It's difficult for businesses to plan for the unexpected, and 2020 has been hard to predict. Therefore, you should conserve cash where possible and have a strong focus on your short-term business model; ideally working to a three-month rolling plan. Pay attention to areas you can control, as the unknown will distract your focus when you need it most.
Long term, it's key that you have a strong, easy-to-implement strategy that lets you evolve with your market. This will keep your business viable and gain the confidence and support of suppliers, finance partners, and other stakeholders.
Top concerns for automotive dealers
During the summer, our report partner, Cox Automotive, asked dealers about their greatest concerns for their business. Many of those responding had taken advantage of the furlough scheme, and all were physically closed, though some had investigated 'click and collect' or online retail options, where feasible.
The top-ranked response was the health of employees and customers, followed by cash flow, reduced sales volumes, entering a recession, and further lockdown measures. A shift into survival mode was expected across businesses in all markets.
In September 2020, the same question was asked and the top five concerns were:
1 Entering into a slowing economic market
2 Reduced sales volumes
3 Further regional lockdown measures
4 The health of employees and customers
5 Cash flow
Dealers focus by September had changed from the easing of lockdown as employees continued to be supported by the furlough scheme and cash flow in dealerships had been helped by government support, rental and mortgage holidays. This both benefited their own businesses and generated pent-up demand for new and used vehicles. So, strategies understandably changed from survival to as many staff as possible back into work to meet the sales and aftersales demand.
Where the automotive industry is now
In both surveys, issues around reduced sales volumes and cash flow loomed large and it's likely they would feature in the top-five if the survey were repeated. So would uncertainty around what is to come next for both further lockdowns and Brexit.
We recently hosted a series of automotive industry roundtables, consensus from which suggests many companies have benefited from government support, such as:
The furlough scheme
VAT payment postponements
Mortgage or rent holidays
Bounce back loans
This means cash flow is looking healthy for the automotive industry. However, if lockdown extends further, or the shortage of in-demand vehicles in the market continues, then the long-term viability of some dealers may be in question.
As the economy slows, so could vehicle and parts sales, and aftersales hours. Costs may start to increase with the end of government schemes, and you may be left with weaker cash flow, just as reserves built up over the third quarter of 2020 decline, but this decline is likely to be in Q1 and Q2 of 2021.
If you need support it is wise to reach early and communicate with your key stakeholders, including funders, employees and senior management, as well as gaining support from your financial advisors.
Understanding the possible outcomes
Our report details several possible best, middle and worst-case scenarios for the future of the automotive industry.
We suggest you use the report to create short-term plans for 2020 and 2021 to cover each scenario. This will enable you to predict the potential impact each of these scenarios can have on your company's profitability and cash flow position.
The report will also cover what you need to know to plan further forward into 2021 and beyond.
Additional considerations for the automotive industry
While COVID-19 has topped the agenda, Brexit, corporate average fuel economy (CAFE) regulations and block exemption are starting to raise questions. How will they impact automotive industry markets and how will this change your strategy in the coming month and years?
The Cartel Court case between Peugeot Austria and one of its dealers, Buechl, could have long-term impacts on competition laws in the EU. How will this impact the UK?
While we await a final decision on an appeal, most commentators are clear that relationships between manufacturers and their dealer networks will likely come under the spotlight in coming months.
Obliging dealers to participate in manufacturer-determined price campaigns
Linking payment of dealer bonuses to manufacturer-managed customer satisfaction surveys
Passing on the cost of ‘mystery shop’ exercises to the dealer
Applying aggressive and complex sales targets at artificially high levels
Setting workshop rates for guarantee and warranty work at unprofitable rates for the dealer
While many dealers have taken advantage of government support this year, assistance has also come from captive and other finance companies.
Several of these companies have extended vehicle stocking terms, which has enabled dealers to fund their vehicles more effectively and to share the burden of the uncertain market.
Pent-up demand for cars has remained strong and some consumers have found themselves with more disposable income, as they have not been on holiday or had to pay to commute. With the return to work, people have also looked to avoid public transport due to the risk of infection and this has increased the demand for new and used vehicles.
The demand for light commercial vehicles has also remained relatively strong. This can be attributed to increased online sales, as consumers under lockdown have switched their purchasing from 'bricks to clicks', which has meant that the demand for delivery vans has increased, out stripping supply in the market. However, with continuing uncertainty in the market and further restrictions possible, it is possible that the winter months will see a further impact on dealers.
Interest rates could support the automotive industry
The Bank of England has reduced the interest rate to 0.1% and there have been comments from some quarters that interest rates could become negative. Low interest rates or negative interest rates would encourage borrowing in order to stimulate the UK economy.
However, this could also make borrowing for a new vehicle cheaper for both consumers and dealers investing in the vehicle stocking process.
To continue the conversation about the challenges facing the automotive industry, get in touch with Owen Edwards.