Automotive inSIGHTS 1/2007 - Roland Berger

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10 | Automotive Insights | Suppliers Top perfomers grew more than 5 times faster than low performers and were more than 2 times more profitable Financial performance by supplier 2000-2005 Revenue growth 1) [CAGR %] ROCE Avg. 2000-2005 1) [%] 16.3 ROCE 2005 [%] 17.3 10.3 10.4 2.9x 11.3 3.1x 7.0 3.4x 3.0 5.7 5.5 Top performer Industry Low performer Top performer Industry Low performer Top performer Industry Low performer 1) If 2000 or 2005 fi gures are not available, 2001 and 2004 fi gures are used respectively Basis: Median of performance-rated suppliers markets such as India and Russia. Carmakers will also continue to pay premium prices for product features that help them differentiate themselves from other brands. In addition, many of the suppliers still have room to cut costs and boost profi tability, by offshoring production and engineering tasks to low-wage countries, optimizing their general expenses and improving their balance sheet structure. To exploit the outlined potential, suppliers should bear in mind the 12 levers that were identifi ed in the study. The key success factor for supplier executives to achieve or maintain the competitiveness of their companies will lie in deriving specifi c conclusions on how to deploy those levers. This could mean focusing more exactly on their product portfolio, making the customer base more international, or reengineering the fi nancing structure. The study, "Strategies for profitable growth in the global automotive supply industry", conducted by Roland Berger Strategy Consultants and the investment bank Rothschild draws on the analysis of fi nancial and business fi gures from more than 350 globally operating automotive suppliers from the years 2000 to 2005. If you are interested in receiving a copy of the study, please complete the order form you can fi nd on the Roland Berger website: www.rolandberger.com/expertise/publications For further information, please contact Dana Rehfuß, tel. +49 69 29924 6301, or dana_rehfuss@de.rolandberger.com THE TAKE-AWAY > Automotive suppliers have become more profi table in the past fi ve years – the gap between top and low performers is widening > Profi tability varies greatly by region, company size, and product segment > Successful suppliers applied – on average – different strategies than their low performing peers Marcus Berret Partner at Roland Berger Strategy Consultants, Stuttgart marcus_berret@de.rolandberger.com
Interview | Automotive Insights | 11 "Strong pressure to reduce prices" Interview: Thomas Kästele of investment bank Rothschild sees challenges for automotive suppliers, private equity and IPOs From the perspective of an investment banker, what are the key challenges the automotive supplier industry in Western Europe is currently facing? Obviously the continued strong pressure to reduce prices together with weak production volumes in Western Europe are the two most important challenges. This is particularly im portant for those suppliers that are signifi cantly exposed to the North American market, which has been really suffering. We have also seen that many European suppliers have been struggling to diversify their customer base to wards successful Asian, e.g. Ja pa nese and Korean, OEMs in order to achieve risk diversi fi cation and open new, profi table growth opportunities. The study, which Rothschild and Roland Berger have published recently, clearly shows that the more successful players, we called them top performers, had one of their advantages in this area. What recommendations would you give to automotive suppliers in Western Europe, and in particular in Germany, with regard to their capital structure? In our work as corporate fi nance advisors, we have seen that balance sheet fl exibility has become increasingly important, as the fi nancial structure of a supplier must be adaptable to an ever faster changing market environment. Therefore we saw the increasing use of fl exible fi nancing instruments, for example asset-backed securities and factoring, in the supplier industry in Germany. Also sale-and-lease-back structures have become increasingly important which refl ects the capital intensive nature of the sector. But it is not only the most suitable instruments at the lowest possible costs which are required, suppliers are also paying more attention to the terms and conditions of their fi nancing arrangements such as covenants, bas kets and transferability of loans. In particular with reference to the last point, a careful selection of the banking syndicate with a strong agency function is key. In this area, Rothschild’s Debt Advisory Team has been working with more and more suppliers to optimize their capital structure in a number of ways. In light of an increasing number of companies stumbling, do you expect that private equity investors will maintain or even further increase their activities in the German supplier industry? Some private equity investors have been struggling with their investments in the automotive supply industry, in particular in the German market. This has raised the level of concern within the private equity community and the fi nancing banks, which have made many of the deals in the past possible with aggressively leveraged transactions. I would expect that we will continue to see buy-outs in the German supplier industry but that investors will become more cautious in terms of the value creation potential and the question of how to exit again. Bearing in mind the rather negative public opinion regarding private equity investors, what is the value-added that those investors can bring to the table for privately-held automotive suppliers? Private equity investors typically take a broad approach in looking at the whole value chain Thomas Kästele Director at Rothschild GmbH, Frankfurt thomas.kaestele@rothschild.de of an automotive supplier. They try to implement improvements in all aspects of a company’s activities, but in our experience with acquisitions most attention was paid to areas such as clear profi table growth strategy, capital expenditures and working capital discipline and optimizing management and customer-oriented organizational structures. In addition, creating value through buy and build strategies is also being considered in an industry, where we expect further consolidation on a global scale in many segments. How do you evaluate the IPO conditions for medium-sized suppliers, given that the last German public offering, Grammer AG, was undertaken almost two years ago? We believe that the equity market in general has no aversion towards automotive suppliers with a convincing equity story. The reasons for their absence in our view were the availability of cheaper funding from other sources of capital, in particular from the debt markets, and the concern of a potentially negative impact of detailed fi nancial disclosure requirements for those companies with attractive profi tability. However, the currently favorable equity market environment has convinced some IPO candidates that are market leaders in attractive niche areas such as infotainment, powertrain or fuel effi ciency to potentially consider a listing. We may see some of them come to the market in 2007.
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