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ovid-19: A unique situation - Never before has a global crisis hit the automobile industry with such speed and impact.
Within just a few weeks, large areas of car production had come to a standstill, with serious results: break-up of supply chains, announcement of short-time working, temporary factory closures and laying-off of temporary staff. Rapid expenditure control coupled with protection for employees’ health were the first steps taken by every supplier. Now, after three months’ experience of the coronavirus crisis, factories can start up again and companies face the challenge of finding the right way to carry out the ramp-up and forecast demand.
It is obvious to nearly every supplier that coronavirus will mark a turning point for their company. Even before the pandemic lockdown, firms were having to put the brakes on spending. The OEMs’ wave of cost savings, for example Daimler with €1.5 billion (November 2019), BMW with €12 billion up to the year 2022 (March 2020) by means of “Performance Next”, and the VW brand with €15 billion in savings planned up to the year 2023 (March 2019), were combined with demands that suppliers reduce their prices again.
In the current climate, familiar measures are being taken, such as adaptation of capacity in the manufacturing process, selective redundancies, optimization of working capital, and easing of terms with outside creditors. The hope is that there will be a rapid and marked recovery. There is nothing wrong with this per se, and in the past these restructuring projects and slim, efficiency-oriented business models have guaranteed companies’ survival and success again and again. But the risks are priced in, and they will rise significantly after the immediate Covid-19 crisis passes.
CASE investments must continue to be made, in order to keep up with the transformation of the supplier industry – the amortization of these expenses is being delayed and that makes the position even more insecure. The future development of the automobile industry, especially with regard to production runs and vehicle classes, segments and power units, is unpredictable. The catchword for this is VUCA: Volatility, Uncertainty, Complexity, Ambiguity. Safeguarding of the supply chain for JIT/JIS delivery is hardly possible while some factories might be suddenly standing empty and others do not manage the ramp-up or restart their output.
The result is that an operations and performance crisis can rapidly turn into a financial and liquidity crisis. Then shareholders, creditors and banks will expect more than the usual improvements. In any case these will be nowhere near enough, because adaptations and restructuring requirements will be more substantial, more fundamental and more profound in the coming two years than they have been in the last 30. Every car supplier must be prepared to accept significant restructuring measures.
The right ingredients for success in an intelligent restructuring are decisive. First, there needs to be process reliability: the restructuring must be carried out in a sustainable and pragmatic way. Above all it is crucial to find a holistic solution which coordinates all the control levers and quickly identifies and reacts to the causes of the crisis.
Secondly, restructuring expertise is needed: alongside the company’s own internal team it is essential to have access to external restructuring expertise. Experience, knowledge and networking skills among all company roles are essentials too. Moreover, if the restructurer can keep a certain emotional distance this can save the company culture from damage.
Thirdly, automobile know-how is important: as well as knowing about the car industry, it is important to know how to make improvements. Benchmarks from the sector’s best players in matters of costs, earning power, financial structure and so on, help to quickly identify the right savings opportunities or structures. Finally, there needs to be stakeholder insight: anything which is important for a bank should never be unimportant to the OEM. And it is precisely when there is a crisis that the car supplier must be fair to everyone.
Berylls has identified nearly 30 control levers from six categories which need to be investigated in the context of intelligent restructuring programs – and used if there are any problems – in order to tackle the company crisis quickly and specifically, and solve it. It is not enough to simply reduce costs. Every company crisis is unique. Whereas for one supplier it might be mainly the financial and debt structure that is problematic, for another it could be the situation with the client that is the main cause.
On the one hand, identification of the cause of the crisis should be carried out alongside the dimensions of strategy, governance, operations, overheads, financing and transparency. On the other hand, crisis management should guarantee that a coordinated and holistic solution works for each individual control lever. Liquidity crises must be handled with a different dynamic, and often in a more pragmatic way, than a strategy crisis. This requires not only substantial experience in the process of crisis management and restructuring, but also sound knowledge about which solutions are sustainable specifically for the car industry. Anyone tackling restructuring in this intelligent, holistic way will emerge from the crisis in a stronger position.
Dr. Jan Dannenberg (1962) has been a consultant for the automotive industry since 1990 and became a founding partner of Berylls Strategy Advisors in May 2011. Until spring 2011, he worked with Mercer Management Consulting and Oliver Wyman in Munich, Germany, on international projects – for five years as Associate Partner, and another three years as Partner. He is a recognized specialist in innovation and brand management in the automotive industry, and primarily advises suppliers and investors on strategy, M&A and performance improvement. In addition he is Managing Director at Berylls Equity Partners, an investment company that specializes on mobility enterprises.
Bachelor of Arts in economics at Stanford University, USA; business administration and doctorate degree at the University of Bamberg, Germany.
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