By Mark Andrews

Copyright expressandstar

After much dithering the UK government has finally unveiled a much-needed loan guarantee to JLR to allow commercial banks to lend to Jaguar Land Rover.

This is expected to unlock £1.5 billion to support JLR’s supply chain.

The Export Development Guarantee (EDG), which will be paid back over five years, will be provided by export credit agency UK Export Finance and will unlock a loan from a commercial bank that will bolster JLR’s cash reserves so it can support its supply chain which has been greatly impacted by the shutdown.

The Business and Trade Secretary Peter Kyle stated that ‘this cyber-attack was not only an assault on an iconic British brand, but on our world-leading automotive sector and the men and women whose livelihoods depend on it. Following our decisive action, this loan guarantee will help support the supply chain and protect skilled jobs in the West Midlands, Merseyside and throughout the UK.’

So the Government has finally done the right thing, but it took far too long to get here. As I’ve been at pains to stress, policy intervention needs to learn from past experience and was always going to involve loans or loan guarantees and/or a temporary wage replacement scheme. The latter should still not be ruled out either.

With JLR not having made a car all month, the supply chain really does need help, especially those smaller firms with limited cash buffers, many of whom are now looking over the edge. The JLR press statement last week talked of a ‘timeline’ and ‘phased’ restart which suggests to me that the impact on the supply chain will actually go on well into October.

Thankfully some JLR systems are now working again. Engine production at the i54 plant is set to restart, as has invoice processing (vital for suppliers) and car registrations with the DVLA (enabling more cars to be sold). But car making has yet to restart and that still leaves some suppliers in a very difficult position indeed.

A key lesson in all of this is to have a policy toolkit available to be drawn on ‘off the shelf’ in response to major shocks, using actions like loan guarantees. That was a key finding from our work on MG Rover in the wake of its 2005 collapse, and during the financial crisis.

Yet this keeps being ignored by government.

Indeed, the hapless Chris McDonald MP (allegedly the Minister for Industry) made a rather bizarre appearance in Birmingham last week, saying that we were ‘unhelpful’ and shouldn’t look to ‘off the shelf’ solutions. McDonald’s visit went down badly in the region, with influential Brummie blogger Mike Olley describing the minister as an ‘empty suit’ delivering soundbites but not solutions. McDonald was packed off with a flea in his ear.

And why not learn from past experience? In fact, I’ve struggled to see why the Government was so set against these types of intervention which are common elsewhere, like in Germany.

The government then seemed to waste time looking at the over-engineered idea of government acting as ‘buyer of last resort,’ buying components from the supply chain before selling on to JLR when it restarts production. There were numerous issues with such an approach, such as the basic point of where it would put all the stock. Each car has as many as 30,000 components, and JLR makes 1,000 cars a day.

That’s 30 million components A DAY.

There isn’t a warehouse big enough in the country to store all of that. That’s why there is a just in time system.

So that idea was a non-starter. Kyle and colleagues eventually went back to the more sensible idea of loan guarantees.

Providing support directly to supply chain firms is actually tricky as JLR didn’t have much of a map of the supply chain beyond its first and second tier suppliers. The SMMT Forum has been working with the firm to build a better picture. Guaranteeing a loan via JLR gets cash into the supply chain but ensuring that the cash cascades down the supply will be critical.

And beyond the loan guarantee, other government agencies have a key role to play still. Again look to past experience. The HMRC can give payment holidays to firms and councils can defer business rates to help firms stay afloat. These were used during the global financial crisis to keep the supply chain.

By the way, JLR has manually paid out £300 million to suppliers in recent days to keep them going in a pretty heroic effort given that their systems were down, in this backs-to-the-wall situation. JLR is facing its biggest crisis ever and has done its best to keep suppliers going. What this is also telling us is that JLR is probably burning through more cash than we previously thought. In the summer it had £5 billion of liquidity. It needs to keep £1 billion in the bank to keep lenders happy. That leaves £4 billion.

We thought JLR was burning through some £1 billion of cash a month, giving it up to four months. But if £1.5bn is needed for the supply chain, that leaves £2.5 billion. And if the cash burn is as high as £1.3 billion a month, then the figures simply don’t stack up over the next month (month two of the crisis). JLR couldn’t keep going AND also support its supply chain on this scale. Hence the government loan guarantee and bank loan to buy time and keep suppliers afloat.

The risks to the Government of doing this are low but not zero. JLR will repay the loan to a commercial bank unless it defaults – that is highly unlikely. The potential benefits are huge. Some 200,000 jobs depend on JLR. The Government has done the right thing, and just in time.

*Prof David Bailey is professor of Professor of Business Economics at the Birmingham Business School. This article first appeared on the website Blogs from the Blackstuff