Upload
emma-fisher
View
215
Download
1
Tags:
Embed Size (px)
Citation preview
A New Auto Industry, Different Challenges, New Opportunities
David Knill, Managing Director, BBK
BBK/ PI LLC Overview
• International business advisory firm• Core competency is manufacturing with
significant automotive experience• Unparalleled expertise in supplier risk
and supply chain management• Senior executives with problem solving
reputations through hands-on interaction
• Interrelated team of finance and manufacturing expertise proficient in executing business strategies
• Middle market prices with global reach and superior results
• High impact professionals providing
variable cost solutions• Results - driven business model• Focused on operational metrics
improvement, VA/VE, supplier assessments, interim management, and production/quality system implementation
• Global support of production and launch activities
• Strategic analysis: manufacturing footprint and supply base rationalization studies and execution
• Hands-on implementation
The Market: Past to Present
2009:Gloom and doom
2010:Stabilize and start to recover
2011 & on:New challenges (good news!)
?
??
What’s the major challenge facing us? -Good News and Bad News
12.6
8.6
11.913.0
14.4
0.02.04.06.08.0
10.012.014.016.0
2008 2009 2010 2011 2012
N.A. production volume in millions per year*
+38% +9%
+51%
+11%
*Source: IHS
? ?
Two Supply Bases vs. One
‘TheSupply Base’
• Distinguishing the two different supply bases
Large
Public Small to mid-size
Private
State of Supply Base – Public/Large Suppliers
• OEMs have good visibility• Still challenges, but fewer
Volumes are on an uptick, leading to strong profitability
and stability
For the largest, healthiest suppliers
with access to public credit
markets, most restructurings have been accomplished
(both balance sheet and
operational)
Costs have been adjusted to break
even at much lower volumes
Ratings Trends 2010 vs. 2011- Public Suppliers
• Public companies demonstrate year over year improvement in Ratings
• The A/B Rated companies have increased, while D/F risk companies have significantly declined. C Risk companies have decreased as well
• Improvement is due to increase in Profitability, measured as, EBITDA as a percent of Sales, and increased Revenues
• Profitability, on average, has increased by 9 percent, with an average Revenue growth of 18%
• Debt Leverage, measured as Debt/Total Assets, remains stable
and consistent year over year
• 9% of the companies reviewed, remain a D/F risk, in spite of increased Revenues
• The high risk companies have low EBITDA at 6% versus the average EBITDA of 12% in 2011, and high Debt Levels at 49% of Total Assets. These companies have high Short-term Debt at 12% of Total Assets when compared with an average of 4%
64 public companies Year over Year trends
Overall, any pressure on the Revenue generation ability may create an additional risk on these companies financial position.
Corporate Ratings*- Public Suppliers/OEMs
Company CompanyS&P S&PMoody’s Moody’s
* Data taken from Capital IQ, Thomson Reuters LPC Loan Connector, S & P’s Leveraged Commentary & Data
Historical Yields 2010 vs. 2011*-
Public Suppliers/OEMs
Term Loan Spreads
High Yield Bonds
* Data taken from Capital IQ, Thomson Reuters LPC Loan Connector, S & P’s Leveraged Commentary & Data
State of Supply Base – Private Suppliers
• Profitability improved with higher volumes
• However, meeting the demand is a major concern
• Restructurings have not all been accomplished
• Financing options are still restricted
• Consolidations remain a concern
• Suppliers unwilling or unable to spend money
• Legal changes being implemented by various groups (customers, government, etc.) How will they impact the supply base?
For 2/3 of suppliers (mid size
and smaller) without
access to the public
credit markets, the
picture is different
Public Suppliers
+3x
Private Suppliers
+2x
• In 2009, supply base adjusted break even to 9-10m vehicles
• Industry is a fixed cost business• Therefore with volume increases in 2010:
EBITDA for NA suppliers (2010 vs. 2009)*
• Europe not as good for either group
*according to BBK Ratings data for 2009 and 2010
Private Suppliers - Profitability
Focus on fixed costs, management of liquidity and improving volumes is critical
Private Suppliers - Demand
• In 2008/2009, suppliers significantly reduced structural costs to survive now the need to deal with:
Global platforms
Maintaining current fixed cost structure
Constant pressure
on competitive pricing
Rising demand
• Many have not restructured their balance sheets– Although much improved overall, over-leverage still
exists for some– Percentage of suppliers rated as D/Fs in 2010 (BBK
Ratings data):• 23% in North America• 31% in Europe
– Restructuring options are more limited
Private Suppliers - Restructurings
So why haven’t we seen the lenders take action?
• Poor liquidation values (real estate and equipment) = amend and pretend
• This will change • Levels are below historical levels even in
good times
Private Suppliers – Lending Market• Lending market has not fully reopened
– Concern over market consolidation and margin degradation– However, the lending environment is slowly improving
• For middle market, transactions are primarily structured as ABL with isolated cash flow based deals and limited term debt
• Funding for cap ex and tooling can be an issue (poor liquidation values, lenders seeing uncertainty around new program volume)
• Unwillingness of borrowers to go “all in”Implications
• Lack of excess availability to fund growth and working capital needs (need to fund internally)
• Refinancings taking longer and may involve non-traditional lenders
• In a 2010 BBK study of >150 mid-sized suppliers, 50% had financing challenges
Entrepreneurs’ resistance to
go “all in” again
Why are they unwilling or unable to spend money?
• Unable: tied to lack of lending in this market
• Unwilling: due to concern over future– 2008/2009 memory– Is demand real? Which demand will
prosper?– Global economic impact– Impact of raw material pricing– Fuel prices– Price downs– Washington wizards
Good News Problems!
• Gloom and doom is over, but new challenges still need to be addressed
• Uncertainty does exist in many areas• Many of the challenges are greater for the tiered suppliers• Clear visibility and action are they keys to success• Operations is the most critical challenge now, but as a
supplier you still must focus on all these:
Failure to manage any of these challenges can jeopardize your long term viability.
Financial viability
Operational
Capability
Stability of lending relationshi
ps
Automotive Industry Tends to Have Short Term Memory
Learn from the past, actively manage today’s challenges and cautiously plan for the future.
Volume 15m this year, 17m next
year
Double capacity so
you are prepared
Go all in
Life is good
= noise in the market
Operational Challenges and Opportunities
Survey
• Recent Survey of 620 manufacturing executives*– External concerns: economy, political gridlock, rising
raw-material costs and federal over-regulation– 60% pessimistic about U.S. economy. 64%
pessimistic regarding world economy– 44% growing, 52% stable, 3% declining– 76% improved productivity in last 12 months. – 88% expect raw-material costs to rise. 85% plan to
pass those costs onto customers
*according to McGladrey Manufacturing and Distribution Monitor
Data
Recent BBK operational capability supply base study; based on a review of >150 mid-sized suppliers
Survey says…44% had supply chain risk
25% lacked capacity for increased volume
15% needed to bolster
quality managemen
t systems
10% lacked sufficient
qualified staff to handle volume changes
Major Drivers Facing AutoGlobal Markets/US Economy/Consumer Confidence
• Will it stay level?
Gasoline Prices
• Trucks vs. Cars vs. Hybrids vs. Electrics
Volume/Throughput• Capacity in the tiers - Japan earthquake delayed impact
• Suppliers unwilling or unable to spend money
Raw material pricing and availability
• Internal and external cost pressures will only increase
Struggling suppliers fewer but still around
• Consolidations still a concern• Viability needs to be proven
Key Challenges
• Meet rising demand while not willing to add costs- Short term (?) strategy driven by skepticism/profits- Stressed labor (salaried and hourly) and equipment- Turnover, quality and throughput at risk- Supply base capabilities/raw material costs
• Competitive pricing- 2008/2009 the suppliers had to focus on reducing structural costs. - 2011 pressure on reducing piece price due to lack of
attention in this area and focus on global market
• Rapidly changing environment- Need to be nimble and react FAST - both cost and revenue - Japan crisis- Fuel prices
Strategy
• Understand the capabilities/capacity/pricing of your supply base
• Resource utilization - caution not to over-task
• Waste/cost reduction efforts
• Be the leader within your segment
• Technological advances
• Improve working relationship with customers and supply base
Best Practices
• Increase your sense of urgency– Slow to deal with inefficiencies can be a death
sentence
• Benchmark your processes – prove your leadership– Purchasing, Risk Management, Quality, Operations,
Technology, etc.
• Take a “variable cost approach” to supplementing resources– Limited resources can struggle to cover all the
necessary ground
• Drive cost down/efficiency, throughput and quality up
• Comprehensive approach– Product (VAVE)– Process (Lean Manufacturing)– Manufacturing Footprint – Supply Chain (Rationalization)
• Flexible and robust sourcing and supplier monitoring strategies– Clear Visibility
Moral of the Story
• Sooner you address problems/inefficiencies (internal and external) – the more options you have and the cheaper the fix
• Slow to take actions to be the best is a problem
• Consolidations say if you are not one of the best you most likely will not be a survivor
• Remember: poor operating performance will quickly lead to financial distress
and production risk