“Following our decisive action, this loan guarantee will help support the supply chain and protect skilled jobs in the West Midlands, Merseyside and throughout the UK,” Peter Kyle, the business secretary, claimed at the weekend.
Decisive? Really? That is not how life looks to many on the ground in the UK car industry. Some smaller suppliers to Jaguar Land Rover are shouting that cashflow pressures on them are getting worse. Nothing has changed since last week, they say.
One cannot be surprised, because the government’s intervention took the most roundabout route. The state, via the UK export finance scheme, merely agreed to guarantee up to 80% of a five-year, £1.5bn loan that JLR had secured from a commercial bank. The guarantee presumably enabled JLR to borrow at a slightly cheaper rate but that is all. It cannot be considered a gamechanger, for two reasons.
First, JLR’s access to cash was never seriously in doubt. The company should be quite capable of raising debt under its own steam if it needs more than the £5bn liquidity it was trumpeting just weeks before August’s cyber-attack. As pointed out here last week, JLR is a rich business that made pre-tax profits of £2.5bn last year and has an even richer parent in the form of India’s Tata Motors.
Second, the cashflow pressures were always most intense among JLR’s suppliers. What matters is the speed at which JLR can advance payments to its direct suppliers, who in theory should then be more equipped to pay their own suppliers, and so on. Cash has to cascade down the chain to be effective. Did the government, when it agreed the guarantee on the third-party loan, set conditions for JLR to hurry up? We haven’t been told.
To be fair to JLR, it seems to be working as quickly as it can to support its first-tier suppliers. A scheme to make advance payments for components may help further. Nor should JLR lack motivation. It needs its return to production, tentatively due to start this week, to run as smoothly as possibly. But the underlying problem remains lower in the chain: it takes time for payments to trickle down.
So you can’t blame the Confederation of British Metalforming, a lobby group representing many JLR suppliers, for requesting their own support package. If the government is in the intervention game, shouldn’t it be intervening where need is most urgent?
Loans from the British Business Bank are one idea. Or HMRC could be told to extend payment periods on payroll taxes for affected companies. Or the government could exert some soft pressure on the banks to go easy with affected suppliers. And since those actions would clearly indirectly benefit JLR itself, one could argue that the government could demand something in return – more UK content in the company’s batteries, for example.
The point is that the government needs to make up its mind. If it thinks it is up to JLR to support its own supply chain in full, then leave the company to get on with it and let it live with the consequences. If, on the other hand, the government believes intervention is necessary to prevent long-term damage to hundreds of smaller companies that serve the wider auto industry (and, in some instances, the aerospace industry), then come up with something that helps them directly.
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What Kyle cannot do is slap a guarantee on a bank loan to an already well-capitalised JLR and claim to have taken “decisive” action. He has merely raised expectations among suppliers that the government cannot fulfil. “It was window dressing to get them through party conference,” is the verdict of one supplier. Hard to disagree.
