Advices to automotive dealerships: How to mitigate short-term cash flow risk after resuming business
At the start of 2020, many businesses were interrupted by the fight against the outbreak of COVID-19 pandemic. Automotive dealers, due to the delayed resumption of business and stagnating sales, faced low customer traffic, low cash flow and low material reserves as a result of pandemic prevention measures. High labor costs, rents and inventory, as well as unstable logistics, added yet more pressure onto their operations. This situation was common to all businesses. Most dealers are operating with "less in, more out", which highlights their cash flow risks. At the same time, these risks could be transmitted to upstream and downstream businesses as well as horizontally through the supply chain and loan guarantee chain, creating a snowball effect.
Automotive manufacturers represent the center of the overall industry chain. They are an inter-dependent community of interests, and central to how the industry responds to the cash flow risk it now faces. Automakers and dealers therefore need to work together to address channel liquidity risk.
Uniting to fight the pandemic
Automakers' effective responses in the short term:
Automakers should act to increase capital and reduce the burden on dealers. The most common measures, which are also the most effective in easing cash flow pressure, are reducing sales targets, giving incentives in advance or accelerating incentive distribution, and providing discounts or coordinating with financial institutions to extend repayment terms as special support for dealers or to develop solutions together.
However, automakers need to consider several issues when formulating such measures. For example:
- How to accurately predict network cash flow?
- How to distribute subsidies at a reasonable pace while monitoring their effectiveness?
- How to avoid wasting already limited support resources?
To answer these questions and resume work in a more efficient, orderly, reasonable and scientific manner, automotive manufacturers should:
1. ESTABLISH dedicated task force to fight the pandemic: Set up a special work groups to unite various business departments, setting out clear powers and responsibilities and ensuring the adequacy and transparency of information communication, as well as consistent policy, between every business department.
2. CHECK and evaluate the funds of dealers throughout the network: In recent years, although many manufacturers have established mechanisms to share financial information with dealers, these put more emphasis on income statements than they do on balance sheets or cash flow. It is now necessary to understand dealers' actual funding, inventory, credit, and payment positions, as well as the financial pressures they face, as soon as possible.
3. CALCULATE using pressure tests and multi-scenario simulations, deducing the impact of various measures on channel cash flow: Quickly improve dealership cash flow pressure test models, relying on valid data and industry benchmarks, to forecast how risks will develop in the channel network. Starting from measures various business departments can take, including approaches to markets, sales, used cars, fleet sales, after-sales services, financing, corporate finance and network management, quantitatively deduce the possible effects of various measures on channel cash flow using multi-scenario simulations to support rapid, scientific decision-making.
4. ACT to dynamically mitigate channel network liquidity risks: Identify material risks and allocate resources to where they are most needed, implementing this strictly to ensure its effectiveness. After putting support in place, closely monitor its effects to obtain feedback and make adjustments.
5. PREVENT regional or group-wide risk incidents by establishing emergency plans for channel network risks: Despite effective measures having been taken, some regions or groups could still be exposed to unexpected risks. In addition, dealer groups with cross-industry operations could face cash flow risks that are transmitted from outside of their networks. It is therefore imperative that automakers develop proper emergency plans.
Dealers should mitigate pressure on cash flow in three areas: operations, investment, and financing, and two directions: inflows and outflows. Specifically:
1. Cash outflows from operating activities: Take proactive actions to cut or extend payment terms
- Obtain policy support for reductions and exemptions from operating costs: All levels of government have been introducing financial support to help enterprises. They have out of necessity granted tax reductions, deferrals and rebates, fee reductions, phased reductions and exemptions in corporate social insurance contributions, and housing provident fund deferrals, as well as guided property owners to reduce rent. For example, according to decisions adopted at the Executive Meeting of the State Council on 18 February, from February to June 2020 small, medium-sized and micro enterprises are exempt from endowment insurance, unemployment insurance and worker injury insurance contributions. Fully understanding and using these policy measures, especially targeted local policies, will play an important role in mitigating liquidity risks.
- Try to pay some fixed fees by non-cash methods: Collate fixed expenses, control the pace of repayment, and seek to pay some fixed fees with products or services, e.g. inventory vehicles in lieu of rent owed or after-sales commitments to replace cash expenses, thereby reducing negative cash flow.
- Strengthen communication to delay accounts payable: Sort out and handle payables to suppliers according to their amounts and payment terms, particularly large, long-term outgoings; communicate with individual suppliers to extend payment periods, reduce or exempt payments.
2. Cash inflows from operating activities: Carry out flexible cooperation for fast, extensive cash collection
- Accelerate collection of accounts receivable: Carefully calculate incentive amounts provided by automotive manufacturers and communicate details of capital inflows. At the same time, collate receivables and assess their collectability according to amounts and collection periods, and coordinate with different business departments to communicate collection requirements.
- Check assets to accelerate sale or activation: Check the status of inventory and spare parts, assess the capital occupation of actual stock vehicles and spare parts, and accelerate sale or activation of assets. For example, reasonably utilize financing policy and payment period adjustments; prioritize full payment for vehicles sold to accelerate cash inflow; lease unrestricted company vehicles to business partners in other industries (such as insurance companies) with overlapping customer bases to activate assets.
3. Reduce cash outflows from investment: Temporally suspend unnecessary cash expenditure on investment, for example by suspending exhibition hall repairs and upgrades, after-sales workshop expansions and other projects.
4. Make full use of policies to reduce financing costs and generate cash inflow from financing activities:
- Financial regulators' policies to reduce enterprises' financing costs, and local implementation rules in particular, must be fully understood if their benefits are to be enjoyed. For example, financial institutions have started implementing the Circular on Further Promoting Financial Support for the Prevention and Control of the COVID-19 Epidemic, which was released by five regulatory authorities including the People's Bank of China. Banks have reduced loan interest rates, increased credit, medium and long-term loans, and sought to avoid the blind withdrawal, cancelation, and withholding of loans. This can reduce pressure from the epidemic on businesses capital chains, especially small and medium-sized enterprises.
- At the same time, dealers can seek to generate positive cash flow from financing activities, for example by pledging good quality accounts receivable to banks or other financial institutions to obtain loans; entering asset sale-leaseback agreements with leasing companies on machinery, equipment and premises, and using mortgages to address short-term difficulties.
5. Beware excessive reduction: While dealers address cash flow risk by seeking to reduce costs and prevent losses, they should also consider potential risks from overly radical cost reductions. For example, rather than suffering heightened turnover of front-line staff as sharp declines in sales volume erode performance-related pay, dealers can instead adjust performance structures to encourage employees to enhance their use of digital tools to attract customers, or make other changes and breakthroughs.
China's automotive industry is undergoing a profound, consumer-centric transformation. Therefore, in addition to the above quick responses, manufacturers and dealers can take advantage of this opportunity to accelerate their transformations and turn the crisis into an opportunity.
First, automakers can use their own brand resources to empower dealers to undergo digital transformations and accelerate their shift to omni-channel marketing by integrating online and offline platforms, enabling search diversion or developing experience-based customer services.
Second, automakers and dealers can seize this opportunity to continue promoting sound network management, consider the profitability and sustainability of networks from a long-term perspective, and ensure effective cash flow management.
1. Strengthen channel risk management
- Establish a professional and effective, full-time dealership risk management team to assess and respond to channel risks, promptly identify and monitor those risks using an early warning system.
- Develop transparent communication and reporting mechanisms to report and share dealership risk assessment results and guide other activities such as sales, wholesale finance, account period adjustments and network developments.
- According to different risk causes and conditions, consider the strategic position of outlets and adopt measures to maintain channel integrity and health to the greatest extent possible, as well as protect brand reputation.
2. Strengthen dealers' sustainability by improving channel performance systems
- Improve channel performance evaluation and objectively evaluate network profitability, risk-resistance and sustainability through benchmarking.
- Where there are weaknesses in dealership performance, identify common problems, individual challenges and solutions through extensive diagnosis and cluster calculations.
- Support and assist dealers as they build sustained development capacity and ensure the long-term stability of their networks through innovation policy, business support, performance guidance and other approaches.
Amid the ongoing pandemic, upstream and downstream businesses in the industry chain need to cooperate to address a severe short-term liquidity crisis. To fight the pandemic and overcome difficulties together, automakers and dealers need smooth, speedy communication and cooperation based on transparency and mutual trust.
While focusing on risks, the industry must have the confidence to overcome its current difficulties and the determination to promote transformation. The pandemic is like a blizzard in winter – the rhythm of automotive market development, rather than its overall direction, has been disrupted. In the short term, temporary measures to reduce cash outflows and increase inflows are of course important, but in the long run, it is more vital that manufacturers and dealers work together to improve their ability to monitor pressure on cash flow and enhance their resistance. Such preparedness in winter will maintain stability and promote capabilities that will help the industry embrace the coming spring.