Coface has upgraded its risk assessment for UK automotive sector but businesses still need to watch out for hazards on the road. The issue of new number plates means March is typically one of the busiest times for the automotive sector which is now showing signs of recovery after several difficult years. A revival in new and used car and commercial vehicle sales and a better outlook for investment are fuelling optimism but take care because insolvencies are still rising.
Background
Coface upgraded our risk assessments of the automotive sector in the UK and five other countries (India, Japan, South Korea, Poland, and Czechia) in our latest Barometer report with the UK moving from very high risk to high risk, in line with rest of Western Europe. The upgrade reflects improvement after the twin blows of the Pandemic and Brexit and the prospects for future growth due to the transition to electric vehicles (EVs). The UK Government’s zero emission vehicle (ZEV) mandate requires all new cars to be zero emission by 2035.
The current picture
The UK automotive sector’s recovery has benefited from improving business and consumer sentiment in response to easing inflation rates, buoyant real wages, and the prospect of lower interest rates. According to Deloitte’s Consumer Tracker, 6.55% of consumers were planning to buy a new car in the next three months in Q4 2023, one of the highest levels of purchasing intent since Q4 2017.
There’s also been support for the sector from the Government, including the extension of tariff-free exports of BEVs between the EU and the UK until 2027 and capital allowances (full expensing) for companies when investing in plant and machinery. In addition, major investment announcements by the likes of Nissan, BMW, Jaguar Land Rover and Tata in 2023 have helped restore confidence after several factory closures (eg Honda’s Swindon site, Ford Dagenham) in the years after Brexit.
But despite upgrading our assessment of the UK automotive sector, we advise businesses operating in the sector to be conscious of the following risk factors:
Domestic activity still behind 2019
Even though the new and used car markets have rallied and more cars have been rolling off UK production lines, the numbers are lower than before the pandemic.
For example, according to the latest figures from the Society of Motor Manufacturers and Traders (SMMT) there was a 10.4% year-on-year increase in new car registrations in March 2024 but new car registrations in 2023 were 18% lower than 2019. And while the SMMT announced new car production volumes were up slightly in Q1, it doesn’t expect yearly output to reach 1.2 million until towards the end of the decade, compared with around 1.3million in 2019.
Uncertainties over transition to electric vehicles
Electric vehicles are the key driver for growth in the automotive sector and yet the transition may not be swift or smooth. The SMMT announced that the number of EVs on UK roads was at an all-time high (in 2022 they accounted for 1.9% of cars and this rose to 2.7% in 2023), but also noted that more motorists were keeping their cars longer with the average car now nine years old which may suggest the consumers are holding back. It also warned that more investment was needed in the infrastructure for EVs.
In the current economic climate, it’s likely that the upfront cost of many EVs is too high for many consumers and the industry was unsuccessful in calling for a temporary reduction of VAT on electric vehicles in the latest budget. The EV market has also encountered more problems globally in the last year with the leading electric car manufacturer, Tesla, announcing price cuts and job losses in response to falling demand and tougher competition.
Difficulties in the car finance market:
Consumers typically buy new cars using finance agreements but the Finance & Leasing Association (FLA) has reported that new business volumes for new cars were 12% lower in the first two months of 2024 compared with the same period in 2023. In March, the trade body forecast growth of only 2% for the overall consumer car finance market in 2024 and noted a “shift from retail to fleet new car sales as consumers opt for obtaining electric vehicles through salary sacrifice schemes” which has implications for traditional dealerships.
Finance providers could also be faced with large compensation bills after the Financial Conduct Authority announced it was investigating concerns about unfair charges in the car loans sector.
Rising insolvencies and arrears:
Insolvencies in the automotive sector rose by 12% year-on-year in 2023 and was 57% about 2019 levels as companies struggled with higher costs and tighter margins. So far, these have mainly been creditor voluntary liquidations involving smaller companies but most segments of the sector have seen a rise since 2021 with carmakers, part manufacturers and repair shops above pre-pandemic levels.
And while more people may be planning to purchase a car, many households continue to feel the effects of the cost-of-living crisis and higher interest rates. According to the latest insolvency statistics, there were 10,136 individual insolvencies in February 2024, 23% higher than the same month in 2023. These factors are likely to influence consumer behaviour and exert a downward pressure on prices, keeping margins tight.
More challenging export markets and supply chains:
While most cars are destined for export markets, growth in recent years has been driven by domestic demand.
Despite Brexit, the EU remains the UK’s largest market but exports to other markets particularly the US have fallen even more sharply and are yet to recover (according to the SMMT, the UK exported 199,599 cars to the US in 2019 but only 73,571 in 2023). A free trade deal between the UK and US also looks a distant prospect.
More generally, manufacturers from countries like China are now jostling for space in the automotive sector, particularly in the EV market. As well as driving down prices these emerging competitors could put pressure on supplies of critical components like lithium-ion batteries. In addition, supply chains have been disrupted by the recent attacks on Red Sea shipping which has forced many container vessels to divert around Africa, adding significant delays and costs.
How Coface can help
The UK automotive sector has demonstrated that it’s one of the most resilient parts of the UK economy but Coface’s high risk assessment reinforces the potential for significant financial hazards, alongside the emerging opportunities. Fortunately, we also have the global resources and expertise to help you manage the risk and trade with confidence:
· Scrutinise prospective trading partners: With access to real-time financial, trading, payment, and fraud information on 195 million companies worldwide, with more and more businesses in the automotive supply chain looking to us to support their risk management. Coface Business Information can help you carry out effective due diligence on new customers and suppliers in the UK and overseas. You can also benefit from unique insights like our Debtor Risk Assessments (DRAs) which indicate a company’s probability of payment default over a twelve month period based on payment incidents and the latest business intelligence.
· Assess your current trade risk: URBA 360 is Coface’s powerful interactive risk management platform that enables you to monitor the financial health of current and prospective business partners. From your online dashboard, you can instantly see our DRA score and credit opinion, key company financials, and relevant country and sector risk assessments so you can make fast, informed decisions.
· Protect your business:Coface trade credit insurance indemnifies you against financial losses arising from non-payment for goods or services, as well as unexpected issues like supply chain problems, political events, and natural disasters. Having a policy frees up money that might otherwise be set aside for self-insurance as well as giving you the assurance you need to offer competitive terms and attract new business.
· Stay on top of events: The UK automotive sector attracts global manufacturers, relies on highly complex global supply chains for raw materials and components, and sells both intermediate products and vehicles to domestic and export markets. Coface’s economic reports provide valuable insights and useful background on the trade, geopolitical, and business climate in more than 160 countries and 13 sectors, including automotive.
· Outsource overseas debt collection: Save time and money by using Coface International Debt Collection to recover debts in countries with different cultures, laws, and currencies. Thanks to our global network of dedicated offices and a team of trained, multi-lingual professionals, we have the resources to investigate late payers and take legal action where necessary to get results.
Want to know how Coface can help your business know more and grow more?
Contact our experts for more information.
