While the number of UK automotive businesses reported to be in significant financial distress is on the rise, Julie Palmer, partner at insolvency specialist Begbies Traynor, believes there is hope on the horizon for the strategically important UK business sector.
Often held up as a highly representative industry when it comes to the robustness of the UK economy, the automotive sector plays an important symbolic and strategic role and is closely watched by many.
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It employs over 180,000 people, contributes £20bn directly to the Treasury and accounts for more than 12% of UK exports. However, there is no doubt that the UK automotive sector is currently experiencing a challenging period.
Figures released by Society of Motor Manufacturers and Traders (SMMT) show that the industry has seen two years of decline in the number of new car registrations, and the early signs are that this trend will continue across 2019. Since the decade high point of 2.6 million new registrations recorded in 2015, the subsequent years have seen decreases of 5% (2017) and 6% (2018). As a consequence, brands and retailers are feeling the pinch.
Industry experts are associating this with the significant fall recently witnessed in diesel engine sales. A previously popular and government-incentivised choice, diesel vehicle sales have seen a 38% drop in recent years from their peak – the result of 21 consecutive months of sales decline, and contributing to the overall volume drop the automotive sector is currently having to grapple with.
Confirming this rapid fall, diesel cars now make up less than 32% of the market, having been virtually at parity with petrol engines just two years ago. Emission scandals, tighter regulations and growing consumer demand for alternative greener transport solutions are helping to turn people away from diesel.
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By GlobalDataOther influences are playing their part when it comes to sales volume declines seen since 2015. In particular, the continued uncertainty around the implications of Brexit – both on the complex supply chains the automotive manufacturing sector utilises, as well as stalled consumer confidence – is negatively influencing big-ticket purchase decisions.
SMMT chief executive Mike Hawes echoes overall business sentiment when he says: “It’s still hard to see any upside to Brexit. Everyone recognises that Brexit is an existential threat to the UK automotive industry, and we hope a practical solution will prevail.”
Red Flag Alert
Latest figures from our Begbies Traynor Red Flag Alert support the challenging scenario facing the automotive sector.
During the first quarter of this year, 484,000 UK businesses are reported to be in ‘significant financial distress’ – a figure that represents 16% of all UK businesses. The overall figure is a 2% increase compared to the same period in 2018.
Drilling down into the automotive sector, the picture is also concerning. There has been a 12% uplift in the number of businesses connected to the sale of used cars and light vehicles reporting that they are in significant financial distress. When it comes to the retail of new cars, we have seen a 4% rise in the number of businesses reporting financial difficulties compared to the first quarter last year. To put these percentage increases into context, they currently represent 2,128 companies in the used vehicle sector, and 3,559 businesses in the new car retail sector.
While the current situation is of great concern for an important UK industry, there also remains cause for optimism moving forward. The thirst for environmentally friendly solutions, such as electric vehicle, hybrids and hydrogen fuel cell power, is gaining real traction as legislators and consumers drive the industry to innovate and deliver commercially and scientifically acceptable answers for society’s future transport requirements.
It will be the brands and businesses that continue to pioneer and innovate to provide the solutions demanded that can secure their futures, and some are already doing so. Over 2 million electric or hybrid electric vehicles were sold worldwide in 2018, led by the marketing and technical prowess of brands such as Tesla. But more established brands such as Toyota, Honda and General Motors are also seeing their investment foresight begin to pay dividends as they start to reach scale in the tens of thousands of units.
This trend offers hope to all involved in the UK automotive sector as it transitions over time from traditional power sources to new alternatives. Subsequent success can help ensure that the worrying figures demonstrated in the Red Flag Alert can be tackled and reversed and the sector can begin to benefit from emerging green solutions that will power the vehicles we want to drive. As with many of the revolutions in automotive in the past, it is a question of whether companies can innovate or perish.
by Julie Palmer
