Why Significant Disruption in Automotive Necessitates New Methods of Financing

The disruption happening across the automotive industry is historic. Innovations that seemed far-fetched a decade ago aren’t just reality – they’re the future of auto manufacturing as we know it. Need proof? Just look at the headlines coming out of CES 2018, the world’s largest consumer electronics tradeshow. Forget Google or Amazon’s latest gadget. The spotlight is on in-vehicle technology.

There are three major disruptors changing how cars are manufactured, driven and owned: electric vehicles, autonomous driving and smart mobility programs (ride-hailing services, vehicle sharing programs and others). Each requires massive influxes of capital to fund research and development, acquisitions and changes to business models. At the same time, auto manufacturers still need the capital to maintain a steady flow of new features and upgrades to current production lines. The days are numbered for those manufacturers that can’t do both.

For those less familiar with the forces buffeting the future of cars, I’ve provided a primer on these disruptive innovations. For those already in the know, skip to the section on how we suggest automotive ecosystem players pay for all the change they are facing.

Electric Vehicles – The move to battery-powered and hybrid cars is brisk. Take Volvo’s recent announcement that by 2019, its new cars will all be hybrid or electric. General Motors, Volkswagen, Mercedes, Audi, BMW and Ford have also recently announced ambitious EV plans. And China, the largest electric car market in the world is China, recently edged out the U.S. in the number of electric vehicles on the road. The country also plans to scrap internal combustion engines entirely by 2030.

Autonomous Driving – There is significant momentum behind self-driving cars and trucks. Companies like Otto and Waymo are already using and/or road testing these vehicles in several states. Volvo announced that its unsupervised autonomous cars will be available by 2021. Meanwhile, the line between auto manufacturers and technology companies is blurring. At CES in Las Vegas, Intel announced its 100-vehicle test fleet and showcased its first autonomous car. Volkswagen and Hyundai Motor Co. have announced a partnership with self-driving startup Aurora Innovation with the goal of producing self-driving electric taxis in major cities.

Smart Mobility Programs – Zipcar, Uber, Lyft (among others) have shifted the dynamics of how people “consume” automotive. Today, Audi, BMW, Daimler and GM are testing out programs to rent their cars hourly or daily. Other pilots include Ford launching the Chariot shuttle system, and Mercedes-Benz testing a kids’ ride service. With investment from General Motors, Lyft is actively testing self-driving ride-share services.

Auto Companies Need New Ways to Generate Capital…Now

Large-scale transformation costs money – real money – which creates a significant challenge to automotive manufacturers (and suppliers) still tasked with meeting financial expectations rooted in the legacy car business. The divisional CFO of a top 10 auto OEM recently said the division needs an incremental $250 to $400 million per year in cash to fund investments to respond to future technologies (note: this is just one division of the business).

How can companies fund this response to transformational disruption? Traditional methods of raising large amounts of capital (issuing debt, selling equity, selling a portion of the business, and layoffs/plant closures) are expensive and can have negative impact on things like shareholder value and market position.

For many auto manufacturers, the answer is supply chain finance through PrimeRevenue.

Auto manufacturers and suppliers often have hundreds of millions of dollars locked in their supply chains, which can be used to fund the transformative initiatives. Supply chain finance is one of the few financial health improvement tactics that works for both buyers and suppliers. Buyer organizations can extend payment terms, releasing money for their strategic needs, yielding potentially hundreds of millions in available cash when applied across hundreds of suppliers.

Suppliers use supply chain finance programs to negate term extensions by trading selected invoices to one of the 55+ funders on PrimeRevenue’s supply chain finance platform. In exchange for a nominal finance fee (significantly less than rates charged for more conventional methods of finance like early payment programs or asset-based lending), the supplier can receive near-immediate invoice payment.

PrimeRevenue’s supply chain finance solution gives both buyers and suppliers increased access to working capital, improved cash flow and visibility into payment processing. Our multi-funder approach means buyers have access to more competitive financing rates than they would through a bank-led program that relied on a single source of funding. Finally, suppliers participating in a customer’s supply chain finance program are able to use the credit rating of their customer to optimize working capital and improve cash flow in their own business.

When it comes to funding transformation, the stakes (and cash requirements) are high. Auto manufacturers and suppliers will need to look beyond traditional financing methods to meet the pace, cost and scale of this change. PrimeRevenue is already helping numerous automotive companies overcome this challenge and pave the road to a competitive and thriving future.

If you’d like to read more, check out this article.