The insight I pulled from the Q3 earnings reports of 33 of the Top 100 Automotive Suppliers confirmed the effect of current market challenges, highlighted additional opportunities/risks, and provided a window into initiatives to excel despite the headwinds.
Additionally, noted from this competitive intelligence is the opportunity for others to apply it to negotiation strategies as new approaches or sources of leverage.
Market Headwinds/Risk
- Soft Global Volumes – down 5% in ’19 and forecasted down 2% more in ‘20
- UAW/GM 6-wk Strike and Production Stop
- Mix shift from pass cars to CUV, SUV, and Trucks
- Unfavorable FX – strengthening USD and YEN
- End of Production without replacement business or delay in production start
- Trade uncertainty and tariffs – Brexit, China/US, USMCA
- Corporate debt (nonfinancial debt 34% of US GDP in ‘19 v. 22% of US GDP in ’08)
Macro Trends and Strategic Initiatives
- Defensive de-leveraging of the balance sheet (reduce financial and oper leverage)
- Optimize Free Cash Flow (reduce CAPEX, working capital, and operating cost)
- Pursue extraordinary cost recovery from customers (one-time and ongoing pricing)
- Consolidate mfg footprint for better asset utilization
- Establish R&D centers in low-cost regions to reduce gross engineering cost
- Continue R&D investment in electrification, connectivity, and autonomous vehicles
- Divest non-core and underperforming assets
- Vertically integrate systems and design for mfg as a competitive advantage
- M&A of bolt-ons to support organic growth
- OEM/Tier 1 Consolidation for scale and strategic growth/synergy potential
Interesting and Noted Benchmarks Regarding Macro Trends/Strategic Initiatives
- Net Debt to EBITDA Ratio under 1.5x for the least indebted companies
- FCF conversion rate of 95%+; FCF Margin 8%+ for top tier
- High-end R&D 9.7% of sales; emphasis on electrification, connectivity, and AV
- Win rate 90%+ of replacement business opportunities for top tier
- Spin-off $1.7B business from segment earning 20% Op margin v. ROC @ 18%
- ROIC 15%+ for top tier; minimum ROIC target of WACC + 3%
Did the Q3 Earnings Reports findings indicate an industry inflection point? Three observations are possible signs to the proximity of an inflection point: 1. mixed YOY results skewed unfavorable; 2. uncertainty of the future; 3. defensive actions in progress.
Contact me if you are interested in additional and unique insights, noted negotiation opportunities, or have a strategic interest in a specific topic – some of the most interesting insight is one-off or limited rather than a macro trend.
#CreateValueThatMatters
