Paul Gordon, Managing Director of SME & Mid Corporate, Lloyd’s Banking Group reflects on the challenges facing UK businesses today.
Recently, business owners across the UK have faced a plethora of challenges. And at the time of writing, the rising cost of living has left the majority of consumers concerned, with fuel costs seeing the greatest increase and the prospect of rising energy prices a main source of worry.
At June 15th 2022 the RAC reported the UK average price per litre for petrol was 187.01p and diesel 193.30p. According to the BBC, reporting on the 27th of May 2022 OFGEM forecast a significant increase to the Energy Price Cap in it’s October review, with a figure of circa £2900 projected – a 46% increase.
Meanwhile, the war in Ukraine rages on and, coupled with soaring inflation, will mean significantly slower growth for the UK according to the International Monetary Fund (IMF).
All of this comes just as small businesses begin to recover from the knock-on effects caused by the coronavirus pandemic such as supply-chain disruption, limited access to materials and higher transport costs.
As you’d expect, the more everyday items and consumer goods cost, the lower consumer spending is likely to be. This, coupled with rising input inflation – an increase in price of materials and fuels bought by UK manufacturers – threatens to have a detrimental effect on small to medium-sized businesses (SMEs) in particular.
And according to recent figures from the Office of National Statistics (ONS), input price inflation recently hit its highest point ever recorded, exceeding 19%.
Moreover, our recent business Recovery Tracker – which measures variables such as output, new orders, employment and input and output prices – showed that manufacturers across the country have borne the brunt of rises in energy, shipping and raw material costs. In fact, despite some UK sectors seeing strong growth in March, the gap between the manufacturing and service sector output indices is the largest it’s been since 2009.
As Jeavon Lolay, Head of Economics and Market Insight Lloyds Banking Group, puts it: “Alongside labour market shortages, the unrelenting pressure from rising costs represents another major challenge for most UK businesses. Both service and manufacturing firms face higher inflation, in part driven by the ongoing war in Ukraine – a factor that is weighing particularly heavily on manufacturing activity.”
It’s fair to say that the market has never been as challenging as it is now. For the automotive industry, these challenges are presenting most acutely as a shortage of vehicles and rapidly climbing costs. But many are unaware of how this filters through to fleets.
A perfect storm
Over the past few years, the automotive sector has experienced a perfect storm. Here’s what Mark Darby, a Customer Relationship Manager with 23 years’ experience supporting fleets at Lex Autolease, has to say about the current outlook.
Of course, there were challenges before, but the first major one in recent years came in the form of Brexit. Tariffs were potentially going to be imposed on vehicles from the EU, including the German brands which are often offered as company cars. However, what many didn’t realise was that it would also impact US built imports, no longer covered by the EU’s trade deal. Overnight, we saw the purchase price of models such as the Mercedes GLE, which are wholly manufactured in the US, increase by as much as £4,000.
Then came COVID, triggering the semiconductor crisis. A mass switch to homeworking drove significant demand for new laptops, as well games consoles and entertainment devices, to fill the endless hours spent at home. This drove unprecedented demand for the chips used in all these devices, as well as vehicles.
Simultaneously, one of the world’s major semiconductor factories in Japan experienced a major fire, and another in Texas suffered severe storm damage. Combined with reduced levels of staffing and Covid-related sickness, world supply reduced by around 40%, creating a significant shortage at a time of exceptional need.
The shortage has been so severe that we’ve seen car manufacturers buying up stocks of chips originally destined for washing machines and dishwashers to use the chip for their vehicles. Likewise, Audi announced at one point that new cars would have only one chipped spare key, rather than two, to free up an extra semiconductor for use elsewhere.
Finally, the horrifying war in Ukraine has brought fresh problems for the already struggling sector. Ukraine is a key manufacturer and exporter of wiring harnesses for many of the popular German brands, without which vehicles can’t be manufactured. Manufacturers are also seeing costs rise in the supply chain because of the war, things you wouldn’t immediately think of. e.g. Ukraine is also a major producer and exporter of wheat, and wheat starch is used in the production of corrugated packaging, so as the price of wheat price has soared, the cost of cardboard boxes for car parts have risen.
Feeling the squeeze
For fleets, these mounting challenges are presenting as significant delays to vehicle delivery times – in some cases, exceeding 12 months. Manufacturers are also delivering vehicles of a reduced specification than originally ordered, in an attempt to speed up production.
Shortages have driven up prices too. BMW has announced across-the-board increases in both April and June, when previously they came annually or bi-annually. Likewise, the price of Tesla models rose by £5,000 in just two weeks, and there’s now a £9.99 monthly charge per vehicle for its previously free connected services.
Manufacturers are also reducing or removing the discounts they have traditionally offered to fleet providers such as us, so higher list prices and/or lower discounts equals higher purchase prices.
These increased purchase prices aren’t necessarily being reflected in increased residual values either. Cars are continuing to depreciate to similar values after a four-year replacement cycle, irrespective of the original purchase price. This is driving up monthly costs for fleets, where a quote must accommodate for depreciation.
Our sector isn’t alone in its struggles; people are acutely aware that prices are rising everywhere. But it’s still a highly emotive topic for drivers forced to downgrade, or left waiting months for a vehicle.
We’re negotiating incredibly hard on your behalf, to get the best prices possible. We’re also working closely with fleets to identify ways to alleviate problems; for example by purchasing batches of popular vehicles or recommending changes to customers fleet policies to bring a wider selection of vehicles into scope.
With many meetings taking place online post-pandemic and mileage reduced, it may be worth considering the mileage that vehicles are contracted on, along with reviewing the potential to transition more ICE vehicles to electric. Although the price of electricity has also risen, fleets will still be reimbursing drivers of ICE vehicles roughly double that for petrol compared to those in EVs for charging. Electric does command a premium on initial purchase price, and as we write the UK Government have announced the removal of the plug-in electric vehicle grant, pushing costs up further, but whole life cost may still be reduced by lower running costs.
It's a challenging time for everyone in the sector, but your dedicated relationship manager is here to help you make the best choices for your fleet, whatever happens. Contact us to discuss your options.