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Send  Share  RSS  Twitter  21 Oct 2008

MANUFACTURING: Automotive Industry Faces New Challenges


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As the automotive industry undergoes significant structural changes in an uncertain world economic climate, manufacturers face a new set of challenges to their business models and cost structures. That’s according to Lauren Patlansky, Associate Director, Accounts & Business Development at Ernst & Young, who says a period of heightened focus on business efficiency is necessary to weather what are undoubtedly difficult times.

Despite the fact that the automotive sector is growing globally, there is trouble, Patlansky says. “In the world’s largest market for vehicles, original equipment manufacturers and suppliers are experiencing poor operating performance, reduced profitability and increasing financial and bankruptcy risk.”

Patlansky says Ernst & Young’s Strategic Business Risk radar – which presents a snapshot of the top macro risks facing an industry – identifies those which pose the greatest challenges to the automotive industry in 2008 as:

·        Consolidation, restructuring and poor execution of mergers and acquisition: Unless executed effectively, takeovers can cause more grief than good
·        Emerging markets: As sources for low-cost materials, can negatively impact supply chain especially where ‘Just In Time’ models are applied
·        Failed product launches: (linked to consumer demands)
·        Cost controls and cash flow pressures
·        Compliance risks
·        Workforce ageing and escalating legacy costs: Increased healthcare costs, lower productivity (especially in the US)
·        Environmental pressures: Higher costs associated with improved environmental responsibility
·        Fuel price shocks

She notes that the automotive industry is by nature a globalised one; manufacturers have for some time recognised the necessity of taking advantage of global sourcing and integrated supply chain networks which are capable of taking advantage of the massive discrepancies in the costs of materials and components from one country to another.

That said,the very global nature of the sector is behind some of the risks it faces in 2008.

“Global sourcing strategies are increasingly critical to scour the world for low cost sources of materials and components. However, that increases supply chain risk, especially with “Just In Time” delivery and the associated risk the unpredictability of doing business in emerging markets,” Patlansky says.

In addition, recent global events such as the financial crises which have plagued the United States and sent shockwaves through world markets, have not made this task any easier. Meanwhile, massive shifts in key input prices such as steel, are difficult to predict, incorporate into costing and pass on to end customers without impacting sales.

“Those automotive companies which are unable to generate adequate cash flow to support ongoing operations will be forced to increase borrowing at higher rates, evaluate restructuring options, and themselves become vulnerable to the risk of unplanned takeovers,” she continues.

Where inadequate cash flow is available to support operations,pressure on management to meet debt obligations increases. In turn, increased administrative costs are incurred due to additional financial reporting requirements which are necessary to support debt and treasury management.

Then there is the substantial issue of fuel price shocks and oil security. “Already a rise in spending on alternate fuel technologies such as hydrogen cells and electric storage is apparent in the United States,” Patlansky says. Furthermore, key auto makers differ substantially in terms of their approach to fuel economy; for those which do not specialise in low-consumption vehicles may find themselves with a competitive threat.

“Given global industry dynamics, cost reductions have to be actively sought in the areas of labour, production, engineering, materials, engineering and administration if automotive companies are to meet their financial performance targets,” says Patlansky.

“While new markets are joining the global community as important production hubs, established markets are increasingly compelling vehicle and component manufacturers to reconsider their priorities and risk agenda to remain competitive in a rapidly evolving environment. The short- to mid-term outlook for motor manufacturers remains difficult, necessitating a sustained focus on improvements in efficiency and cost structures,” she concludes.

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