Market developments

‘Locked liquidity in industry’

A recent study by SFS demonstrates that industrial companies have tied up tremendous amounts of capital in the purchase of machinery and equipment. Working capital that could otherwise be available for use in the short term for purposes such as product development, remains locked in the outright equipment purchase in the manufacturing sector. Over the long term, this can slow companies’ growth and harm their competitiveness.

SFS modelled levels of locked liquidity in the four main Nordic countries over the next four years (between 2015 and 2018), both as financial volumes and as a proportion of gross domestic product (GDP). The estimates, from what SFS terms “a highly conservative model” are shown in the table. The key reason for the difference in the percentage levels of GDP is the fact industrial companies in Sweden and Finland have a greater share in their national output.

Locked liquidity in Nordic manufacturing, 2015−2018

Source: Siemens Financial Services, Locked Liquidity in Industry, January 2015

The amounts of locked liquidity amongst SMEs are also revealing. These firms are important players in the Nordic economies, noticeably so in Denmark and Norway, and with bank lending continuing to tighten, having working capital tied up in outright equipment acquisition is likely to be restrictive.

Alternative financing solutions like leasing and hire-purchase models can help release locked liquidity. As a result, equipment and machinery no longer have to be purchased. Rather, they can be financed through the entire term of the agreement. In the process, liquidity is protected, and traditional lines of credit do not have to be used. At the same time, companies acquire the latest technology and maintain the flexibility they need to make additional or short-notice investments. The costs for installation, upgrades and maintenance can frequently be included in the instalment payments as well.

The SFS report reveals that there is a significant reserve of untapped liquidity potential in manufacturing industry across the globe, and that the wider use of asset finance could unlock levels of capital representing, on average, around 6% of annual profits. It concludes: “The use of asset financing tools, such as leasing, to unlock that liquidity is becoming increasingly urgent in all the countries studied. As credit conditions have tightened (possibly in the long term), mature industrial countries need to make the most efficient and effective possible use of working capital in order to finance sustainable growth and maintain their competitive edge.”