The withdrawal of credit insurance for automotive parts suppliers in the UK has led to warnings of a domino effect of bankruptcies across the sector, which could impact on logistics service providers. But a new state guarantee scheme due to be announced in next week’s Budget could provide help by underpinning supply chain insurance for automotive parts suppliers.
Credit insurance protects companies that supply goods on credit against the risk that they do not get paid. But the credit crunch has led to a gradual withdrawal of credit insurers from the higher-risk end of the market which the automotive market now certainly falls within.
The proposed new scheme, which is designed to help small and medium businesses survive the recession, comes after warnings sent to Business Secretary Lord Mandelson by automotive supplier Steel & Alloy Holdings that the loss of credit insurance could have “disastrous” consequences for the economy.
In a briefing note seen by the Guardian newspaper, the company said: “Without credit insurance, any business downstream in the supply chain can easily cause a domino effect, taking down all of the businesses further up the supply chain and multiplying the negative effects on the economy many times over, with catastrophic results.”
Those results are also expected to hit those supplying logistics services. In the case that suppliers lose credit guarantees, they could change their payment terms to "cash on delivery," meaning payment would be due when goods arrive, rather than the normal terms of 45-60 days. There is widespread worry that few manufacturers would have the liquidity or the IT infrastructure to operate this way.
However, negotiations with insurers over recent months, which were led by Lord Mandelson, may now bear fruit in a scheme that is expected to offer guarantees for companies that have seen cover reduced but not withdrawn. France introduced a similar scheme at the end of 2008.
In addition, the UK government will decide this week whether to introduce a scrappage scheme similar to that one introduced in Germany. Consumers with vehicles more than nine years old could receive a £2,000 ($3,000) discount on a new vehicle if they choose to scrap their old vehicle. The scheme boosted new car sales in Germany by 40% in March while sales were down 30% in the same month in the UK.
