Lessons from change

A roadmap to sustainability in automotive


The road to recovery is marred by sink holes in the automotive industry. Profitability is a fading memory, replaced by the indelible presence of widespread supplier instability, plummeting sales, bankruptcy and severe financial distress.

The global recession shook the automotive supply chain like an earthquake, toppling the structurally weak and damaging even the strongest companies. The crisis exposed the critical faults of an industry that were either well hidden or long ignored.

The ripple effect

According to Jay Young, an Ernst & Young LLP partner in the US serving the automotive industry, “The scale and depth of the downturn is affecting the industry in ways many might never have anticipated.”

The financial crisis led to enormous declines in new vehicle sales. Relative to the same period in 2008, unit sales in the first six months of 2009 for 8 of the world's top 10 automakers declined anywhere from 10% to 31% (see Figure 1). The ripple effects from these declines extend upstream throughout the supply chain and downstream into dealer networks.

A collision of circumstances

Too much went wrong for automotive at the worst possible time. A brief spate of higher oil prices suppressed demand for larger and more profitable vehicles. And then the credit market collapsed, leaving consumers without access to credit for the financing of new vehicles.

Further declines in industrial and other output affected sales for heavy equipment manufacturers. Add to this the growing list of government mandates that the industry produce smaller, greener cars — which has required heavy investment in both R&D and retooling.

The industry's financial underpinning has also changed dramatically. Some have received injections from sovereign wealth funds and more such capital may be on the way. Others have received government bailouts.

Governments and unions are now principal owner-investors. And with private capital still scarce, government-offered incentives, grants, loan guarantees and other programs are now more prominent in financing decisions.

The sum total is an industry facing severe distress — with many participants still trying to find their footing on shaky ground.

In January 2009, Ernst & Young published Opportunities in adversity, a study that provided insights into the issues executives were facing as they grappled with the implications of the economic downturn.

We suggested that every company falls somewhere on a stress pendulum between cash burn and cash earn; and for every business there is an appropriate course of action to take. By executing that course of action quickly and effectively, management teams can seize a potential source of competitive advantage.

But we wanted to know more. And so we went back to our automotive professionals to gain their insights. In total, Ernst & Young's automotive professionals around the world conducted more than 1,300 client meetings.

These conversations revealed a series of strategic actions the industry is taking to position itself for success. Not all of their lessons from change may be new, but they are taking on new importance as automotive companies strive not only to survive but also thrive in the new economic environment.