
list.
Do you need to look for cuts or has
the recession from which the economy is allegedly recovering forced
you to pare the business to the bone?
What else might you be able to
trim? What new business might come out of any planned reduction in
the local public sector activity?
Better make a contingency plan while you have time. With a bit
of luck it may never need see the light of day.
