RBS To Launch Fund For Motor Component Manufacturers
The Royal Bank of Scotland (RBS) has announced that it is to launch a special £25 million tooling fund to help British automotive component firms manufacture parts for the booming car industry.
The Royal Bank of Scotland (RBS) has announced that it is to launch a special £25 million tooling fund to help British automotive component firms manufacture parts for the booming car industry. This will enable these firms to invest in the capital equipment needed to 'tool up' for modern component making.
The fund will address a problem that has been dogging the motor industry for years. Automotive suppliers have long complained that banks do not understand the tooling aspect of the industry and this has been compounded by the recent financial crisis to result in a situation where very little bank lending is taking place in the automotive supply sector.
Society of Motor Manufacturers and Traders chief executive, Mike Hawes, welcomed the move by RBS, saying: "It’s an important development after a difficult few years for a lot of our members in the supply chain who have raised concerns that banks have not always understood the business model behind tooling."
The problem stems from the unusual way that automotive companies pay for tooling. Suppliers must pay for the tooling upfront when they win a supply contract but the tooling itself will be owned by the car manufacturer giving the contract.
The supply company is only paid for the new tooling investment once they start making parts of the car company. This creates a sort of Catch-22 situation, where the component company cannot get the contract until they pay for the tooling but cannot pay for the tooling until they win the contract. Against this background, the car industry has often looked abroad for suppliers who already have the tooling infrastructure or who can more easily secure the finance to develop it.
Head of automotive business at RBS, Richard Hill, expanded on the problem that the fund is designed to tackle, saying: "When a supplier receives the good news that they have won a contract, invariably they are given a requirement to fund making the tooling. This can be restrictive as sometimes they don't have the working capital to fund it as well as other requirements. The difficulty suppliers have in raising finance comes from this structure because the tooling cannot be counted as an asset."
The level of finance involved in such tooling projects can be considerable, ranging from tens of thousands of pounds to well over £1 million, so for most companies, finding investment finance is vital. The RBS fund is designed to overcome the complex ownership issues, while providing the much needed cash.
According to the SMMT, Britain's car industry has a demand for £3 billion of new tooling in order to keep pace with the car industry's continued growth. Many new models are in the pipeline and these will require extensive investment to ensure the UK's component industry is able to supply all the necessary parts.
Mr Hawes continued: "We're now seeing a recognition in the banking sector that the auto sector is worthy of investment and we're beginning to see the lending shackles come off."
Currently the UK automotive component industry is significantly underperforming its international competitors. In Germany, for example, around 60% of components that go into new cars are made in Germany. In the UK, however, that figure is nearer 30%. With almost 70% of component orders going overseas, there is a huge opportunity to expand the sector and create thousands of new jobs. Such a move would also help the UK economy by balancing imports and exports. Mr Hawes confirmed that the goal for the UK automotive components sector was to get the ratio of domestic parts in British cars more in line with the German model.
Clearly the RBS £25 million tooling find is only a drop in the ocean against a £3 billion requirement. RBS has, however, been working with the UK Automotive Council for more than two years to understand the unusual tooling ownership model and come up with a finance package that can address these elements. It may be that this model can now be replicated elsewhere and the tooling fund expanded to meet the huge demand.