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Strategic and Financial Insights on Leaders in the Vehicle Supply Industry

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Title: Strategic and Financial Insights on Leaders in the Vehicle Supply Industry


1
Strategic and Financial Insights on Leaders in
the Vehicle Supply Industry
Automotive Strategy Facts and Trends
November 27, 2007
2
Agenda
  • A.T. Kearney introduction
  • Macroeconomics and Industry dynamics
  • Financial analysis
  • Private Equity impact
  • Year 2020 outlook
  • Summary

3
A.T. Kearney is a leading, full service,
high-value added general management consulting
firm
Americas AtlantaBoston ChicagoDallas Detroit Mex
ico City New YorkSão Paulo San
FranciscoToronto Washington DC
Europe Amsterdam Berlin Brussels
Bucharest Copenhagen Düsseldorf
Frankfurt Helsinki Lisbon Ljubljana
London Madrid Milan Moscow Munich
Oslo Paris Prague Rome Stockholm
Stuttgart Vienna Warsaw Zurich
Asia Pacific Bangkok Beijing Hong Kong
Jakarta Kuala Lumpur Melbourne Mumbai
New Delhi Seoul Shanghai Singapore
Sydney Tokyo
Middle East Dubai
4
A.T. Kearney is a leader in Global Automotive
Industry consulting
Strategic/Industry Analysis
Strategic Information Technology
Operations Expertise
  • Engineering effectiveness
  • Commonality
  • Design for cost
  • Integrated cost management
  • Strategic sourcing
  • Supply chain optimization
  • Distribution / transportation operations
    improvement
  • Network design
  • Operations improvement
  • Warranty reduction
  • Lean asset effectiveness
  • Sales force effectiveness
  • Market entry/growth strategies
  • Product/technology strategy
  • Mergers and acquisitions strategy/operational due
    diligence
  • Business and portfolio strategy
  • Logistics/distribution/ transportation
    strategies
  • Manufacturing strategy
  • Organization design strategy
  • Shared services
  • Offshoring
  • IT strategy
  • Information management
  • Enterprise transformation
  • Business process re-engineering
  • Change management
  • Consumer database marketing
  • Solution selection
  • IT outsourcing
  • Large scale program management
  • Return on invested IT value capture

Implementation and Tangible Results
5
A.T. Kearneys Global Automotive Practice
supports its clients to create and sustain a
competitive advantage
Düsseldorf Frankfurt London Milan Paris Stuttgar
t Stockholm
Southfield Cambridge Chicago Mexico City New
York Toronto
Europe
North America
Beijing Melbourne New Delhi Mumbai Shanghai Singap
ore Seoul Tokyo
São Paulo
Latin America
Asia-Pacific
  • Dedicated global automotive resources
  • In-depth knowledge of local markets
  • Differentiation through industry and automotive
    content

6
Agenda
  • A.T. Kearney introduction
  • Macroeconomics and Industry dynamics
  • Financial analysis
  • Private Equity impact
  • Year 2020 outlook
  • Summary

7
GDP growth rates present a positive
macro-economic outlook although consumer
confidence is decreasing
of Real GDP
4
20062009 CAGR
8
3
11
10
18
12
Note (1) Confidence Level in 1985
100 Source Economist Intelligence Unit The
Conference Board A.T. Kearney analysis
8
In the next 5 years, 70 of global vehicle growth
will come from China, Europe and India
These regions also have the highest annual growth
rates, and are thus the focal point for global
OEMs and suppliers
Note (1) Versus 2006 country vehicle sales
volume Source J.D. Power, Global Automotive
Sales Forecast, 1Q 2007 A.T. Kearney analysis
9
Many experts predict that Chinas growth will
continue, making it a long-term attractive market
Key Drivers for Increased Auto Demand
Likely GDP Growth Scenario
Total GDP(US B)
  • GDP of China is slated to surpass major EU
    nations and Japan in 2008 and 2015 respectively
  • Chinas vehicle penetration is low relative to
    other developed nations, suggesting a potential
    for future increase of demand as average personal
    incomes rise

35,000
May become the worlds largest economy by 2040
Rising Standard of Living
30,000
25,000
US
China
  • Vehicle prices will continue to decline since
    China has pledged to reduce imported vehicle
    tariffs
  • Overcapacity and competition will continue to
    drive prices down

20,000
Declining Prices
Surpass Japan
15,000
Surpass UK/ Germany/France
10,000
  • Industry deregulation, improvement of the
    national credit system, has made auto finance
    available to the average buyer in China
  • Chinas auto finance industry is expected to grow
    rapidly at 15 CAGR through 2010

Japan
5,000
Availability Of Auto Finance
Germany
UK
France
0
2000
2010
2020
2030
2040
Source Goldman Sachs A.T. Kearney analysis
10
However, Chinas highly fragmented OEM base and
numerous lower volume assembly plants are
resulting in excess capacity
of OEMs that make up 80 of market
Million Units
Thousand Units / Plant
If domestic demand stalls, the excess capacity
may be used by OEMs for export, thus making China
a potential automotive hub
Note (1) Comprising 80 of the market
(units) Source J.D. Power, Global Automotive
Sales Forecast, 1Q 2007
11
Agenda
  • A.T. Kearney introduction
  • Macroeconomics and Industry dynamics
  • Financial analysis
  • Private Equity impact
  • Year 2020 outlook
  • Summary

12
The 2007 A.T. Kearney analysis includes 129
companies across the automotive value chain
Asia
North America
Europe
13
CFRIC is a measure of periodic cash flow return
on invested capital
Supplier Example
Cash Margin (Cash In/Sales)
CFRIC
(1)
(2)
CFRIC 16.4
Asset Turns (Invested Capital)
CFRIC is based on publicly available Balance
Sheet, Cash Flow and Income Statement data
(3)
Notes (1) Net Interest Expense Interest
Expense Interest Income (2) Special items can
be positive or negative and are net of
taxes (3) Non-debt monetary liabilities include
accounts payable, income taxes payable and other
current liabilities
14
Asian Light Duty OEMs led in both CFRIC and
topline growth
2006 Average 3.5
2005 Average 6.8
CFRIC (2)
2005 Average 8.7
2006 Average 7.4
Percentage Change in Sales (1)
Notes (1) Average change in Sales are weighted
averages (2) Average CFRIC are weighted
averages Source Factset Annual Reports 10Ks
A.T. Kearney analysis
15
Heavy Duty OEMs incurred higher returns on
invested capital than Light Duty OEMs due to
higher operating margins
2006 Average 11.0
CFRIC (2)
2006 Heavy Duty OEM Average 10.1
2006 Light Duty OEM Average 7.4
Percentage Change in Sales (1)
Notes (1) Average change in Sales are weighted
averages (2) Average CFRIC are weighted
averages Source Factset Annual Reports 10Ks
A.T. Kearney analysis
16
European suppliers excelled in CFRIC while Asian
suppliers had the greatest revenue growth
Hyundai
Caterpillar Eng. Div.
2005 Average 6.8
2006 Average 8.1
2006 Performance North America Europe Asia
Leoni AG
Toyota Boshuku
2005 Average 8.7
CFRIC
2006 Average 8.3
JTEKT
Mitsuba
Percentage Change in Sales (2006)
Dura
Delphi
Federal Mogul
Visteon
Note Percentage Change in Sales is calculated
as percentage change in Global Supplier Sales
(in Local Currency) from 2005 to 2006 Average
Change in Sales represents arithmetic averages
Average CFRIC represents arithmetic
averages Source Factset A.T. Kearney analysis
17
In 2006, North American supplier CFRIC continued
to deteriorate due to weak revenue growth and
higher structural costs
Regional CFRIC for Suppliers(1)
Year-over-Year Increase
North America
Europe
Asia
Impact on CFRIC
CFRIC
of Revenue
Asian suppliers performance deterioration was
driven by their global manufacturing expansion(3)
Notes (1) Includes 14 additional Asian
suppliers and 2 additional European suppliers
compared to 2006s analysis (2) Includes
Pension and Other Post Employment Benefits (OPEB)
periodic expenses (3) In 2006, Asian suppliers
cash-in grew at a slower rate than invested
capital, resulting in lower y-o-y CFRIC
Source Factset Annual Reports 10Ks A.T.
Kearney analysis
18
Auto-Diversified Suppliers continued to lead
CFRIC, with a 0.3 p.p. increase in 2006
CFRIC
1-2 lines(2)
3 lines(2)
N 36 16
21 500
Notes (1) Excludes bankrupt suppliers due to
first-year write-off skewing (Delphi, Tower,
Federal Mogul, Dana, and Dura) (2) Lines were
established around the following commodities
wiring, electronics, HVAC, powertrain, chassis,
interior, exterior, metal/fabrication, tires,
aftermarket, financial services Source Factset
Company Reports 10Ks A.T. Kearney analysis
19
Agenda
  • A.T. Kearney introduction
  • Macroeconomics and Industry dynamics
  • Financial analysis
  • Private Equity impact
  • Year 2020 outlook
  • Summary

20
Bankruptcy domino effect occurred in the Airline
and Steel industries the same will take place
in Automotive
Steel
Airline
Percent of Industry (Revenue)
NA Automotive Suppliers
Note (1) Cumulative filings normalized for
industry size Source BBK Center for Automotive
Research Literature search Automotive News
Lopuckis Bankruptcy Database A.T. Kearney
analysis
21
Several North American auto suppliers remain at
risk of filing bankruptcy
Healthy Zone
2006 Chapter 11 Filings
Risk Zone
Companies Not in Bankruptcy
Unhealthy Zone
Companies that have Filed Bankruptcy
Source A.T. Kearney analysis of 1B or greater
North American based suppliers
22
Private equity is playing a significant role in
the ongoing restructuring of the NA Auto Industry
Top 10 North American Based Automotive Private
Equity Deals, 2001-2007 (Ranked by Target
Revenue)
Source A.T. Kearney Townsend PE Survey 2007
Automotive News Global Insight Factset MergeStat
23
PE firms typically create value through 2 phases
PE Value Creation Models
Automotive Investment Phase
PE Deal Characteristics
Applied Strategies
  • PE firms target underperforming, distressed
    suppliers
  • 2-3 years
  • Reduction of labor force possible
  • Operating cost and working capital reduction to
    improve cash flow
  • Address performance fundamental issues
  • Focus on core value generating products and
    activities

80 of PE deals
1
Restructuring Phase
20 of PE deals
2
  • Acquisition of suppliers which form a nucleus
    as basis to grow the business
  • 3-5 years
  • Increase of workforce to support growth plans
  • Consolidation to gain focused scale
  • Technology Leadership Acquire complementary
    technology to support market leadership
  • Global Growth Expand market presence globally

Growth Phase

  • Going forward, PE deals will focus on Growth in
    addition to Restructuring
  • As PE firms complete the Restructuring phase,
    they often sell to another PE firm to execute
    the Growth phase

Source A.T. Kearney Townsend PE Survey - 2007
24
PE firms bring a multitude of levers and
capabilities to drive value creation
Highlights from A.T. Kearney Townsend PE Survey,
2007(1)
High
Low
Weekly
Monthly
Quarterly
Note (1) Survey conducted via interviews and
questionnaires with 8 CEOs/Presidents of PE-Owned
Companies and 10 Managing Directors of leading PE
Firms Source A.T. Kearney Townsend PE Survey -
2007
25
Increased private equity activity has created a
growing wave of anxiety
What the Media is Saying
  • As private equity deals grow, so does public
    anxiety
  • But as these (PE) investment titans become
    bigger and richer there's a natural suspicion
    that private equity's gains may come at the
    expense of average investors and of workers,
    lenders and perhaps the economy as a whole.
  • Many working in the auto industry fear
    private-equity companies merely will eliminate
    jobs and close facilities as they restructure
    operations on their way to making a quick buck.
  • they buy companies, slim them down with big
    layoffs, then load the companies up with debt to
    pay their high management fees and dividends

Source Media Quotes
26
However, there seems to be many positives that
result from private equity ownership
Average Annual Employment Growth of PE Backed
Firms vs. Traditional Firms Across All
Industries(1,2,3)
United States(1)
What Suppliers are Actually Saying
  • PE introduces the necessary expertise that
    enables sustained growth.
  • Without PE ownership, this company would not
    exist today.
  • Fear is more in the media than reality.
  • Theres lots of evidence that say where PE is
    involved that jobs are created and not
    destroyed.
  • PE gives management more freedom to do what it
    takes to make the company successful.
  • After some initial fears and concerns, things
    are now very much back to business as usual...If
    anything, many of our people feel it is easier to
    operate under PE ownership

Europe(2)
Notes (1) Global Insight/NVCA 2004 (2000
2003) (2) EVA/CEFS 2005 (2000 - 2004) (3)
Includes PE activity in Europe and NA, covering
30,900 portfolio firms in both restructuring and
growth phases Source A.T. Kearney - Creating
New Jobs and Value with Private Equity A.T.
Kearney Townsend PE Survey - 2007
27
Agenda
  • A.T. Kearney introduction
  • Macroeconomics and Industry dynamics
  • Financial analysis
  • Private Equity impact
  • Year 2020 outlook
  • Summary

28
The steep increase in middle and upper income
classes in the emerging markets will be a
dramatic change of power
2005
Total 1.3 billion consumers (20 world
population)
Canada
UK
Ireland
85
Japan
31
56
United States
15
36
8
Russia
Scandi-navia
SouthKorea
75
China
98
9
4
9
Benelux
7
11
5
18
163
Germany
Mexico
France
EastEurope
24
36
29
17
Caribbean
12
Taiwan
7
8
Hong Kong
CentralAmerica
16
Spain
Thailand
Iran
23
Italy
10
31
Brazil
India
Singapore
3
15
Portugal
Israel
Indonesia
Chile
7
Argentina
Philippines
Greece
North Africa
Australia
South Africa
New Zealand
? 10 mil. consumers
Middle Incomeannual spendingper capita USD
10K-25K
Upper Incomeannual spendingper capita USD
40K
Upper Middle Incomeannual spendingper
capitaUSD 25K-40K
Source World Bank, EIU, US Census Bureau, A.T.
Kearney analysis
29
The steep increase in middle and upper income
classes in the emerging markets will be a
dramatic change of power
2005
2020
Total 1.3 billion consumers (20 world
population)
Total 2.3 billion consumers (31 world
population)
Canada
69
UK
Canada
23
UK
United States
Russia
Ireland
85
Japan
31
56
Scandi-navia
20
United States
73
Japan
15
18
36
8
Russia
7
Scandi-navia
Benelux
10
7
SouthKorea
6
9
China
10
EastEurope
Germany
75
China
98
9
164
26
4
9
21
Benelux
7
23
France
11
5
22
18
163
26
15
SouthKorea
625
Germany
Mexico
France
EastEurope
24
36
13
29
16
17
Mexico
26
Caribbean
12
Taiwan
7
8
9
Iran
Hong Kong
Italy
CentralAmerica
Spain
16
90
Spain
Taiwan
Thailand
CentralAmerica
Iran
23
Italy
10
11
31
Brazil
India
Singapore
18
Hong Kong
3
Brazil
15
Portugal
27
Israel
Indonesia
Philippines
North Africa
Chile
7
Argentina
Thailand
Philippines
Chile
Greece
India
Greece
North Africa
Australia
Australia
112
South Africa
4
8
New Zealand
New Zealand
South Africa
Argentina
? 10 mil. consumers
Middle Incomeannual spendingper capita USD
10K-25K
Upper Incomeannual spendingper capita USD
40K
Upper Middle Incomeannual spendingper
capitaUSD 25K-40K
Source World Bank, EIU, US Census Bureau, A.T.
Kearney analysis
30
In 2020 Chinas 1.4 mn. unit premium market will
represent nearly 15 of the worlds premium LV
demand
  • Assuming Chinas would reach present advanced
    countries market maturity by 2020 its premium
    market could measure1.4 mn.
  • Chinas premium market will draw equal with the
    German market in 2020, second only to the US
    market which could measure 2.7 mn. units
  • The 2020 world premium market will measure nearly
    10 mn. units, compared to 5.8 mn. In 2005
  • Between 2005 and 2020 the premium market will
    grow over-proportionally (3.5 CAGR compared to
    2.9 CAGR of the total market)

Statistical market share forecast (persons and
LV sales in mn.)
U.S.2005
China2020
Germany2005
Premium LV sales (in Mn.)
West. Europeanregions(1) with 1 Mn. LV sales
in 2005
Persons in upper middle and upper income
categories (in Mn.)
Note (1) Benelux, France, Italy, Scandinavia,
Spain, U.K. Source J.D. Power, A.T. Kearney
Global Business Policy Council
31
Toyota is currently the 1 after several years
of above average organic growth
Passenger Cars and Light Truck (20071)(in mil. units)
Sales Growth(CAGR 2001-07)
7
0
-1
3
2
13
3
5
0
0
1
8
-2
1) Estimated Source J.D. Power, A.T. Kearney
analysis
32
Premium and Asian OEMs have above average sales
and profitability growth, whereas Ford and GM
lack behind
Revenue vs. Profitability Growth (CAGR 2001 vs.
2006)
10
? 1.8
Revenue Growth
? 3.7
-10
-20
30
EBITDA Growth
Source WorldScope Reuters, A.T. Kearney
analysis
33
In the future, Toyota is expected to grow
organically far beyond 10 mn units at double
market growth rates
Organic Growth Expectation of JD Power (in mil.
units)
2005
2020
CAGR 20052020
3.6
0.1
  • Key reasons
  • Footprint
  • Firm, long term strategy
  • Management Philosophy
  • Culture
  • Quality
  • Car Mix

2.3
3.0
0.1
4.6
2.5
2.1
22.2
4.0
3.3
0.0
Avg.
3.0
Source J.D. Powers A.T. Kearney analysis
34
This coming gap of 50-300 to Toyota will force
followers to catch up by acquisitions or mergers
Organic Growth Market Expectation (in mil.
units)
2020
300
50
Mega-OEM No. 1
Mergers in this group will create one or two
Mega-OEM
Source J.D. Powers A.T. Kearney analysis
35
There are a number of quite possible mergers
36
Yet there are some lessons to follow when these
conglomerates want to be successful!
Lessons learned from successful cooperations
Lessons learned
Examples to learn from
  • VW/Seat
  • Keep local market
  • DaimlerChrysler
  • Be realistic and take care
  • GM/Saab
  • Maintain brand values
  • Respect local requirements, master
    globalization/localization
  • Ford
  • Allow for creativity beyond financial business
    cases
  • Ensure a long breath
  • Renault/Nissan
  • Empatically restructure and seek synergies early
    on
  • ...
  • VW (Skoda et al.)
  • consequently conquer segments leveraging strong
    mother
  • Be rigorous and provide appeal quality
  • ...

37
Summary and advice
  • A big part of the future growth will come from
    China you need to be present
  • Take the positive learning from private equity
    ownership and try to adopt it to your culture
  • The OEM consolidation will continue your
    customers will get even larger
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