DeLoitte & Touche experts Michelle Collins and Peter Koudal tell how finance is an indispensable function that can help drive change in the automotive industry.
Over the last several years the automotive industry has undergone a tremendous transformation, and as we near 2008 the impacts of this transformation are now beginning to surface. Deloitte Research has conducted several detailed analyses of manufacturing industry business transformations and found that, despite large-scale investments in management practices, processes and technologies, the results for most companies have been less than stellar.
Our detailed analysis of 500 of the world’s largest manufacturing companies listed on stock exchanges in North America shows more than 30 percent had negative average economic margins over the last five years. Among the 41 largest automotive vehicle and parts makers included in the analysis, an astounding 40 percent had negative economic margins during the same period.
Globalization, changing customer demands and competitive landscapes, new products and process technology, and an increase in government regulations all contribute to a very complex and volatile environment. In fact, our benchmark research which to date has included more than 1,000 companies and business units to date from around the world, including 150 automotive OEMs and suppliers, shows that changing business drivers and the ever-increasing complexity of global operations are making business improvement through transformation more difficult every year.
Is there a better way for automotive companies to improve and transform their businesses in this environment? While there is rarely a one-size-fits-all solution to achieve successful business improvement and transformation, there is a growing recognition that finance plays a critical role. In fact, our ongoing research suggests that finance transformation holds the key to helping automotive companies resolve some of the most intractable problems facing them today and capitalize on the opportunities that the newly transformed industry has created.
There are several areas where finance function leadership can make a difference.
Meeting investor expectations for profitable growth.
In a world of round-the-clock scrutiny, capital markets are putting enormous pressure on automotive companies to grow and increase capital returns in order to improve valuations and share prices. Few automotive companies, however, are getting the returns on investments they would like, and many are not meeting shareholders ‘expectations. Since investor valuations are often driven by expectations about a company’s future performance, making the right investments to help ensure future success is as important as improving current operations. This places enormous pressure on companies to find profitable investment targets and executing investments, which puts finance on center stage. Effectively linking strategy, investments and execution to shareholder value is of crucial importance for automotive companies aimed at returning to profitable growth.
Reaping the rewards of globalization.
With seemingly boundless prospects and demands from consumers and commercial customers in emerging markets like China and India, and the early successes of automakers such as Volkswagen and General Motors in those markets, it is no surprise that they top the priority list for globalizing the industry. However, companies need to tread carefully. In our global benchmark research we estimate that more than 85 percent of the world’s largest and most complex manufacturers are unable to maximize the returns on their global investments. Finance must play a significant role in making sure that investment decisions are well-conceived and vetted, supply chains are properly designed and optimized, and compliance requirements for reporting, taxation and trade are properly and efficiently handled.
Profiting from innovation.
With an increasingly hyper competitive automotive market and the need to keep vehicle line-ups fresh in the market, the burden on research and development (R&D) is huge. More spending may not be the solution, however. Our benchmark research across hundreds of companies has been unable to establish a reliable link between expenditures on R&D and profitability. Analysis of the problem points to an “innovation paradox” in the automotive industry. Most companies put new product and service launches on top of their growth agendas, but when it comes to the supply chain, investments in supporting those new products and service launches are far down the priority list. As the successful launch of new models, like the Mercedes M-Class and the Porsche Cayenne, have shown, it is crucial to effectively link new product development and launch to strategic and operational planning around sourcing, manufacturing and distribution.
Coping with structural cost.
Avoiding, or escaping, the trap of structural costs can seem impossible for mature automotive companies in long-established industries and markets. Finance transformation, however, can help automakers and suppliers consistently make better, more sustainable decisions across the enterprise. The transformation includes taking a more holistic view of the enterprise, including business, regulatory and tax issues, weighing financial and operational decisions early before major investments are committed in the wrong places, and developing processes for continuously optimizing the business.
Making M&A work.
Driven by industry consolidation and the desire to access new technologies, products, markets and sources of supply, automotive manufacturers around the world are constantly on the lookout for new M&A opportunities. Making money in a merger, however, is hardly a sure thing as many automotive companies have learned. Research suggests that acquisitions pay off for most shareholders of target firms, but that the payoffs for shareholders of the acquiring companies are often less than certain. Overestimating an acquisition target’s worth; strategic incompatibility with the acquired business; inability to effectively integrate the merged entities: these are all typical reasons why a buyer may gain less from a deal than expected. And, they are all areas in which stronger finance capabilities can contribute to better M&A strategy and execution.
Realizing returns on risk.
The increasing complexity of global automotive value chains is making it harder for manufacturers to manage risk. New market entries, new product introductions, new sources of supply, far-flung supply chains, and a myriad of complex physical, information and financial flows around the world make integrated risk management seem elusive. The challenge and cost of managing risk across a complex global manufacturing company can seem insurmountable. Yet, the costs of doing nothing may be even greater. Indeed, through better financial and risk management processes, combined with financial and operational hedging tools, automotive companies can improve risk mitigation to make better decisions.
Indeed, it is time to rethink the role of finance across the organization. There is a growing recognition that the transformation of finance, combined with greatly improved systems and processes for managing information, provides a real opportunity for improving strategies and operations and driving business performance. The transformation must not only encompass key roles of corporate strategy and execution, but also support competitive capabilities across operational business departments such as marketing, sales, and service; supply chain; research and development (R&D); information technology (IT); and human resources. We believe that finance is that indispensable function that can unlock the potential of nearly all aspects of the business in concerted way to help lead the transformation of the automotive industry.
Michelle Collins is the Vice Chairman, US Automotive Leader of Deloitte & Touche, USA LLP. She can be reached at MiCollins@deloitte.com, Peter Koudal is the Director, Manufacturing, Deloitte Research, Deloitte Services LP and can be reached at PKoudal@deloitte.com.
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