Member Article

Component manufacturers can ride out VW emissions scandal

First and second tier suppliers of automotive components are in a good position to navigate any disruption caused by the VW emissions crisis and some may even achieve growth as a result.

The VW emissions-rigging crisis has come at a time when the car industry has been performing strongly; new car sales in September hit record levels again - up 8.6% on the same month last year. However, the crisis is expected to have an impact on the sale of diesel-engine cars in the months ahead and suppliers in the sector will need to be prepared to react quickly and ensure their business plans and management information are robust.

The region’s automotive supply chain is entering a potential period of uncertainty in the wake of the VW emissions crisis and some suppliers could be more affected than others. The majority of manufacturers will need to re-evaluate current business forecasts to assess their exposure to any reduction in demand and, where necessary, adjust investment strategies in order to protect their working capital position.

Suppliers that have already taken steps to diversify their offering in order to tap into market opportunities in other sectors will be in a stronger position to withstand any market volatility.

For the diesel car market, one of the earliest signs of uncertainty is likely to be reductions in call-offs as consumers react to the crisis; leading to a reduction in orders for new vehicles. For manufacturers this will lead to reductions in both order book levels and visibility, which will impact on production. In such situations, it is vital for businesses to react quickly to protect working capital levels and, where necessary, ensure any financial covenants in place are adhered to.

It is important to spot the signs of any potential slowdown early and make sure that cash flow forecasts are robust. The automotive industry in the Midlands has enjoyed strong trading conditions for some time and while all will be hoping this will continue, manufacturers should ensure they are as prepared as possible for shocks.

As they adapt to any market changes, opportunistic manufacturers with healthy finances and proactive management may also consider looking at acquisition of businesses with related skills, markets or products in order to diversify their offering and achieve growth.

Deal activity in the automotive manufacturing sector has been buoyant for some time and, in the short term, any potential uncertainty surrounding the fall-out from the VW emissions crisis could cause this to slow. However, depending on the extent of any market reaction, it could be that activity increases as manufacturers seek to diversify and strengthen their businesses.

Steve Horrocks, is partner and automotive sector specialist at accountancy firm Clement Keys

This was posted in Bdaily's Members' News section by Clement Keys .