6 Aug 2020
Cars in port tilt shift aerial view

Helping UK automotive flourish despite supply chain difficulties

David Borland

EY UK&I Automotive Leader

Passionate about the automotive industry and delivering innovative solutions for clients. Outside of work, focused on family and community. Enjoys sports.

James Nicholson

Partner, Advanced Manufacturing & Mobility, Ernst & Young LLP

Strategy leader in automotive, industrial products and manufacturing. Passionate about sustainable, long-term value and the power of diverse perspectives and thinking.

6 Aug 2020

The automotive value chain must ensure resilience today, whilst innovating for future growth.

Before the COVID-19 pandemic, many automotive businesses were struggling. Now they are in peril. Government furlough payments and soft loans helped in the short term but falling volumes, cancelled projects and difficulty refinancing debt are a grave concern for original equipment manufacturers (OEMs) and suppliers already battling to revive output, recover profitability and manage the transition to zero emission technologies.

According to the Society of Motor Manufacturers and Traders (SMMT), UK automotive manufacturing employed 168,000 people in 2019, with a further 655,000 jobs in the rest of the automotive value chain. 1 The SMMT now says one in six posts is under threat and is calling for sector-wide support. 2

COVID-19 lockdowns compounded vulnerabilities in globalised automotive supply chains exposed by recent trade disputes. National efforts to reduce job losses and maintain competitiveness will be hindered if policy responds more slowly than the pace of change in the industrial landscape. Both demand-side and supply-side might benefit from stimulus.

How can players and affected stakeholders across the value chain emerge stronger than before?

The last straw, not the root cause

Long before anyone had heard of COVID-19, several OEMs and suppliers were shrinking their European operations. 3,4,5,6 Vehicle manufacturers are responding to the crisis by further reducing capacity and cancelling or deferring new models. 7,8,9,10,11,12 In general, suppliers have less cash in hand and greater regional exposure than OEMs and are at higher risk. Some made layoffs during the lockdown, some became insolvent before they could restart. 13,14

Restart? Yes. Back to normal? No.

Factories have reopened but weeks of sales have been lost. The European Automobile Manufacturers’ Association (ACEA) forecasts European vehicle sales in 2020 will be 25% lower than 2019. 15 Preparing for the restart with additional protective measures and redesigned workflows cost money and reduced efficiency. Working capital has been hit as sales have stopped but vendors received payment for previous deliveries. Suppliers are less optimistic than OEMs that output will return to pre-crisis levels until social distancing ends. 13,16,17,18,19

Events are moving quickly

Large OEMs already have departments to manage supplier distress but what if the scale and speed of restructuring is too over whelming? Supplier failures in the financial crisis played out over several years; what if this time it is just a few months? Orders are weak and furlough subsidies are being withdrawn, squeezing cash reserves. Financing is available but at increasing cost. 20 Existing debt must also be refinanced. Requests for early or upfront payments are rising and OEMs are already nudging multinational suppliers to absorb weaker rivals. 16,21,22

Troubling times for global supply chains

Whilst OEMs react to financial turmoil amongst their suppliers, they must re-examine global supply chain vulnerabilities exposed by trade stresses - the UK’s future relationship with its biggest trading partners remains unclear - and rolling regional lockdowns. Some will be tempted to avoid such shocks in future by sourcing regionally rather than globally. Good for supply chain resilience but bad for the factories that lose customers.

There are few easy options

Supplier distress is usually managed reactively with limited risk forecasting. Financial health monitoring mostly relies on data that is published weeks after the fact. Faltering deliveries or counterparties reporting payment problems are often a surprise.

The customer’s options for resolving supplier failure often have downsides:

  • Help them using quicker payments or higher prices?
  • Stabilise them by taking on liabilities via loan guarantees, capital injection or acquisition?
  • Build inventory to sidestep potential interruptions?
  • Encourage consolidation and grant pricing power to the survivors?

What about moving to a new source? Customer-owned tooling at direct suppliers is generally more effective for protecting intellectual property than production continuity. Physical access can be troublesome and tooling often requires modification to fit a new factory. Resourcing therefore frequently turns into dual sourcing; requiring financial investment and upfront planning.

Companies are already thinking about how to repay huge sums borrowed to weather the lockdown. 23,24,25 They have no appetite for cost increases and wish to thrive in the longer term. Greater proactivity and agility can identify and resolve problems before the threat to current output overshadows wider concerns. Technology is increasingly important as vehicles transition from traditional combustion engines to zero emissions. How will companies preserve gains in sustainability and traceability? A futureproof sourcing footprint considers demand, technology, the final assembly location and supply chain vulnerabilities. The analysis should focus on long-term value and identify actions to take today through future-back planning.

Using a future-back approach, companies can explore how global challenges and megatrends may impact the future

Future back planning

Quick wins to improve supplier risk management

  • Increase the efficiency of existing tools (e.g., by simplifying approvals for supplier intervention)
  • Stress test internal resources and reaction plans for confronting systemic problems and market access issues
  • Improve intelligence about supplier and competitor financial health and strategic alternatives by building or buying forward-looking data
  • Check tool ownership, condition, access rights and practical re-use alternatives
  • Processes for detailed analysis of upstream suppliers must be available, albeit rarely used

Governments must remain alert

The threat of lost jobs and technology capability should worry governments, especially in areas like electrification and autonomy where many promising firms lack scale. Effective analysis is challenging, firms are in difficulty, and the consequences for their counterparties, must be identified. Some risks are obvious: internal combustion engine technology seems in permanent decline. Issues are complex: if the pool of large vehicle manufacturers shrinks as rivals depart, how can the supply base meet their competitive needs and support smaller players with diverse requirements?

Bold options exist

There are precedents where automotive companies created special arrangements to manage the terminal decline of factories burdened with outdated technologies or unresolvable legacy cost problems, but they acted alone. 26 A coalition could be more powerful and make long-term decisions that consider a broad range of stakeholders. A scheme could involve select assets of the OEMs, where vertical integration was advantageous. Shared risk will make rivals uncomfortable, but their influence would be stronger collectively than individually. If competitors can share on-demand mobility businesses at arm’s length, why not vehicle technologies? 27 Although there would be complexities, a multiparty scheme with a long-range view and predictable funding might gain the support of unions and politicians more readily than solo efforts.

Suppliers might solve the problem through mergers or joint ventures. Consolidation and capacity reductions following the financial crisis rewarded them with greater pricing power, why not this time? A new generation of aspiring OEMs is an opportunity. Their vision of Lego-like interchangeable vehicle systems is attracting money and contracts from established players. 28,29,30 Selling complex modules to them could prove more lucrative than bidding for each switch on a traditional brand’s steering wheel.

I’m from the government and I’m here to help

How will governments preserve carefully crafted industrial strategies in the face of market volatility? The UK recognised the special circumstances of COVID-19 in recent changes to insolvency law. 31 Can active intervention be avoided? European governments are offering direct financial support. 32,33 Some recently increased purchase incentives and rewarded those scrapping older vehicles. 34,35  The effectiveness of demand-side incentives as a stimulus for suppliers depends on the local content of the target products. In Germany, where homegrown brands are the market leaders, domestic production is more closely aligned with registrations than in the UK, where production has been reducing since 2016 and only 2 of the top 10 cars sold in 2019 were locally built. 36 

Five questions to help frame the issue

For OEMs …

  1. Are providers of important future technologies financially secure?
  2. How will our competitors be affected and act?
  3. How will this affect our sustainability strategy?
  4. What is the holistic remedy to permanent declines in technologies that affect our own and supplier assets?
  5. How do we engage with governments and unions about widespread supplier capacity and competence changes?

For suppliers …

  1. Which products or sites are reliant on one or two major customers or sales to other regions?
  2. What does our footprint and technology set need to look like for the future?
  3. Is there an opportunity to consolidate production assets, for example, a sector solution or joint venture with other suppliers for commoditised or declining content or to solve global trade concerns?
  4. Where are the underserved customers and how can we appeal to them?
  5. What are the scenarios for mergers and acquisitions that would grow our business and increase our value to our customers?

For governments …

  1. Which companies and sites are key to national competitiveness now and in the future?
  2. Where might separate policies be needed to stimulate both supply-side and demand-side?
  3. Where are the systemic issues that changes to policy could usefully mitigate?
  4. How will multinational companies choose between plants in different countries?
  5. What effective support could we provide without resorting to direct intervention?


The COVID-19 pandemic has intensified financial problems in the automotive industry. To prosper, companies must combine timely and accurate assessment of which counterparties are at risk with a clear vision of the best future operational footprint and partners.

About this article

David Borland

EY UK&I Automotive Leader

Passionate about the automotive industry and delivering innovative solutions for clients. Outside of work, focused on family and community. Enjoys sports.

James Nicholson

Partner, Advanced Manufacturing & Mobility, Ernst & Young LLP

Strategy leader in automotive, industrial products and manufacturing. Passionate about sustainable, long-term value and the power of diverse perspectives and thinking.