Why global supply shortages have left the automotive sector at a crossroads

Thursday October 7, 2021

Corporate Finance Director Greg Cox, and Restructuring Advisory Partners, Tony Barrell and Raj Mittal explore emerging challenges and opportunities in the automotive sector amid chip shortages and supply chain issues.

Automotive manufacturing is a key industry for the UK economy with more than 168,000 people employed by the sector. However, the integrated nature of the industry has left it particularly vulnerable to the impact of the COVID-19 pandemic. The disruption caused over the past 18 months will result in billions lost in the sector, and it will take time for a full recovery to be made. For this reason, it’s important that companies remain agile and develop their operations to adapt to the ever-changing landscape.

Some of the world’s most renowned vehicle manufacturers including Jaguar Land Rover, Nissan and Toyota have reduced production, with the pandemic leading to shortages of key raw materials such as iron and components including semiconductor chips, which have only been compounded by labour shortages and cost inflation that are impacting supply chain infrastructure at almost every level.

Exacerbated by the impact of Brexit, these conditions have rendered the ‘just-in-time’ manufacturing model, which refers to the production of goods to meet customer demand exactly on time, increasingly difficult to execute, leaving both manufacturers and retailers in the UK being asked to adapt to these significant challenges. From a retail perspective, growing consumer demand driven by the removal of lockdown restrictions is seeing the appetite for vehicles return to pre-pandemic levels – but the continued shortage of new vehicles is making customers turn to used car dealers, resulting in showroom retailers struggling to compete.

So, as automotive manufacturers and retailers look to trade out of the pandemic, what are the immediate challenges they face, and how can they best be navigated?

Manufacturing a solution

Factories around the world temporarily closed as a result of the pandemic, creating a worldwide shortage of key components – namely semiconductor chips. The chip shortage has halted the production of electrical products from computers and phones to toothbrushes and tumble dryers, impacting on the recovery prospects of manufacturing subsectors around the world. With some modern hybrid vehicles requiring up to 1,500 chips to complete, the automotive industry has been greatly affected, with recent industry data indicating that the chip shortage has resulted in £159 billion in lost production this year alone.

Even before the chip shortage grew, any prolonged issues in component manufacturing would have the potential to leave Original Equipment Manufacturers (OEMs) with less vertical integration in their supply chains struggling to meet production requirements. And it isn’t just components that are in short supply. Ongoing global supply chain issues have caused the price of key raw materials such as iron and rubber to climb dramatically, an issue that has had widespread repercussions for the UK manufacturing industry which has consistently struggled to return to pre-pandemic levels of output, despite the uptick in demand. These shortages – combined with challenges following worker absences due to COVID isolation enforcement – have created a perfect storm for the UK’s vehicle and component manufacturers.

The latest data from the Society of Motor Manufacturers (SMMT) shows that in the summer of 2021, British car factories produced the fewest cars since 1956, leaving many suppliers with difficult decisions to make as they look to navigate the months ahead. With more firms than ever relying on alternative, asset-based funding arrangements, many companies with longstanding roots in the industry could face cashflow problems. Some OEMs are resorting to propping up supply chain manufacturers while the shortage persists to ensure that, when raw material and component availability improves, vehicle production will be able to pick back up again. However, with many unsure of how long the supply issues could last for, this is arguably an unsustainable solution.

In addition, not all suppliers will have the backing of an OEM. As a result, the market is likely to see a consolidation of resources and expertise among competitors and peers as component manufacturers look to generate security through scale. To this end, we can expect to see a sizeable uptick in M&A activity in the sector as those with greater resources look to gain challenged – but viable – component manufacturers to boost their offering.

We may also begin to see the supply chain model as a whole begin to change. Manufactures are beginning to look at additional supply options and are even sourcing new alternatives altogether, in order to reduce their exposure to future disruptive events. Thus, we may begin to see OEMs and manufacturers alike begin to cultivate close loop supply chains in which materials can be recycled and reused as a long-term strategic goal, in a move that would revolutionise the way the industry operates.

With so much uncertainty lying ahead, manufacturers should be proactive in developing their operational resilience, to avoid being caught out by jolts to the market, such as the recent worldwide gas shortage. We would advise that a 13-week cashflow model is put together in the first instance, which takes into account important weekly and monthly receipts and payments as well as quarterly outgoings. A cashflow forecast is a powerful tool that can help management teams make the operational and financial changes needed to manage cash and create a more stable runway, so that a robust medium and long-term plan can be put together. The plans need to be discussed with key stakeholders, such as shareholders, lenders, HMRC, other significant creditors and key customers, obtaining additional support if necessary, to agree the best way forward.

Retailers – investing for the future

Restrictions on social contact during the pandemic meant that showrooms and dealerships were closed intermittently for almost a year after the pandemic arose in March 2020, and this was reflected in sales figures. However, since the lifting of restrictions, demand has started to increase – fuelled by household savings – indicating that there is a strong appetite among consumers for personal vehicles. However, while the growth in new car registrations remains affected by the chip shortage, demand for used vehicles has dramatically increased as consumers look for alternatives, leaving dealerships in a challenging position.

Manufacturers are having to prioritise the production of certain models over others, vastly reducing the amount of variety that dealerships can offer, while increasing the prices of luxury models that require more chips. Some manufacturers are also providing showrooms with unfinished models, with the intention of completing them when the chips become available. Although this may provide retailers with stock to display that can be ready to sell once the shortage eases, dealers who purchase stock through finance will still have to pay interest, slowly reducing capital from their business and subsequently leaving them to sell vehicles that are no longer brand new. This would affect revenue at a point where every sale will count towards post-pandemic recovery – something that in an industry as competitive as vehicle sales, some dealerships won’t be able to afford.

Equally, many dealers operate on a minimal gross profit basis, and instead generate income through claiming stocking bonuses from OEMs, meaning that they can offer products at competitive prices. With the size of the bonus depending on the number of cars sold, dealers operating on such a model face a potentially significant loss of income – and although some may list stock as sold to qualify for bonuses, this will not alleviate the full impact of the financial implications.

The supply issue is not the only crucial development impacting car retailers. The pandemic has also caused a significant shift in the way that we purchase cars. With dealerships closed over the past year due to lockdowns, the limited sales that have taken place have occurred remotely, meaning that digital platforms such as Cazoo, which provide customers with home delivery and a seven-day trial period of cars, have enjoyed great success. By adopting a similar offering, other dealers could make significant savings in property and staffing costs by reducing the scale of their showrooms, whilst also providing a more tailored digital customer experience.

This, coupled with the projected reduction in demand, could see a significant change in traditional bricks and mortar showrooms. As in the manufacturing space, we may see smaller dealers look to exit or consolidate in order to benefit from scale. However, for many, this may not provide the capital needed to pivot to multi-channel operations, resulting in the need for additional external investment in order to finance their evolution.

Access to finance therefore will be a key determinant in any dealer’s future, particularly for smaller firms. A cash injection can be crucial in developing and managing cash flow cycles while providing the financial headroom to invest for the future. In addition to high street lenders, there is a wealth of capital to be deployed by alternative finance providers which, with the right support, firms can access to arrest their decline and propel their evolution.


For both manufacturers and dealers, it’s best that management teams engage with lenders and investors at the earliest opportunity in order to ensure readiness. Often businesses approach advisers for support when issues are developing and any problems are engrained, requiring more complex solutions. By planning ahead and developing a strategy to boost resilience and tackle the challenges facing the sector, automotive component manufacturers and the supply chain that feeds them will have a better chance of navigating what is a crucial time for an industry woven into the fabric of the economy.

Click below to read our automotive sector publication.

Restructuring in the automotive sector publication

In case you missed it, we recently published our Restructuring in the automotive sector publication, in which we explore the emerging trends in the sector and outline the risks and opportunities the future holds.

By planning ahead and developing a plan to boost resilience and tackle the challenges facing the sector, automotive component manufacturers and the supply chain that feeds them will have a better chance. Tony Barrell Restructuring Advisory

Related team

Raj Mittal

Raj Mittal

Raj Mittal

  • Partner
  • Restructuring Advisory
  • Birmingham
Greg Cox

Greg Cox

Greg Cox

  • Director
  • Corporate Finance
  • London