Car Companies Must Innovate or Risk Being Left Behind

Julie Palmer

Regional Managing Partner

4 Minutes to read

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Car Companies Must Innovate or Risk Being Left Behind

Updated: 4th March 2020

The Importance of Innovation in the Automotive Sector

Recent months have been particularly tough for companies within the UK’s automotive sector but there are still good reasons for them to be optimistic about the future, if they can get their strategies right, according to Julie Palmer, partner at RBR Advisory.

The automotive industry is often taken to be an indicator of how the wider British economy is performing and what its prospects are for the coming quarters. That’s no surprise perhaps given that the industry employs more than 180,000 people, contributes close to £20 billion to the Treasury on an annual basis and accounts for roughly 12 per cent of all exports heading out of the UK.

But the travails of the sector in recent months and years have been well documented. According to figures from the Society of Motor Manufacturers and Traders (SMMT), there were declines in new car registrations of 5 per cent in 2017 and 6 per cent in 2018. Signs so far this year are that 2019 will see another fall in new car registrations, with challenging operating conditions continuing for car companies, both manufacturers and retailers, across the country.

Part of the problem for automotive companies is that they’ve seen a sharp decline in demand for diesel-powered vehicles, with consumers increasingly inclined to seek out potentially more eco-friendly alternatives. Only a few years ago, diesel cars made up roughly 50 per cent of the UK market but that share has fallen significantly and diesels now only account for around a third of the nationwide market for new vehicles. Scandals relating to emissions testing and tougher regulations on the eco credentials of diesel cars have also contributed to their quite precipitous decline in popularity.

Meanwhile, car companies based in the UK have been faced with very significant uncertainty as a result of Brexit and the political wrangling over Britain’s departure from the EU. Carmakers rely to such an extent on their complex and often multi-national supply chains that they have been struggling to protect their operations and their finances from the impact of Brexit and particularly from the threat of a No Deal Brexit.

As Mike Hawes, chief executive of the SMMT has said: “It’s still hard to see any upside to Brexit. Everyone recognises that Brexit is an existential threat to the UK automotive industry, and we hope a practical solution will prevail.”

“Demand for environmentally-friendly vehicles is growing fast and this is creating dynamics that mean - perhaps more than ever - those automotive companies that can innovate quickly and effectively will be those best placed to succeed in the current market.”

Red Flag Alert

In the meantime, while solutions are sought by politicians and diplomats in relation to Brexit, the latest figures from Begbies Traynor’s ‘Red Flag Alert’ report show that there were some 484,000 businesses facing ‘significant financial distress’ in the UK during the first quarter of 2019. That number represents a 2 per cent increase from the same period in 2018 and 16 per cent of all British businesses.

Within the automotive sector, there was a 12 per cent increase in significant financial distress among companies connected to the sale of used cars and light vehicles. Meanwhile, sellers of new cars saw a 4 per cent increase in financial difficulty, which equates to several thousand businesses operating within the sector having serious cash flow concerns.

However, there remains cause for optimism within the industry, according to Julie Palmer from RBR Advisory, who says:

Both commercially and scientifically, the automotive industry is ready for change, and pioneering brands and businesses will be rewarded for their boldness, while those that fail to adapt could well be left behind and find themselves struggling to compete.

More than two million electric vehicles were sold across the world during 2018, led by innovators like Tesla. But, increasingly, much bigger car companies and vehicle making giants like Honda, Toyota and GM are responding to the demand for less environmentally damaging products, with investments in the space reflecting changes of emphasis.

This trend towards new types of vehicles represent a positive and optimistic route forward for vehicle makers and for automotive operators more broadly. The demand for ‘greener’ modes of transport is clearly there from consumers and the revolution in these contexts is already well under way. What remains to be seen, however, is which companies in the automotive sector will succeed in getting ahead of their rivals and staying there, and who will be left behind as the industry transitions towards greener solutions and moves towards new horizons.”