Significant liquidity is trapped in the manufacturing industry due to the outright purchase of equipment and machinery, according to new research from Siemens’ Financial Services unit (SFS). In the UK, the level of this “Locked Liquidity” is estimated to be £10 billion between 2014 and 2018. This represents 0.12% of the nation’s GDP. In comparison, Locked Liquidity in manufacturing in the same time period totals £23 billion in France (0.30% of GDP) and £48.4 billion in Germany (0.44% of GDP). Considerable amounts of liquidity are also trapped in the manufacturing sector of emerging economies – £1129.1 billion in China (2% of GDP), £137.3 billion in India (0.70% of GDP) and £22.9 billion in Turkey (0.53% of GDP).
Manufacturing represents more than 22% of Germany’s economy, compared to around 10% in both France and the UK. Germany therefore has a much higher level of Locked Liquidity than its developed European neighbours. This trapped capital cannot be deployed in other business-driven activities, such as new product development, sales initiatives or increase in production due to spikes in demand. As a result, it has a restrictive effect on businesses’ competitive positioning and is a serious lost opportunity cost. Locked Liquidity levels represent, on average, around three quarters of a percent of manufacturing turnover. Given that global net profit margins in manufacturing are around 10 – 11%, Locked Liquidity would therefore be equivalent to around 7% of annual profits.
Asset finance, in particular leasing and renting, is increasingly recognised as an effective method of liberating liquidity currently locked in outright equipment purchase. By spreading capital expenditure over a pre-agreed financing period, the need for a large initial outlay is reduced, thereby increasing the funds available for operating expenditure. Businesses can therefore access the latest technologies, without having to commit scarce capital or use traditional lines of credit. The capital preserved can then be used to fund other short-term business activities. In addition, financing arrangements can cover other requirements including installation, maintenance, service, training and upgrades.
“Industrial companies need to refresh, renew and extend their equipment, plant and technology to compete in the fierce global marketplace,” says Brian Foster, Head of Industry Finance, SFS. “However, they need to fund acquisition in a way that is financially efficient using asset financing techniques. This not only allows them to conserve precious capital, but also gives them additional financial flexibility.”
The research results are based on projections for capital equipment spending by industrial companies between 2014 and 2018 across ten countries – China, France, Germany, India, Poland, Russia, Spain, Turkey, the United Kingdom and the USA. These sums were then adjusted to reflect the proportion of industrial equipment spending for which leasing and asset finance is an appropriate financing technique. Based on leasing association data in each country, the sums were further adjusted to reflect the volume of that capital equipment investment already financed through leasing. The remaining sum is regarded as Locked Liquidity.
Adapted from SFS press release by Louise Fordham
Read the article online at: https://www.worldcement.com/special-reports/25022014/sfs_reports_siginificant_liquidity_locked_up_in_industrial_equipment_799/