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Could supply chain issues cause problems for car finance funders?

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Published: 12 Jan 2022

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The pandemic has caused plenty of problems for all manner of trade, especially the car market. But could problems with manufacturers spread into their finance operations? Chris Lemmon writes.

Covid-19 has caused immense disruption around the world, affecting every country and every industry on the planet. The automotive industry, unfortunately, has been one of the worst affected sectors, with full-scale lockdowns, closed showrooms and staffing issues grinding sales down to their lowest point since records began. Consumer confidence and demand rebounded in 2021, however, the shortage of a little-known component called a semiconductor chip has stunted the industry’s much-needed recovery.

The latest statistics from the European Automobile Manufacturers’ Association (ACEA) revealed that EU car sales in 2021 are currently behind the totals set in 2020. In the UK specifically, data from the Society of Motor Manufacturers & Traders (SMMT) shows the continuing impact of the shortage, with car production falling 28.7% in November. Year-to-date, 797,261 vehicles have rolled off the factory floor; some 432,794 less than pre-pandemic 2019 and 667,441 off the five-year pre-Covid average of 1,464,702.

Mike Hawes, chief executive of the SMMT, acknowledges that the worrying situation is likely to run well into 2022. “With an increasingly negative economic backdrop, rising inflation and Covid resurgent home and abroad, the circumstances are the toughest in decades,” he says. “With output massively down for the past five months and likely to continue, maintaining cashflow, especially in the supply chain, is of vital importance.”

What the future may bring

Forecasts from industry analysts point to an easing of supply chain problems in the second half of 2022, as manufacturers and suppliers have sought to sever the reliance on distant factories for key materials.

The majority of semiconductor chips are currently produced in Asia, where factory closures have been widespread over the course of the pandemic. In addition, the global auto industry only uses around 8% of the total number of semiconductor chips produced – placing the needs of the automakers behind those who produce digital consumer products such as laptops, smartphones and tablets, which have seen huge spikes in demand in the working-from-home world. Of the chips designated to the auto sector, Asian marques have fared better due to closer relationships with the local suppliers.

All factors considered, a perfect storm has gathered for the car industry at the most imperfect of times. In October, Volkswagen reported that €500m had been wiped from its pre-tax profits in the third quarter of 2021, while Stellantis reported a 14% fall in revenues over the same period, with semiconductor shortages at the heart of the problem.

“Customer demand is high, we have more than 1m vehicles in our order bank in western Europe alone,” said Herbert Diess, chief executive of Volkswagen. “The results of the third quarter show once again that we must now systematically drive forward the improvement in productivity in the volume sector.”

Global reach

Vehicle and chip manufacturers alike around the world have taken steps to do just that, particularly in the US and mainland Europe. Over the past few months, OEMs have been working hard to forge stronger ties with semiconductor groups, while plans for numerous new factories have been earmarked to solely serve the semiconductor needs of the western World.

Ford, for example, has signed a non-binding agreement with New York-based chip developer GlobalFoundries to boost availability, while General Motors has sought partnerships with no less than seven chip suppliers to help increase supply.

Speaking on the challenge facing the European market, Oliver Zipse, president of the ACEA and chairman of the board of management of BMW Group, said: “For the sake of our industry’s global competitiveness, Europe must strengthen its technological sovereignty to be able to provide essential components to the region’s core industries.”

Carmakers certainly seem to be getting the message. Europe’s largest chipmaker Infineon recently revealed that a record number of chips had been ordered by the auto industry – enough to fulfil 120m vehicle orders. To put that into context, the record number of vehicles delivered to customers in one year was in 2018, when 95m orders were fulfilled.

The knock-on effect

With the new car market faltering, the used car market has seen extraordinary growth during 2021. Used car values have reached record highs, and in some cases have actually surpassed the price of their brand-new equivalents. This in turn has led to a situation where car finance funders are seeing significant declines in their new car business, as well as losses on PCP deals where the vehicle has appreciated in value.

To combat this, OEMs and their funders have had to expand or alter their services to minimise delays and disruptions for their customers. Volkswagen Financial Services, in the wake of the Covid-19 disruptions, launched a Short Term Solutions PCP package, which is designed to allow customers to finance the optional final payment of their current vehicle for 12 months, with monthly payments kept the same as the original agreement.

In a statement, Volkswagen FS said that the new service forms part of an “ongoing and evolutionary process to enhance the customer experience as they interact with and return to Volkswagen Financial Services UK for their vehicle financing needs”.

Further steps

FCA Bank, the financial arm of the Stellantis brand, has bet big on new mobility services, investing heavily in its subscription and car rental platform Leasys, which is now operational in 12 European countries.

To further consolidate the structure of its new mobility business, Stellantis has also opened negotiations with BNP Paribas Personal Finance, Crédit Agricole Consumer Finance and Santander Consumer Finance, with a view of creating an operational leasing group and ‘enhanced’ captive finance arm “to bring consistent and attractive financing activities to all Stellantis brand customers, dealers and distributors”.

Whatever the future may bring, more often than not it is the companies who are fastest to adapt to change that come out on top. Supply chain strategies have seen Toyota cement its place as the top global vehicle manufacturer, increasing output and achieving record profits while its rivals faced idle factories and slumping sales. Despite suffering some disruptions over the summer months, the Japanese brand still posted a 48% increase in operating profit for the period and confirmed last month that all 14 of its plants are fully operational again.

Decarbonisation deadlines draw closer

To compound the challenges faced by global OEMs, decarbonisation deadlines are another year closer, and we are still a long way off carbon neutrality in the automotive sector.

Figures from the ACEA show that less than one in five vehicles sold in the EU are electrified, with that figure dropping to fewer than one in six in the UK. While growth in the electric sector is far outstripping the sales of internal combustion engine (ICE) vehicles, much more needs to be done. Manufacturers are certainly targeting the electric sector as an area for growth, with a number of new models set to launch to market in the next 12 months, including the BMX iX, Renault Megane E-Tech, and the VW ID.5m.

Yet serious concerns still remain around the deployment of EVs and whether the infrastructure can be scaled quickly enough to match the growth in demand. Recent research from the SMMT found that Britain’s ratio of plug-in vehicles on the road to standard public chargers deteriorated 31% year-on-year in 2020, from 11 plug-in vehicles potentially sharing a standard public chargepoint to one charger for every 16 EVs.

Immense challenges

In a report published by the Green Finance Institute, Rhian-Marie Thomas, chief executive of the organisation, acknowledged the immensity of the challenge faced by the industry: “Decarbonising road transport, key to meeting our national emissions targets, is a challenge that is too large and interconnected for any one part of the market to solve alone. We need radical collaboration through public and private partnerships across finance and industry focused on tackling the barriers and unlocking the estimated £150bn of investment that is required to accelerate the pace of change.”

The report proposes a series of solutions to help the industry achieve the targets, developed by the Coalition for the Decarbonisation of Road Transport (CDRT). These include:

  • Increasing loan capacity in the market through securitisation of used EV loans to allow aggregation and sale on secondary markets;
  • Standardised battery health certification to give confidence to buyers in the used car market;
  • Bundled vehicle and infrastructure financing products enabling consumers through simplifying purchasing by making one monthly payment for EV costs, including the EV itself, chargepoints, and energy.

Government incentives

To reduce the risk faced by OEMs in reconfiguring factories and prioritising the development and sale of electric vehicles, manufacturers will need the support from their governments to boost confidence among consumers and invest properly in infrastructure. In the UK, OEMs now have eight years to withdraw internal combustion engine (ICE) vehicles from their line-ups.

Finance houses will play a significant role in accelerating the switch, as consumers seek the best possible deals when committing to an EV purchase. New product lines such as subscription services or personal contract hire agreements are still in their relative infancy in terms of popularity but could prove to be a real avenue for customers looking to make the EV switch. Businesses with their finger on the pulse, reacting quickly to trends and changes, will most likely be the ones to see success moving forward.

Manufacturers certainly have a lot of their plates at the moment, and while predictions for recovery point to a return to full production capacity in the second half of 2022, the problems caused by the emergence of the Omicron variant highlight the continuing fragility of the situation.