Midlands braced for jobs cull as car industry pain rolls on

Thousands more workers in the West Midlands car industry face redundancy, despite government attempts to free up finance for cash-strapped businesses.

Some 50,000 people work in the automotive sector's Birmingham heartlands. Yet, a fifth are already on reduced hours or have been laid off following a catastrophic collapse in demand, and more are threatened as two companies a week fall into administration, according to the local Chamber of Commerce.

The Regional Development Agency is braced for yet more job losses. "Redundancies in the automotive sector are still rising, and the peak is likely to come around April or May," according to analysis by Advantage West Midlands (AWM) seen by The Independent.

Car sales have fallen for 11 consecutive months and show no signs of recovery. Even in March, traditionally a bumper month because of the new licence plate, sales were down by more than 30 per cent year-on-year. Between them, the big car-makers have already laid off more than 3,000 staff and instituted massive production cuts.

Honda's Swindon factory will not re-open until June, the Vauxhall plant at Ellesmere Port is on a four-day week, and Toyota employees have an extra day off every fortnight. But there could be worse to come, particularly for the smaller, more vulnerable components makers further down the supply chain.

"With demand for vehicles down, and the remaining stockpiles, future production could be down by up to 50 per cent," says AWM. "This will have an obvious knock-on for redundancies unless employment support and training grants are used to keep staff. Both blue- and white-collar workers will be laid off, usually in large tranches of between 200 and 1,000."

The biggest problem for smaller companies is the dearth of available finance from banks. Lord Mandelson, the Business Secretary, launched an initiative in January to try to boost lending. Under the Enterprise Guarantee Scheme, the Government will underwrite 75 per cent of eligible loans of up to £1m for businesses with a turnover of up to £25m. By the beginning of April, 1,900 loans worth almost £211m were being assessed, processed or offered.

But in the West Midlands' beleaguered motor industry, even a 25 per cent exposure is proving too much. Rachel Eade, who runs the Birmingham Chamber of Commerce's Accelerate programme for the motor industry, said: "For smaller companies, the big issue is finance. Even if the Government is guaranteeing 75 per cent, the banks are still unwilling to accept the other 25 per cent. There is simply no risk-taking by the banks at all."

Often, although banks do not directly pull the plug, the conditions for continuing support may be so onerous – including requiring directors' homes as collateral – as to have the same effect.

The Government's Automotive Assistance Package (AAP), also kicked off in January, is of no use to the smaller companies in the sector. The £2.3bn scheme offers loan guarantees for investments of £5m or more for environmentally-friendly research programmes. The plan has drawn more than 50 applications since it went live, but while such an offer may help free up working capital for Jaguar Land Rover (JLR), Vauxhall, and even the tottering van-maker LDV, it does little to address the cash-flow problems of niche suppliers which make up the majority of the sector. "For a normal business, £5m for green-related investment isn't going to assist survival today," Ms Eade said.

So far, under the AAP, the European Investment Bank has agreed to loan JLR £340m and Nissan £370m – which will be split between its UK and Spanish factories.

Case Study: 'We weren't asking the bank for more money'

Barton Cold Form, which fell into administration last month, is a prime example of the finance problems besetting the West Midlands, writes Sarah Arnott.

The high-end forging company, which relies heavily on the car industry, spent six months trying to negotiate continuing support from its bank. But to no avail.

After approaching Barclays in October, Barton spent £72,000 for the bank's accountants to verify its forecasts, and thousands more on a bank-recommended company doctor. Though hit hard, the company was performing in line with revised predictions, and was building future business outside the tottering motor sector.

Yet, monthly losses of £300,000 were leaving it undercapitalised. And Barclays' refusal to provide a letter of support put paid to a £250,000 Regional Development Agency bridging loan that Barton's management said would have bought the time the business needed.

Finally, in March, the bank did offer a deal. But the terms were impossible, according to Paul Denning, the managing director – who is now helping BDO Stoy Hayward sell the company. Barclays wanted £50,000 up front, to be added to the company's existing mortgage; the invoice discounting rate was to go up from 1 per cent to 2.9 per cent over base rate; the mortgage from 1 per cent to 3 per cent over base rate. The two directors were required to underwrite £250,000-worth of guarantees against their homes. The bank also wanted a risk reward of 30 per cent of the business, and another £50,000 at the end of the year. These demands are becoming standard for many banks.

Mr Denning said: "Barclays did nothing wrong – they followed their rules – but the banks were being asked by the Government to try to help companies. We were not asking the bank for more money, just to continue the invoice discounting facility and the mortgage. We were still paying the mortgage, and we didn't even have an overdraft."