"Rightsizing Europe" - The European car crisis and ... - Roland Berger

"Rightsizing Europe"
The European car crisis and
implications for automotive suppliers
March 2013
1

Contents
A B C
Market outlook Supplier implications Need for action
Development of global and
European car markets in the
next few years
"Rightsizing" European
structures is becoming a top
priority
Key levers for suppliers to
sustainably improve
profitability
2

A. Market outlook: Development of global and
European car markets in the next few years
Roland_Berger_Automotive_Supplier_Europe_20130328.pptx
3

Global car sales: Strong recovery since the 2008 crisis. Continued
growth expected after 2013
Global sales of passenger vehicles 1) [million vehicles]
FORECAST
H1 (Jan-Jun) H2 (Jul-Dec)
69.5
34.4
35.2
-5.0%
-11.7%
+1.6%
66.0
30.3
35.7
-3.3%
+10.3%
-14.9%
63.8
33.5
30.4
+13.5%
+9.0%
+18.5%
72.5
36.5
36.0
+4.4%
+3.4%
+5.3%
75.6
37.7
37.9
+5.2%
+4.1%
+6.2%
79.5
39.2
40.3
+3.0%
+3.1%
+3.0%
81.9
40.5
41.5
+6.0%
+5.7%
+6.3%
86.9
42.8
44.1
+5.9%
+5.8%
+5.9%
92.0
45.3
46.7
+4.6%
+4.5%
+4.7%
96.2
47.3
48.9
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
1) Incl. light commercial vehicles
Source: IHS; Roland Berger
4

Regional growth rates: Western Europe will see another weak year
in 2013
Global sales of passenger vehicles 1,2)
NAFTA Western Europe China
9%
12%
5%
3%
3%
2%
0%
4%
6%
3%
4%
7%
9%
11%
9%
7%
-9%
-3%
2011
2012
2013
2014
2015
2016
2011
2012
2013
2014
2015
2016
2011
2012
2013
2014
2015
2016
South America WORLD Japan/Korea
19%
10%
5%
0%
6%
6%
6%
4%
5%
3%
6%
6%
5%
-12%
-8%
1%
0%
-2%
2011
2012
2013
2014
2015
2016
2011
2012
2013
2014
2015
2016
2011
2012
2013
2014
2015
2016
1) Incl. light commercial vehicles 2) Year-on-year growth rate = Forecast
Source: IHS; Roland Berger
5

Western Europe: Market volumes stagnating at "crisis level" – 2008
production levels will not be reached in the next few years
Medium-term outlook for passenger vehicles 1) in Western Europe [million vehicles]
Sales
Production
16.9
15.4
16.0
14.4
15.0
14.5
14.4
13.2
12.8
13.4
14.2
14.5
11.8
13.2
13.6
12.4
12.1
12.4
12.7
12.9
'07
'08
'09
'10
'11
'12
'13
'14
'15
'16
'07
'08
'09
'10
'11
'12
'13
'14
'15
'16
1) Including light commercial vehicles
Source: IHS; Roland Berger
6

Western Europe: Global importance of W. Europe as a production
hub is declining due to falling local sales and OEM globalization
Development of WE passenger vehicle production structure… [million vehicles; %]
… as a proportion
of global
production [%]
➨ Declining global
importance of
Western Europe
23
21
12
2007
25
19
15
2013
27
18
13
2016
China
North America
Western
Europe
… by OEM
origin [%]
➨ Share of German
OEMs rising
significantly
35
27
19
11
2007
48
24
13
8
7
2013
47
23
15
9
2016
German
French
US
Other European
Asian
… by size
segment
➨ Only minor
changes in size
structure
16.0
1%
14%
23%
35%
26%
1%
2007
12.9
0%
14%
23%
40%
3% 20%
2016
HVAN
E/F
D
C
B
A
… by price
segment
➨ Decline in
production of
entry-level cars
16.0
27%
23%
50%
2007
12.9
39%
23%
38%
2016
Premium
Mid
Entry
1) Including light commercial vehicles
Source: IHS; Roland Berger
7

OEM profitability: The difficult market has already impacted OEM
margins. German brands show strong performance
EBIT margin of OEMs 1) [%]
4.5
5.3
5.0
5.2
4.0
4.4
4.8
5.2
5.8
~5.5
0.1
-0.6
’01
’02
’03
’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 '12E
1) n = 14 (BMW, Daimler, Fiat, Ford, General Motors, Honda, Hyundai, Mazda, Nissan, PSA, Renault, Suzuki, Toyota, Volkswagen)
Source: Thomson; FactSet; OEMs' annual/half-yearly reports; Roland Berger analysis
8

B. Supplier implications: "Rightsizing" European structures is
becoming a top priority
Roland_Berger_Automotive_Supplier_Europe_20130328.pptx
9

Supplier profitability: After the all-time high in 2010, the profitability
of the global auto supplier industry is now declining again
Key performance indicators of automotive suppliers
Revenue growth [2000=100] EBIT margin [%]
141
154
148
~180
~175
167
150
6.1
6.6
6.1 6.1
5.8
5.2 5.0
6.9
6.6
~6.0
~5.5-6.0
117
129
125
3.3
100
106
2.3
1.8
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12 1)
13 1)
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11 '12 1)
13 1)
1) Estimate – Calculation of final 2012 data currently in progress
Source: Roland Berger/Lazard Global Automotive Supplier Database
10

Regional differences: The main drivers of this decline are suppliers
headquartered in Europe
EBIT margins in the automotive supply industry by HQ location 1) [%]
Europe
NAFTA Japan China Korea
10.3
~9-10
~9-10
7.0 7.1
~5-6
5.6
6.3 ~6
6.5
~6
5.1
9.8
6.5
9.3
'07 '11'12 2) '07 '11'12 2) '07 '11'12 2)
'07
'11'12 2)
'07
'11'12 2)
Trend 2012 vs. 2011
1) n = approx. 600 suppliers, 2012 estimated 2) Estimate – Calculation of final 2012 data currently in progress
Source: Roland Berger/Lazard Global Automotive Supplier Database
11

Looking forward: Local market development and OEMs' globalization
initiatives are two of the top issues for European supplier CEOs
Supplier CEO radar screen for 2013 and beyond (as of March 2013)
3 COMPETITION 4 LEGISLATION
1
CAR
BUYERS
Demotorization
2 OEMS
Stagnation of triad
markets
Rising star
OEMs
Volatility in
demand
Terms &
conditions
Additional
price pressure
Market
volumes 2013
Europe
Selective
consolidation
Global
localization
Emerging
market
suppliers
Emerging
market
investors
Zero casualties
Further pressure to
reduce carbon
emissions
Connected
vehicle
Factor cost
inflation
2013
Rising energy
costs
Insolvencies in
supplier base
Oil price
increase
Availability
of skilled
workforce
Volatility of equity
Credit capital markets
shortage
Basle 3
5 FACTOR
MARKETS
Investor view of
automotive industry
6
CAPITAL
MARKETS
Topics with particular impact on Western Europe
Excluding product segment-specific technology and operational issues
Source: Roland Berger
12

Consequence: Given the disappointing market situation, many auto
suppliers are currently "rightsizing" their operations in Europe
SUPPLIER'S REACTION
Market
situation
Production R&D SG&A
> Weak European
car sales
(medium term)
> Global
localization of
European OEMs
➨ Reduced car
production
levels in W.
Europe
> Adjustment of
direct labor
capacity
> Adjustment of
indirect labor
capacity in line
with direct labor
> Relocation of
R&D capacity
to growth
markets (closer
to local OEM
R&D/production)
> Adjustment of
European R&D
capacity
> Adjustment of
SG&A headcount
more or
less in line with
reduced
production
capacity (to
keep a constant
SG&A cost
ratio)
> Lower supplier
headcount in
Western
Europe, while
total (global)
headcount
continues to
grow
Source: Roland Berger
13

Headcount impact: As a result, approximately 10% of the total
750,000 Western European automotive supplier jobs could be at risk
Estimated impact on automotive supplier employment in Western Europe
Western Europe
automotive supplier
employment 2012
~750,000
High-level job split
100%
~10% SG&A
~10% R&D
~80% Operations
Medium-term
"misalignment"
SG&A and R&D
~5-7%
> Adjustment to reduced
"volume grid"
> Adjustment due to relocation of
activities
OPERATIONS
~10-13%
> Adjustment to reduce current
avg. supplier overcapacity (5-
10%) and to reflect efficiency
gains in the next 3-4 years in a
more or less constant market
MEDIUM-TERM
IMPACT (3-4 yrs.)
Employees at risk
~85,000
~75,000
~65,000
> Highest
"relative"
impact:
FR, IT, ES
> Highest
"absolute"
impact (due
to large
number of
locations):
GER
Source: Eurostat; VDA; ACEA; Roland Berger simulation
14

C. Need for action: Key levers for suppliers to sustainably
improve profitability
Roland_Berger_Automotive_Supplier_Europe_20130328.pptx
15

Need for action: Nine key levers suppliers can apply to combat
declining or stagnating margins in Europe
"Rightsize
Europe"
R&D Purchasing Production Overhead/
crossfunctional
>Improve
R&D
efficiency
> Adjust plant
footprint
> Optimize
overheads
Lower
breakeven
point in
Europe
"Operational
excellence "
>Improve
project
management
organization
> Achieve
purchasing
excellence
> Anchor cost
engineering
> Cut stocks
> Achieve
logistics
excellence
> Achieve
working
capital
excellence
Increased
operational
efficiency
Source: Roland Berger
16

Nine key levers suppliers can apply to combat declining or
stagnating margins in Europe (1/3)
IMPROVE R&D
EFFICIENCY
ADJUST PLANT
FOOTPRINT
SMART OVERHEAD
COST REDUCTION
LEVER
OBJECTIVE
10-15% reduction in R&D
resources (with constant
output)
Increase flexibility, efficiency and
long-term utilization of European
plant setup
15-20% improvement in
overhead efficiency
ROLAND
BERGER
APPROACH
> Identify actual costs and
resources in R&D
> Set a target figure for costs and
resources based on benchmarks
> Carry out strengths/weaknesses
analysis, comparing with best
practice
> Use the RB lever tree and derive
necessary actions (e.g.
organizational setup, R&D
footprint, resource allocation,
controlling/KPIs)
> Gain a clear picture of the current
footprint in terms of setup and
technical/personnel scalability
> Identify improvement measures
within plants and the production
network
> Assess the financial feasibility of
measures – focus on "true
effects/synergies"
> Derive implementation plan and
closely manage layoffs while achieving
per capita cost improvements
> Ensure transparency regarding
the company's current overhead
costs and headcount
> Derive an efficiency target for
each functional area/company
on the basis of benchmarks (we
have a benchmark database
covering approx. 200 suppliers)
> Develop appropriate bottom-up
actions in workshops
Source: Roland Berger
17

Nine key levers suppliers can apply to combat declining or
stagnating margins in Europe (2/3)
IMPROVE PROJECT
MGMT. ORGANIZATION
PURCHASING
EXCELLENCE
ANCHOR COST
ENGINEERING
LEVER
OBJECTIVE
Clear improvement in
efficiency and effectiveness
of project management
Best practice achieved in
purchasing organization and
processes
Reduction of procurement costs
through better integration of
development and purchasing
ROLAND
BERGER
APPROACH
> Describe existing project
management organization
(especially interface between
development and sales)
> Carry out strengths/weaknesses
analysis, comparing with best
practice
> Draw up a conceptual objective in
cross-functional workshops,
especially for competencies and
responsibilities at interfaces
> Prepare an action plan
> Identify and evaluate the actual
situation in purchasing using 10
standardized criteria (e.g.
organizational setup, processes,
tools, committees, employee
quality, controlling/KPIs)
> Carry out detailed comparison
with best-practice examples
from the supplier industry
> Derive a conceptual objective
for purchasing and produce an
action plan
> Draw up a company-specific
conceptual objective for cost
engineering
> Develop detailed components of
cost engineering (organizational
setup, processes, methods and
tools, KPIs, staffing, etc.)
> In parallel, apply in 2-3 specific
pilot projects
> Draw up an implementation
roadmap (incl. communication)
Source: Roland Berger
18

Nine key levers suppliers can apply to combat declining or
stagnating margins in Europe (3/3)
REDUCE
INVENTORY
ACHIEVE LOGISTICS
EXCELLENCE
ACHIEVE WORKING
CAPITAL EXCELLENCE
LEVER
OBJECTIVE
Reduction of inventory by approx.
20% along the entire value chain
Reduction of logistics
costs and improvement
of performance
Lasting reduction of 15-20%
in net working capital (NWC)
ROLAND
BERGER
APPROACH
> Identify potential reduction on the
basis of a structural analysis, benchmarking
and discussion of best
practice levers (e.g. base stock/nonmovers,
buffer stock, stock planning)
> Hold 2-3 cross-functional workshops
per location (incl. aftermarket)
> Implement identified levers/actions
immediately
> Anchor long term through structural
actions (incentives, processes, best
practice transfer, etc.)
> Identify current logistics
performance using standard
questionnaires and data analysis
> Audit critical locations using
best practice checklists and
define improvement actions
> Derive a standard logistics
concept for global rollout
> Create transparency regarding the
structure and drivers of NWC
> Draw up short-term actions for all
areas of NWC (receivables,
liabilities, stocks) based on the RB
lever toolbox
> Methods: Benchmarking, inventory
structure analysis, optimization of
payment terms, receivables mgmt.
> Ensure sustainability through
systematic NWC management
Source: Roland Berger
19

Roland_Berger_Automotive_Supplier_Europe_20130328.pptx