There continues to be major supply chain challenges across the automotive sector because of an unexpected increase in demand for new vehicles, with the pandemic and the war in Ukraine continuing to disrupt global trade, and create shortages in certain raw materials. OEMs are starting to increase production volumes in order to better utilise their production capacity and meet this increase in demand, which is in turn putting pressure on the tier one to four parts suppliers.
Furthermore, the introduction of new technology is also causing disruption as OEMs need to “keep up” with consumer demand and gain access to the required technology advancements. Tech skills and capabilities are likely to be in short supply as the automotive sector will struggle to meet the salary packages available in the tech sector. OEMs will need to consider partnerships with established technology providers as battery electric vehicles gain in popularity and there's increased demand for connected autonomous vehicle technology (automotive upstream).
At the same time a number of OEMs are also impacting dealers (automotive downstream) with the introduction of the agency model and in time we expect an oversupply of new vehicles moving back to the pre-COVID days of tactical pre-registrations and lower gross profit margins.
In addition, both upstream and downstream automotive companies are having to manage the ever-rising energy costs and mounting pressure to define clear actions to improve long-term sustainability. It's likely that emissions legislation will continue to develop in the UK and globally, putting additional pressure on businesses to increase monitoring and improve reporting. A notable regulation is the Climate Related Financial Disclosures (CRFD) regime, which requires covered businesses to include eight sustainability-related disclosures within their annual reports. It's already a requirement of such businesses to report Scope 1 and 2 emissions under the Streamlined Energy and Carbon Reporting (SECR) scheme, but it's now best practice to begin measuring and including Scope 3 emissions.
But what's really keeping everyone awake at night? In the immediate short term, it continues to be the UK’s plan to require by law that car manufacturers meet sales targets for zero-emissions vehicles (ZEV) and the potential impact of rising inflation and interest rates.
ZEV mandate a major headache for automotive
Although still under consultation, the new government ZEV mandate, proposes targets on OEMs for the sale of zero-tail pipe emissions vehicles in the UK:
- 22% of total vehicles sold in the UK by 2024
- 80% of total vehicles sold in the UK by 2030
- 100% of total vehicles sold in the UK by 2035
And with the potential to act against this mandate, the looming changes to the EU rules of origin and accompanying 10% tariff (currently expected in 2024) could potentially make electric vehicles more expensive and lead to more consumers considering ICE vehicles.
Against this backdrop, and as debt is becoming more and more expensive, businesses are rethinking future direction, in particular the approach / access to funding and target markets. We've seen a rise in the number of automotive businesses that are seeking government funding. With the ATF and eRGF funds being the most prevalent, companies are relying on this grant funding not only to relieve some of the financial burden of their growth plans, but also open the door to other forms of financing that would be inaccessible.
The right time for a robust business plan
With this in mind, there's more pressure on automotive businesses of varying shapes and sizes, up and down the value chain, to develop a robust business plan to support them in securing investment, to formalise their transformation plan ahead of a sale or to communicate the cost-cutting activity needed and ensure the business has sufficient cashflow to survive the challenging economic environment to come. In this regard, you need a business plan that sells the strategic vision and future value potential of your business, as well as communicating its financial and non-financial goals, while also being able to stand up to any detailed third-party due diligence (for example by banks, shareholders/ investors, the government etc).
Eight points for telling a credible story
While every business plan will necessarily be different, some of the challenges are relatively consistent. Here are eight tips we have collated from our experience of supporting the preparation of robust and credible business plans:
1 Have a clear timeline
Consider a meaningful timeframe that aligns to your commercial strategy (three to five years is common).
2 Align your forecasts to your story
Develop integrated financial forecasts (not just a profit and loss account) that align with your story and can help you to identify where actions need to be taken within your plan, to prove your direction and purpose to key stakeholders: OEMs, National Sales Companies (NSC) banks etc
3 Explain your assumptions
Provide context to your robust revenue and cost assumptions through market and operational insight. For example, the size of the global market demand, your competitive position within that market, your global footprint, and your available capacity to facilitate growth.
4 Position yourself in the macroeconomic environment
Reference macroeconomic changes to the extent that they may impact your business. As an example, a business plan that doesn't mention inflation or relevant new legislation will lose credibility on first impression, OEMs and NSC will be considering these points when setting vehicle volume and parts supply targets.
5 Showcase your management
Highlighting what makes them effective in their leadership will give readers more faith that the plan will be executed.
6 Identify opportunities in ESG
Consider the wider ESG impact of your business, such as how your approach may give you a competitive advantage, open up new investment channels or more generally show credibility through awareness of future requirements on your industry (for example, green borrowing for wholesale vehicle stocking plans, potentially making your borrowing cheaper).
7 Leverage support
Utilise third-party independent support where you do not have a proven track record, where you need external data as proof points, or when you want to test the plan.
8 Make it user-friendly
Think about the aesthetics as this document should sell the strategy, future direction of the business and management’s ability to deliver. Substance is better than style of course but the communication of your plan needs to be digestible and impactful.
Maximising future efficiency and being due diligence ready through complete and effective referencing and sourcing of all information. Where possible, build an agile financial forecast model with integrated balance sheet, profit and loss and cashflow, that allows you to easily adjust and update assumptions, and undertake sensitivity analysis and scenario modelling.
There's no single way to collate a business plan, but the biggest factor in success will be it's cohesiveness. Committing your vision, financial performance targets, and the plan for execution in a coherent document can be a complex task, but the above guidance can help you get it right.
For more insight and guidance, get in touch with Natasha Teeling.
