The case for a long term supply chain investment fund

The unique nature of the COVID-19 crisis has meant that the aerospace sector was one of the first to be hit and will be one of the last to fully recover.

Industry is reliant on an increase in demand for domestic and international air travel. Yet the reduced demand for travel we have witnessed since COVID-19 hit has significantly affected the health of the airlines, and subsequently aerospace manufacturers and those who provide maintenance, repair and overhaul services (MRO). Even if air travel restrictions are eased internationally, there will be a lag between airline restart and the demand for new aircraft, resulting in a prolonged period of subdued manufacturing rates and demand for MRO services.

This lack of demand is filtering down aerospace supply chains and many suppliers face a very challenging period for the next few years. A combination of no new orders and revenues, increased borrowing, and cost of capital invested pre-crisis to increase rates is placing companies in a perilous situation. This is notwithstanding the upcoming end of the Brexit transition period with all the uncertainty that entails.

What next?

Government support has been helpful in the immediate term to keep companies afloat, but these measures are unlikely to last until rates recover, nor provide long-term capital required for the industry recapitalisation or structural adjustment needed.

The impact of production rate cuts means several suppliers are left with excess capacity and this combined with companies incurring further debt will increase the risk of them becoming less competitive and ultimately insolvent. This would lead to supply disruption in the short term and loss of UK competitiveness in the long-term.

The fund proposal

ADS is therefore proposing the establishment of a long-term supply chain investment fund with contribution from industry, private finance and Government. The fund would recapitalise critical UK supply chain companies and support mergers and acquisitions to drive restructuring of the supply chain whilst helping to scale up innovative start-ups.

A long-term supply chain investment fund would in many ways be transformational for UK companies. It would:

• Help protect the UK’s valuable supply chains in return for trusted capital that also secures crucial national capabilities
• Help the high-value manufacturing sector overcome the challenges it faces due to long investment cycles
• Bridge the investment inequalities that exist across the regions and nations of the UK

ADS has previously outlined how investment banks can aid recovery by providing confidence and a means to invest as well as the importance of a long-term approach.

Unprecedented times call for new thinking. Targeted sector specific support for high value and complex industries that contribute significantly to the UK’s economy, productivity, security and prosperity is required. Industry is prepared to invest in the fund and ADS is therefore discussing this proposal with Government as a significant opportunity to safeguard the UK’s nationally important high value manufacturing sector and its supply chain.