Who knew the world would suddenly change? Volatility and deep market changes are shaking the 2008 global automotive industry to its core as the fourth fiscal quarter draws to a close.
Automotive is a sterling example of an industry in acute distress. In October, this distress was amplified by the Wall Street fiscal meltdown, a credit crunch, plunging sales and stock market crashes. A North American problem until last year, the crisis is now spreading globally. All automakers – and thus suppliers – are affected by the fiscal crisis, say industry consultants. The problems are migrating across the Atlantic and Pacific as supplier orders dwindle and automaker volume reductions take hold.
“The financial health of the North American auto industry has gone nowhere but down,” says William Diehl, chief executive officer and president of international business advisory firm BBK. “We do not expect to see anything but worsening conditions in the next year or so.”
The economic health of major global suppliers had improved slightly in 2007, according to an annual study of 80 top firms by BBK. “In the midst of consolidations, globalisation, commodity price volatility and declining consumer spending, we expect distress levels to increase when the new 2008 study results are released next May,” says Mr Diehl.
While there was less slippage in 2007, it was a significantly different picture in 2008. Mr Diehl estimates that 50% of private supply companies and at least 17% of public firms are experiencing financial distress. Given the deepening of Wall Street’s problems, frozen credit and reduced consumer confidence, the number of distressed suppliers is likely to grow in 2008 when a new BBK study is published, he adds.
In 2009, production volume is likely to go down. Mr Diehl projects a 12 million production build for 2009, down from 2007. He does not expect volumes to recover for three or four years.
The effects of the US meltdown and a $700bn federal bailout of banking institutions in October have yet to take effect and boost the economy. In November, Detroit 3 automakers requested an additional $25bn bailout, beyond a $25bn package approved for new energy technology retooling in September. General Motors, for example, has said it has money to operate until January 2009.
US auto sales have plummeted to their worst levels in almost 26 years. All this presents a grim picture for investments in new technology and features that differentiate automotive products.
Most analysts and suppliers predict accelerated consolidation and supply base alliances. Acquisitions, however, will be slowed due to lack of funding and credit, says Mr Diehl. “Until consumer confidence [spending] comes back, it’s pretty devastating for both suppliers and original equipment manufacturers (OEMs),” he says. Focusing on cost cutting and business innovation are the key, he adds.
One company determined to navigate the turbulence successfully is Hella KGaA Hueck & Co, a leading German global supplier of automotive lighting and electronic components, with a strong sales presence in North America since 1978.
“Our positive results for the past fiscal year are important, as the slowdown in many parts of the global auto industry is going to have its impact on Hella,” says Martin Fischer, president of Hella US Corporate Centre. The company has 70 facilities, production sites and joint ventures around the world.
Hella reported a 7% sales increase to $5.7bn for the 2007/08 fiscal year ending in May, which marked a 4% return on sales. However, North American sales have been flat since the US economic meltdown intensified this year, casting global economic gloom.
This corresponds to the fact that all OEMs have lowered their volume production forecast this year, and “the general decline in the auto industry eliminates growth stemming from new product launches”, says Mr Fischer. Hella’s market sales saw a 5% to 15% European decline. The decline over a similar period was 20% to 30% in its North American Free Trade Agreement (Nafta) region.
“Europe is not at the same level of decline yet. One year ago, conditions were good in Europe. Those days are gone,” notes Mr Fischer.
The cost pressures on suppliers to do more with less are great on suppliers, and Hella is continuing to invest in new product development and existing programmes such as innovative lighting, which is taking off in the US as well as Europe, says Steve Widdett, executive vice-president of automative sales for Hella US.
He adds: “We see a pick up in the LED [light emitting diodes] market overall in 10 to 15 years. By 2010/12, Europe and Japan will see expanding market growth. The US Nafta region is growing more slowly.”
The US and Europe show different rates of LED adoption, and Asia is even harder to predict, says Winfried Menge, Hella’s vice-president of marketing and business development, electronics. “In Europe we expect a compounded annual growth rate (CAGR) of 45% for headlight features including daytime running lights. The CAGR in the US will be not be that high, but there is no stable forecast yet,” he adds.
Mr Menge sees further growth and investment in its driver assistance systems, energy management components and sensors in the next few years. Investments in safety technology include integrating front camera systems and sensors for advanced safety, including a new Li Vision system.
More cost cutting
Cutbacks are also the trend at Continental Automotive Systems, a leading automotive supplier for electronics, brakes, lithium-ion batteries and services.
The parent company says it is putting on hold any investments that are not urgent. Continental could not ride on the coat-tails of its success in Europe and Asia for long. In response to the current market meltdown and stock developments, the company has initiated additional cost savings.
In its third-quarter 2008 report, Continental noted that a weak North American market in H1 was balanced by favourable economic conditions in Europe and Asia. “We made it quite clear that in Q3 there were drastic signs of slowing in all markets, whereby the dramatic declines in Europe in particular have negatively affected us. This trend will probably become even stronger, continuing far into 2009,” says Antje Lewe, Continental spokeswoman in Hanover, Germany.
In 2009, Continental plans to reduce the number of temporary workers, lengthen plant holiday shutdowns at year-end by using existing work time accounts, and “depending on plant locations and orders, deviate downwards from the five-day week until further notice”, Ms Lewe said.
Continental is aiming for sales of E25bn for fiscal 2008 and will reduce net indebtedness as planned, she says. “We have confirmed our goal of an EBIT (earnings before interest and taxes) margin of about 8.5%. This margin figure is before adjusting for amortisation and depreciation resulting from the Siemens VDO purchase price allocation as well as restructuring and integration expense.” Continental acquired Siemens VDO in 2007.
Meanwhile, Saul Berman, partner at IBM Global Business Services, says the time is ripe for business model innovation. Nearly 80% of CEOs anticipated turbulence this year and were planning bold business moves; and two-thirds had a strong global business model focus, according to a 2008 IBM study of 1000 leading executives.
“CEOs are hungry for change. Collaboration of the best companies from around the world and being able to move product wherever needed are important. Be disruptive, be genuine. Figure out where you’re going and how you will make that change,” Mr Berman advises auto leaders.