- The coronavirus pandemic has brought the worst for the British automobile sector
- The revival prospects of the sector post the pandemic hinges a lot on the trade deals which could bring about a strong turnaround.
- Tax concessions and other sector-specific stimulus measures are required to help the industry restart the production lines
The Society of Motor Manufacturers and Traders (SMMT), the trade body of Automobile manufacturers of United Kingdom, in a report released on Friday 26th of June 2020, enumerated the state of affairs that the auto industry is in, post the lockdown. The industry, which was the crowning jewel of British exports, has come to a very weak state following the outbreak of the Coronavirus. The production of 5,314 cars in May 2020, though can be called a significant jump compared to only 197 cars produced in the previous month of April, but these figures are nowhere near to what the industry uses to produce in the pre-pandemic period and is a tiny fraction of its total capacity. The plants remained idle or started producing at a reduced capacity in the month of May that led to a drop of 95.4 per cent drop in the production for the month, while on a year to date basis the decline was of 41.7 per cent as compared to 2019.
There are three factors currently that can be called primarily responsible for the trouble of the industry. The logistics and supply chain setup of the industry has been very badly affected by the coronavirus pandemic. The British Automobile industry has been for a while sourcing a significant portion of its components from countries like China which are cheap then producing it in the United Kingdom and help the British industry be internationally competitive. When the pandemic first broke out in China, most of the suppliers from china has to shut their factories and warehouses for an indefinite period. This inadvertently also resulted in a stoppage of production lines in the United Kingdom. The disruption was so sudden that the manufacturers in the country did not have an opportunity to even develop alternative sources and were forced to issue production and revenue warnings. After the lockdown was imposed, things became worse from bad, the factories which were operating with whatever raw material inventories they had, had to shut down completely because the labour was forced to stay at home because of the government directive. Third and most importantly, the demand structure facing the industry has also crumbled down during the time the lockdown was in effect. The industry which exports nearly 81 per cent of all cars that it produces, is not able to access the international markets because of restricted movement of goods across borders because of the pandemic.
Factors critical to the revival
Despite being badly affected by the pandemic, most of the companies in the industry has been able to keep itself intact thanks to the government’s furloughing scheme and the loan guarantee scheme. The industry has been able to retain several of its highly skilled workers who would have otherwise been displaced during the lockdown and are now slowly returning after the lockdown has been thrown open. There are still more important and pressing considerations now that needs to be addressed urgently if early recovery is to be expected. First of all, the supply chains of the industry need to be restored on an urgent basis. The problem that had started before the lockdown has only got complicated because of the lockdown. The industry urgently needs multiple sources of supply of components so that situation that was developed in February and March this year can be avoided. The second important factor that will have a bearing on the early revival of the industry is the demand situation faced by the industry. The export corridors for the industry need to be opened urgently with destination countries, even if the country has to enter into tariff agreements that allow concessions on goods entering the United Kingdom.
The criticality of FTA’s for the revival of the industry
The United States of America and the European Union are important export destinations for the British car industry. In the year 2019, the industry exported 55 per cent of its produced cars to the European Union and 19 per cent to the United States of America. A suitable free trade agreement with these two economic blocks and an increase in exports to these two blocks can virtually make up for all the losses it has suffered in the rest of the smaller markets. Realising the importance of the above the government has in fact been engaging in trade negotiations with both these blocks through videoconferencing even when the lockdown was in full effect. The United Kingdom currently has FTA's in place with South Africa, South Korea, Morocco, and Israel and is currently in negotiation with Canada, Mexico, United States, European Union, Australia, Turkey, Japan, Ukraine, Algeria, and New Zealand. What is also worth noting here is that these FTA’s will also help the country to resolve is supply chain issues, as many of these countries can supply the components at the required quality levels and suitable prices.
Aston Martin Lagonda Global Holdings plc
Aston Martin Lagonda Global Holdings plc (LON: AML) is a British luxury car manufacturer which manufactures Luxury sports cars as well as grand tourers. The company is headquartered in Gaydon In United Kingdom and has three production facilities, a 55 acres facility in Gaydon, a 90 acres facility in St Athan in wales alongside its old car making facility at Newport Pagnell.
The company had announced in March of this year that it would be halting production in all its plants in the UK till 20th of April 2020 on account of reduced demand and the closure of about two-third of its distributors worldwide.
Nearly two and half months after that decision the company in the first week of June announced that it would cut its workforce by nearly 20 per cent which works out to about 500 positions on account of the reduced demand for luxury sports cars in the current market position. The company has been trying to save as much as £18 million in operating and manufacturing costs and £10 million in reduced capital expenditure. The company has raised £207 million of funds through equity placing and high-cost debt. As per its announcement the placing and the Retail Offer in raised gross proceeds of £152 million, while £55million has been arranged through borrowing.
The stocks of the company closed at GBX 50.90, down by 18.43 per cent on 26 June 2020 following the announcement.
The Automobile industry will see a steady bounce back in its production levels as has been witnessed by several manufacturing industries in June. Though it’s still not certain as lots of factors still need to be analysed, but the IHS Markit/ CIPS Flash manufacturing PMI for the month of the June has already indicated that the manufacturing sector in the country is entering into an expansionary phase. The critical factor that remains then to ensure a speedy turnaround will be a rise in demand levels for cars. In this regard, the government is fast at work negotiating trade deals with potential car importing countries, the sooner a breakthrough is achieved, things will start moving up in tandem.