Insurers need to watch the automotive sector carefully, as the initial middle class enthusiasm for electric cars wanes and dealers are left with lots of rapidly depreciating stock. Add on anti-car legislation, ULEZ taxation/toll zones, 15 minute city roadblocks, planters etc and you could see a rapid shrinkage of the UK car market over the next few years. Here’s the word from Atradius;
The UK’s second-largest trade credit insurer, Atradius, has revealed the number of claims it received in the automotive sector in Q1 of 2023 has increased by 50% compared to the same period in 2022. This comes after a period of subdued activity as firms took advantage of lasting government support offered during the pandemic, with insolvencies among firms involved in the wholesale and retail trade and repair of motor vehicles and motorcycles also increasing by 31% YoY, according to the latest figures from the Government’s Insolvency Service.
The sector has faced significant challenges in recent years as firms battled with supply shortages, most significantly in the lack of semiconductors, supply chain inflation, increasing energy costs, and staff shortages.
SPOTLIGHT – DEALERSHIP CLOSURES
Autovogue in Staffs has closed, after claiming that Jaguar Land Rover used vehicles needed too many repairs.
Underwoods closed their Skoda dealership in Colchester earlier in 2023, as the German brand seeks to increase online sales, and therefore reduce face-to-face selling.
Vertu closed its Mini and BMW dealership at Malton in Yorkshire in April this year.
Running a main dealership is incredibly expensive in terms of business rates, staff costs, security and many other overheads, including insurance. But insuring the used stock via loans and dealer finance is arguably the biggest expense. As online retail replaces dealership sales, manufacturers can centralise many operations regionally and therefore cut out the frnachise holders margin by shrinking the dealer network. IE prediction? Expect more dealership financial stress by 2025 as more anti-car legislation, cycle lanes, bus gates, ULEZ zones, climate lockdowns and more slowly strangles the UK car market.
INFLATIONARY PRESSURES
With inflation remaining at record levels, and interest rates rising for the 12th consecutive time in May, Atradius is urging businesses to ensure they have robust financial forecasts in place and to act early by protecting loyal customer bases and diversifying their business models. Experts at Atradius suggest that while there are some encouraging signs of recovery in the sector with vehicle production increasing and supply shortages easing, the ongoing cost of living crisis is likely to see lower demand for high-ticket items like new cars.
Atradius provides trade credit insurance, which helps to protect suppliers against the risk of a retailer becoming insolvent between when they place an order and make payment. Without insurance, suppliers tend to seek more specific payment terms, putting pressure on a retailer’s cash flow.
A rise in claims received in the sector indicates the number of firms failing to pay their suppliers has risen exponentially over the last 12 months, as firms struggle to stabilise or grow amid ongoing market challenges.
Nicola Harris, Senior Underwriter to the automotive sector at Atradius says:
“It’s safe to say it’s been a turbulent time for the automotive sector in recent years, and with huge changes set to be implemented in the coming years, this is likely to continue.
“We are starting to see improvements in the sector with vehicle production on the increase as supply shortages ease and manufacturers look to fulfil order backlogs. However, many of the companies in the sector are facing higher costs through supply chain inflation, higher wages, increased energy costs and staff shortages. With consumers also facing mounting inflationary issues and higher financing costs, demand for higher ticket items could suffer. Insolvency rates and protracted defaults across the sector are already on the rise and this negative trend is expected to continue for the remainder of 2023.
“At Atradius, we continue to underwrite retail firms on a case-by-case basis, but it’s crucial that firms have robust and updated financial insight and forecasts. To guard against the domino effect that crumbling supply chains can have on firms, a trade credit insurance policy can play a very important role in maintaining a company’s confidence in its trade debtor book. In a time of high volatility this could be a determining factor as to whether a company flourishes or fails.”
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