Choosing a new car used to be determined by a few simple factors – style, speed, and, for those who were economically minded, how much it cost to run. But the newest generation of vehicles are kitted out with all the latest technology, have internet capability, and are able to link to external devices and networks. The connected car market is revolutionising both the experience of driving, and the automotive industry – and no more so than for the smaller companies that serve it.
SMEs struggle for investment
Of the 2,350 companies operating in the British automotive sector, the bulk are small and medium firms engaged in the supply chain or aftermarket. More than 52 per cent of employment in England’s automotive manufacturing is in companies with fewer than 500 staff, but these account for almost 99 per cent of all firms in the sector. And for these smaller operators, keeping up with the boom in connected cars is a challenge. The connected car market is growing at a five-year compound rate of 45 per cent a year, according to research from BI Intelligence, ten times faster than the general car market. It is calculated three out of four of the 92 million cars shipped globally in 2020 will come with internet connection hardware. But many small garages, car dealers, and manufacturers are struggling to keep pace with this technological change, and cannot find the investment necessary to remain up-to-date.
Smaller players in Britain’s £55 billion automotive industry already languish behind their larger peers in terms of access to funding. Yet, they have sizeable expenses – production tools, for example, involve a huge outlay for smaller companies in the supply chain, with returns on investment not evident for some months in most cases. Banks have often proved reluctant to lend to small suppliers in an industry where lead times on new products can be five years or more. Now businesses are expected to invest in state-of-the-art digital technology to keep pace with industry developments, this financial divide is becoming ever more pronounced.
Alternative finance on the rise
Large manufacturers and vehicle suppliers are making big investments in the connected car field, but smaller companies rarely have the resources to follow suit. Whether it is money to invest in new factory premises, buy new plant and machinery, or simply use as extra working capital, auto-related SMEs are often poorly served by the big financial institutions. A 2012 study by the Smith Institute into finance supply to the UK automotive industry found conventional lenders had a common misunderstanding and disinterest in automotive suppliers, particularly smaller businesses. Many firms complained that banks frequently sought to renegotiate overdraft agreements, sometimes used a technical breach of covenant to justify charging a larger fee for borrowing, or demanded evidence that firms were profitable on a monthly basis before lending – a tough requirement for automotive companies whose income often varies considerably at different stages in the business cycle. Directors of automotive businesses have also been asked more often for personal guarantees on bank loans since 2008, a development many resent, and resist.
Unable to raise money from the banks, firms have been increasingly relying on their own cashflow to fund growth – where that is possible. Asset finance also remains a popular option for about one in four auto firms, the Smith research showed, while trade credit was used by about 15 per cent. But those for whom working capital and cash reserves are limited have also been increasingly looking to alternative finance for help filling the growth funding gap – peer-to-peer loans, crowdfunding, invoice factoring, and short-term, unsecured finance, such as that provided by Boost Capital.
Government help for smaller firms
The Government is aware that SMEs in the automotive sector are often financially disadvantaged, and is doing something to help. It launched a £20 million fund earlier this year to encourage the development of autonomous and connected cars, with small and medium firms eligible for support. Small manufacturers could receive as much as 70 per cent of their research and development project costs, while medium firms could get 60 per cent of their expenses covered. Participating SMEs will also have access to a growth workshop, an online diagnostic, and an expert to provide coaching, mentoring and help with developing a growth plan. But those interested should hurry – the deadline for entries is September 30.
In 2013, the Government also joined the Automotive Council and industry leaders to launch the Advanced Propulsion Scheme, part of a £1 billion initiative to help to grow and develop the UK’s vehicle and component manufacturing sector over the next decade. More than 7,600 apprentices will be created by 2018, as well as 1,700 graduates in the automotive-related fields. Firms, including SMEs, are being nurtured to develop new R&D projects, and foster innovation, while the supply chain in Britain is being strengthened, with more car and vehicle parts produced in the UK itself.
The opportunities of connectivity
The connected car does present enterprising business owners with some great opportunities. The embedded connectivity of these cars will allow manufacturers to maintain a greater level of contact with customers for the purposes of aftersales service and repairs. Dealers and garages will also be able to communicate with clients with tremendous ease on an ongoing basis, trouble-shooting problems, and providing a better and faster level of customer service. Fundamentally, relationships between drivers and those putting and keeping their vehicles on the road will become closer, which provides firms with a great chance to cultivate repeat business, and grow a loyal customer base. About 25,000 new manufacturing jobs will also be created by 2030 in the UK’s automotive industry by the connected car market boom, a study by KPMG for the Society of Motor Manufacturers & Traders (SMMT) has found.
But in order for SMEs to play a full and productive role in this period of innovation, they need finance to make the necessary investment in future growth plans. Banks must better understand the automotive sector as a whole, and learn that it has long since shaken off its oily and unsophisticated image, and is now entering a period of high technology and innovation. And too few business owners realise the funding options away from the traditional banking institutions, with various forms of alternative finance potentially offering them great growth funding delivered quickly, and on flexible terms. The new developments in the auto industry will require investment, adaptation, and the adoption of a new business model for many. But for those that get the formula right, the future of the connected car market holds enormous rewards.