Joint press release from VDA and Oliver Wyman
New Automotive Deal?
Study of the automotive supply industry by VDA and Oliver Wyman
- German suppliers can emerge from the crisis stronger than their competitors
- After securing funds comes restructuring
- No profits forecast for 2009 and 2010
- Automotive suppliers' turnover collapsed by 35 per cent in the first quarter of 2009
- Automotive market remains a growth market in the long term
The crisis is having an extremely severe impact on the suppliers around the world. In the first quarter of 2009 their turnover collapsed by 35 per cent. Profits are not expected either this year or in the next. A double-figure drop in worldwide vehicle production must be expected in 2009. In view of this assessment, the supply companies markedly reduced the size of their workforce in the period up to the end of March. These are the results of the recent study entitled "Anhaltende Krise oder Neuanfang der Automobilzulieferindustrie?" ("Lasting Crisis or New Start for the Automotive Supply Industry?") conducted by Oliver Wyman and the German Association of the Automotive Industry (VDA), which analyzes the current crisis, effective countermeasures and the restructuring of the supply industry in Europe, Asia and North America. The study is based on a survey of 120 CEOs in the automotive supply industry around the globe. In order to survive, the companies have to follow up the securing of funds with extensive restructuring measures. The German suppliers have the opportunity of emerging from the crisis as winners. All the long-term forecasts assume that the automotive market will remain a growth market around the world.
However, this long-term development is being overshadowed by the present crisis. The growth phase in vehicle construction that had lasted for decades came to an abrupt end within only a few weeks. In one country after another the sales figures collapsed like a house of cards. So far the only secure location in this ocean of crumbling figures has been the Chinese vehicle market. The German passenger car market is being stabilized by the scrapping bonus, and similar instruments are also being applied in other countries. They show that buying a new car is still a high priority among consumers.
Worldwide, however, the year 2009 is expected to see a drastic drop in automobile production. The main reason for this slump is the credit crunch. When the financial crisis started affecting manufacturing, demand for new vehicles went into a severe state of collapse. The structural challenges in a highly consolidated industry exacerbate the consequences for the automotive OEMs.
No rapid end to the crisis in sight
In the last six months the crisis has been affecting the automotive supply industry even harder than the manufacturers. Since November 2008, 31 companies have had to apply for insolvency in the German-speaking region alone. In the USA roughly half of the 30 largest automotive suppliers, with a combined turnover of around 270 billion US dollars and over one million employees, are threatened by insolvency.
Yet at the beginning of the crisis the suppliers were in a strong position. In the year 2007 they recorded an EBIT (Earnings Before Interest & Tax) of six per cent. In 2008, despite the slump in the fall of that year, the suppliers' turnover still grew by 2.9 per cent and they finished the year with a positive EBIT margin of 4.3 per cent. But the devastating effects of the crisis became apparent in the first quarter of 2009. Turnover caved in by 35 per cent - almost all the companies made losses.
The 120 top-level managers surveyed for the study "Anhaltende Krise oder Neuanfang der Automobilzulieferindustrie?" stated that they had already markedly reduced their workforce by the end of March. Furthermore, the use of agency workers and temporary contracts has been cut and short-time working introduced in 70 per cent of supply firms. Of the 7.4 million jobs in the automotive supply industry worldwide, 15 per cent could be axed by the end of 2009, mostly in countries other than Germany. Less than five per cent of the companies will still make a profit. The loss made over the whole industry will equal about three per cent of turnover. The figures are not forecast to return to 2007 levels until the year 2014 at the earliest.
First, secure liquid funding
Ninety-six per cent of the CEOs surveyed reported that securing liquid funds was currently their most urgent task. The terms of payment were being renegotiated accordingly, receivables were being collected, less important projects stopped, and a task force set up for overcoming the crisis. In addition, they were pulling out all the stops in the areas of personnel and material costs in order to bring costs down without having to dip into cash reserves.
The management, owners and employees are standing shoulder to shoulder in an effort to keep their companies afloat. "Managers and employees are cooperating and have been pulling together," says Klaus Bräunig, one of the VDA's Managing Directors. Smooth cooperation on guarantee or loan programs is regarded as one of the most important aspects. However, the suppliers all agree that the guarantees should only be available to healthy companies. Those who have neglected to work efficiently over recent years and keep their companies competitive cannot expect the taxpayers to come along and bail them out now. On the other hand, tensions are increasing in dealings with public and private banks and credit insurers. Many banks are now more reluctant to lend money to the automotive sector due to an overall high risk rating of the industry, or else are not willing to extend or renew existing credit lines on the same terms as before.
Restructuring is absolutely essential
However, these measures will not be sufficient on their own to overcome the crisis. The lasting drop in sales and turnover has severe consequences. "The measures currently being introduced, such as short-time working, give the companies a brief breathing space but do not provide a long-term solution," says Jan Dannenberg, a partner and supply expert at Oliver Wyman. "The automotive suppliers are therefore being forced to make major structural adaptations to their cost structure." This can only be done within a restructuring of operations. Crisis teams and turnaround teams have to be established, cost-reduction programs implemented, portfolios adjusted, and capital costs brought down. If the markets do not revive, it will soon be impossible to avoid shedding jobs, closing factories and selling off individual parts of the companies. Yet even these measures will not be enough to avert the insolvency threatening to engulf some firms. The pressure from the providers of external capital is too great. The CEOs surveyed expect that by the end of 2010, up to 500 of the 4,000 automotive suppliers around the world with a turnover of more than 20 million euro will become insolvent. In Germany this could affect a total of up to 70 companies, although a large proportion of them may be expected to continue in some form after being restructured. Many suppliers owned by private equity firms are in an especially precarious situation owing to the high proportion of outside capital and the associated burden of interest payments.
In order to come through the crisis successfully and maneuver their companies into position for the economic upturn, the managers must act quickly and decisively. The study "Anhaltende Krise oder Neuanfang der Automobilzulieferindustrie?" provides recommendations for action assigned to three phases of the crisis. In the last three to six months the top priority was to ensure liquid funding and delivery capacity. The objective for the end of 2009 will be to push forward corporate reorganization as part of an extensive restructuring drive. Not until 2010 can the management once again turn its attention to the medium-term reorientation of the company and initiate the measures necessary for boosting competitiveness and optimum market positioning.
"New Automotive Deal" or weaker value-added structure?
Despite all the negative aspects, the crisis will also lead to a stronger supply industry. Weakened companies will cease trading and strong suppliers that have run into financial problems will be taken over by either competitors or investors. "OEMs and suppliers are facing the question of what form their partnership should take in the coming years," Bräunig says. Either they will try to tackle the challenges jointly and as equals and to develop new types of partnerships, or else the relationship will be characterized by a lack of trust and by strategies for short-term success. "‘New automotive deal' or weaker value-added structure," is how Bräunig summarizes the challenge for the industry.
In addition, the crisis will generate new business models. For example, polarization can be expected between function-oriented business models for the premium customer that are based on innovations, and low-tech, low-cost business models. The executives in the study agree that the state should hold back and restrict its activities to creating the necessary general conditions. Many companies on the market have the opportunity of coming out of the crisis in a stronger position and expect as little distortion of competition as possible on their way. Success factors that are important today, for instance customer orientation, cost leadership and drive for innovation, remain the focus of the companies' activities. Moreover, "soft" success factors such as entrepreneurial competence, active exploitation of globalization, and a strong capability for networking, are becoming more and more significant. The degree to which these factors currently exist shows just what a good position the supply firms are already in. "This means that the German supply companies have the chance of emerging from the crisis stronger than their competitors and of starting a new chapter of growth," Dannenberg stressed.
The study "Anhaltende Krise oder Neuanfang der Automobilzulieferindustrie?"
For the study "Anhaltende Krise oder Neuanfang der Automobilzulieferindustrie?" ("Lasting Crisis or New Start for the Automotive Supply Industry?") Oliver Wyman surveyed 120 CEOs of automotive supply firms in Europe, Asia and North America in the period from March to April 2009. The topics included the current crisis, countermeasures taken by the companies, and the restructuring of the supply industry. The results were then complemented with extensive secondary research and a financial analysis of the supply industry involving an evaluation of the financial indicators from a total of 250 automotive suppliers.
ABOUT THE VDA
Sustainable and modern mobility are the main objectives of the VDA. Its president is Matthias Wissmann. The VDA nationally and internationally promotes the interests of the entire German automotive industry. It has around 600 members, consisting of automobile manufacturers, suppliers and manufacturers of trailers, special bodies and containers. In the interest of all its members, the VDA is active in all areas of the motor traffic industry like economic and transport policy, technical legislation, quality assurance and taxation. In addition, the environment and climate protection are of particular importance. The VDA is also the organizer of the German International Motor Shows (IAA) for passenger cars and commercial vehicles.
ABOUT OLIVER WYMAN
With more than 2,900 professionals in over 40 cities around the globe, Oliver Wyman is the leading management consulting firm that combines in-depth specialized knowledge of economic sectors with sophisticated methodologies for strategy development, process design, risk management, organizational consulting and executive development. In consultation with its clients, Oliver Wyman develops and implements sustainable growth strategies. The firm helps clients improve their business models, processes, risk structures and organizations, speed up their processes and make the most of market opportunities. Oliver Wyman is a member of Marsh & McLennan Companies (NYSE: MMC). For more information, visit www.oliverwyman.com. Also in the German-speaking world, Oliver Wyman is one of the leading strategy consulting firms, with above-average growth rates. At the Oliver Wyman offices in Munich, Frankfurt, Düsseldorf, Hamburg and Zurich, 600 employees work on providing advice and support to the leading companies in the automotive, retail, manufacturing, financial services, aerospace, mechanical and plant engineering, media, telecommunications and transport sectors. In this work, they are supported by a global network of experts, which enable them to assemble the best team for a given project.
