News focus: Car suppliers lag behind

1 June 2012

7 June | Anna Scott

Anna Scott explores the challenges that the boost for UK car manufacturing has given its suppliers.

General Motors' announcement last month of a £125 million investment in its Vauxhall Ellesmere Port car plant was the most recent in a series of good news stories for the UK automotive sector.

Plans to manufacture the Vauxhall Astra at the plant from 2015 will lead to the creation of 700 jobs, and a £1 billion investment in the UK supply chain. Jaguar Land Rover, Honda and Nissan are among the car companies investing in the UK automotive manufacturing sector, and the past 18 months has seen a total investment of £4.5 billion in UK-based car plants.

These deals have a massive impact on the UK supply chain: the Society of Motor Manufacturers and Traders (SMMT) estimates that every job in the UK vehicle assembly sector supports 7.5 elsewhere in the economy. The automotive supply chain also typically generates £4.5-£5 billion of added value each year. So while the government and manufacturing workforces celebrate these big wins, there are calls from various parties to make the supply chain as UK-based as possible.

The Automotive Council, a body set up to forge links between government and the UK automotive industry, has calculated in its report Growing the Automotive Supply Chain, that the amount UK-based automotive manufacturers spend in the UK equates to 36 per cent of their global purchasing spend. It also estimates that about 80 per cent of all component types required for vehicle assembly operations can be produced by UK suppliers.

“All vehicle manufacturers have made clear that they would like local suppliers to be in their supply chain,” says Paul Everitt, chief executive of the SMMT. “Proximity is important, and transport costs are rising. There are additional costs and vulnerabilities associated with an extended supply chain. So organisations are looking for a more regional supply base.”

Jaguar Land Rover needs late configuration of car components to be possible because of the expensive ad hoc features it offers customers. “We like the customer to have the ability to choose what they want in their cars, and we don’t want to have to store a lot of these components somewhere,” says Dave Allen, JLR’s purchasing director. “So we need to have suppliers adjacent to our plant.”

Well over half of JLR’s spend in the supply chain is with UK-based suppliers, many of them local to its plants in the West Midlands.

But there are issues with the capacity and capability of the UK auto components supply chain. “Car production in the US has ramped up with something of a resurgence and it’s happened quickly,” says Robert Downes, policy adviser at the Forum of Private Business. “The supplier side is playing catch up at the moment to make sure it keeps pace.” For this the supplier side needs investment. With the banking sector being so risk-averse to lending, this investment is hard to come by.

Part of the problem is that banks look for relatively short-term returns on their investments. “While the automotive sector is a high-volume, low-margin industry, it is also secure,” says Everitt. GM Vauxhall plans to manufacture the Astra at the Ellesmere Port plant from 2015 for at least five years. Then demand for replacement parts for the car could run on for a further five to seven years. “The potential business could be over 10-15 years,” he adds.

Another problem is that the kinds of funding banks do offer are not necessarily suitable for the supply chain. “Some supply chain finance products only work when the company has a direct relationship with the manufacturer,” says Everitt.  The problem with this is many of the components companies in the supply chain don’t even have a relationship with the tier 1 suppliers to the manufacturer.

Allen agrees that the banks are too cautious, particularly when it comes to lending to tier 2 and 3 suppliers. “The government can also start to put more pressure on the banks to lend more,” he says. “The lack of capacity and capability in [tiers 2 and 3] are often used as one of the reasons why tier 1 suppliers are not UK based. So it’s important that we resolve that.”

Non-bank funding is one solution. The government offers the Advanced Manufacturing Supply Chain Initiative which makes available up to £125 million to UK suppliers. The fund is set up as a competition to manufacturers that can create competitive supply chains (see panel), but Allen suggests that it should be set up as an ongoing “evergreen” fund.

He also suggests that organisations in the sector should be encouraging inward investment by overseas suppliers, in the same way manufacturers have done to win contracts to build cars in the UK. “We need to have a very proactive and visible outward face of UK PLC waving a flag to say the UK is a good place to do business.”

Allen’s own company “tries to make as compelling a case as possible by being relatively open about our growth plans to suppliers”. But he adds for many suppliers, there is a challenge in choosing where to invest. Manufacturers can also offer prompt payments terms and help to find other avenues of market activity for suppliers, but suppliers themselves need to do a lot of the relationship building with manufacturers, in order to build a local supply chain.

According to the Automotive Council’s report, suppliers need to know where sourcing decisions are made within the manufacturer, and understand what manufacturers’ short and medium-term needs are, and where critical support is needed.

It’s a double-edged sword for suppliers. Until more investment is generated, having the capacity to offer what automotive manufacturers want will be a tough call. Until that’s available, the relationship building with purchasers will be essential.


Advanced Manufacturing Supply Chain Initiative

Funding from the Department for Business Innovation & Skills (BIS) has made available up to £125 million for “innovative projects where the UK is well placed to take a global lead with one of the desired outcomes being to increase the level of purchasing from UK supply chains by primes and tier 1s,” a BIS spokesperson says. The scheme awards successful applicants for funding in two ways:

Stream 1 – £100 million is available in all manufacturing sectors for collaborative projects. Organisations must apply for this by 13 June 2012 for the first round of funding and 12 September 2012 for the second round.

Stream 2 – £25 million for projects in the automotive and aerospace sectors, and organisations must apply by 13 June.

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