OverviewThe automotive industry is facing unprecedented challenges and turmoil in the wake of the prolonged global financial crisis. Declining consumer confidence coupled with the tightened credit market has eroded demand for new vehicles. What's more, the industry is facing other, somewhat familiar challenges: costs of raw materials and fuel remain volatile, regulations are increasing, and pressure is intensifying from both government and consumers to produce greener, cleaner vehicles.
With the Economist Intelligence Unit, in June 2009, we interviewed senior executives from major automotive industry firms around the world to gain insights into how these firms are managing their businesses during this tumultuous period. While it was no great surprise that the respondents were troubled by the impact that the downturn has had on their businesses, there were positive signs about the sector's willingness and ability to implement swift and decisive actions. What's more, respondents even indicated glimmers of promising signs — most notably new products that should emerge from continued investment in research and development (R&D). Automotive company executives that participated in the survey also revealed a fundamental shift in mindset, from an industry-wide focus on profits to one focused on liquidity and cash _ ow management and forecasting.
With the awareness that the financial crisis has impacted the automotive industry as severely as — if not more so than — any other industry, Ernst & Young highlights how executives are actively managing to secure their companies' present, improve their performance and position to sustain their future.
Market challenges: cash management focus emergesWorldwide, the market for new vehicles has declined sharply due to the economic crisis. Automakers have responded by reducing headcount and closing factories in the hope of rightsizing their organizations to the new sales reality. Expansion plans in promising markets (such as Russia and India) have been shelved as the industry looks for signs that the market has reached the bottom. Governments around the world have stepped in, taking extraordinary measures — ranging from direct loans to automakers and suppliers to implementing incentive regimes designed to spur vehicle sales — to assist struggling industry participants. Still, the industry has been rife with bankruptcies and the de facto nationalization of distressed automakers.
The decrease in industry revenue, as well as companies' inability to obtain credit to fund operations, has raised the industry's appetite for cash management. Companies are also pursuing cost control initiatives with vigor, focusing on enterprise-wide improvements, along with driving supply chain and procurement efficiencies. Reduced revenue as a result of decreased vehicle production, combined with lessened capital availability has resulted in bankruptcy filings by vehicle manufacturers, which in turn further reduced vehicle production. Accordingly, bankruptcy filings of retail dealerships and component suppliers have also accelerated rapidly in 2009. These market dynamics are forcing industry participants to recalibrate their strategic plans to ensure that they will be able to survive the market downturn and be ready to adapt when sales rebound.