Back in 1985, when the Sinclair C5 was unveiled as an ambitious vision of a future where everyone would be driving around in electrified vehicles, it was met with scepticism and even outright derision from the motoring press. Nearly 40 years on, the electrification revolution is clearly here to stay; however, it sits against a backdrop of arguably one of the most uncertain periods of time in automotive history.
The relentless drive from governments in recent years, through regulation, to push the automotive industry away from traditional internal combustion engines (ICE) towards electrification may ostensibly be driven by noble goals, but there is an increasing realisation that the automotive industry faces significant challenges to electrification. The phasing out of ICE cars in favour of electric brings with it numerous questions around battery production and the mining of the resources needed for those batteries, recycling and disposing of old batteries, installation and maintenance of charging infrastructure, and the significant related environmental considerations.
Electric vehicles (EVs) have come a long way since the “Formula One bath-chair” (as the Sunday Times somewhat unsympathetically referred to the C5 at the time), due in no small part to the innovation of remarkable technology by manufacturers and suppliers, and there is increasing speculation around the importance of hydrogen and synthetic fuels as alternatives to electrification, but all of these technologies need enormous investment. Can the automotive industry go it alone?
If recent events are anything to go by, it seems not. The collapse into administration of Britishvolt is evidence that the level of investment required to supply the materials and technology needed for the next generation of EVs may be far more than some governments have the appetite to provide. Whilst caution is understandable in turbulent times, it is worth remembering that the original intention of Britishvolt was to produce batteries for up to 300,000 EVs per year. Although the administrators of Britishvolt were able to close a deal with a purchaser, reportedly the stated immediate aim of the acquired business has now shifted away from supplying batteries for EVs towards energy storage. This is just one example of a business set to supply the automotive sector which failed due to lack of support. Who will fill the gap and, perhaps more importantly, who will fund that?
Absent the necessary support and incentives, there is a risk that manufacturers and stakeholders will find the UK increasingly less attractive compared to other parts of the world. Much has been made of the green incentives introduced by the US government’s Inflation Reduction Act, with good reason. VW recently announced it was putting on hold its plans to build a battery plant in Eastern Europe in favour of prioritising pushing forward with a battery plant in North America due to an anticipated circa €10bn in incentives, and the chief executive of Bentley recently pointed out the problems with UK policies which offer nothing to support incumbent businesses seeking to convert to green technologies. The EU is clearly looking to compete with the Inflation Reduction Act, with its recent announcements about its Green Deal Industry Plan, but UK support seems some way off the pace or not fit for purpose, and could yet fall further behind the US, China and the EU.
It may be that there is simply no political appetite at the moment for the scope of governmental support required to keep the UK ahead, or even on the same playing field. If so, the automotive sector will inevitably see significant and potentially large-scale restructurings and likely consolidation over the coming years. However, it may be too soon to count the UK out, as legislation passed by the UK government back in 2020, which isn’t specific to the automotive sector, might just provide the tools needed to survive and even thrive in the uncertain period to come.
The level of investment required to supply the materials and technology needed for the next generation of EVs may be far more than some governments have the appetite to provide
The Corporate Insolvency and Governance Act 2020 came into force in June 2020 and introduced a new “restructuring plan” to stand alongside the existing “scheme of arrangement”. Schemes of arrangement have been used for many years by UK and foreign companies to restructure all or certain categories of their indebtedness. They have been a valuable tool for all sorts of companies to impose compromises on creditors and restructure balance sheets by grouping creditors into separate classes which then vote, in each of their respective classes, to approve a compromise intended to facilitate an improvement in fortunes for the debtor company. Restructuring plans bear a lot of similarities to schemes of arrangement, but they are arguably more relevant for companies in the automotive sector facing financial difficulties due to a stand-out difference: “cross-class cramdown”.
Whereas under a scheme of arrangement an approval threshold is needed by each class of creditors, a restructuring plan only requires the approval of one class to impose the compromise on all classes of participating creditors. This results in a potentially more powerful instrument. Like some of the airlines, which have successfully utilised both schemes of arrangements and restructuring plans to deal with the not insignificant challenges of COVID-19, automotive companies tend to have groups of important but quite different classes of creditors with diverging interests. The restructuring plan may be the ideal tool compel a company’s stakeholders to unite behind a plan for the future, and may be exactly what is needed to find some breathing space whilst pressure inevitably grows on the UK government to step up and provide sufficient support to what is an essential sector of the UK economy.
As ever in times of uncertainty, the companies which will fare best are those which have the foresight to work alongside all stakeholders (including financial creditors) to secure the time, liquidity and infrastructure required to meet the challenges of a rapidly changing automotive industry, stay relevant and maintain their market share, so that they are positioned as best they can for a future which remains difficult to predict. If the scope of UK governmental support is going to remain difficult to quantify in the short term, at least there are tools available right now to allow for survival and to build towards potentially bright futures for the key players.
About the author: Wayne Beck is partner at Faegre Drinker