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All tied up - Working capital management report 2011 - Regional and country performance review - EY - Global

All tied up: Working capital management report 2011

Regional and country
performance review

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Five regions and countries out of seven managed to report an improvement in WC performance in 2010.

Summary: The WC performance gap between both regions has been tightening in the last two years, with Europe catching up with the US.

US vs. Europe performance comparison

This latter trend can be attributed to the global footprint of corporations, increased impact of globalization of trade, industry consolidation and concentration of demand. Common WC leading practices have also been spreading steadily across regions.

Yet US-headquartered companies still exhibit much lower levels of WC than those based in Europe. Overall C2C for the US in 2010 was 4 days, or 9% below that of Europe. This is primarily due to a strong performance in inventory (–5 days, or 13%).

The differential between receivables and payables cycles (DSO vs. DPO) across both regions is less than one day, with the effect of generally longer trade terms in Europe (although with wide variations, notably between the North and the South) than in the US being mitigated at the net level.

There are still several reasons that may partly explain the WC performance gap between both regions:

  • Production, logistics and distribution facilities in Europe tend to be smaller and dispersed over many different countries
  • Transport takes longer and logistics costs are higher in Europe than in the US
  • The US benefits from the absence of national borders and a unique trading currency

European country performance comparisons

Five regions and countries out of seven (representing close to 75% of total sales and number of companies in Europe) managed to report an improvement in WC performance in 2010.

WC changes by European region and country, 2010 vs. 2009

  % Weighing C2C change 2010/2009
Country Sales Companies Overall
Benelux 11% 8% -8%
France 22% 17% -4%
Germany 18% 13% 1%
Scandinavia 10% 14% 0%
Southern Europe* 11% 11% -7%
Switzerland 6% 6% -8%
UK 21% 27% -3%
Other 1% 4% nm
Europe 100% 100% -4%

*Greece, Italy, Portugal and Spain

Source: EY analysis, based on publicly available financial statements

Only Germany showed a slight deterioration in WC performance, while for Scandinavian countries, performance remained unchanged.

For Germany, higher levels of WC resulted from some diverging trends among its industries. Automobile suppliers, chemicals and diversified industrials companies managed to improve WC ratios, with production and inventory buildup playing catch-up with stronger than expected sales growth spurred by exports, notably to emerging countries.

By contrast, electric utilities, general retailers and steel posted a deterioration in WC performance. Overall, both DSO and DPO increased by 3%, while there was a stability in DIO.

For Scandinavia, C2C performance remains heavily skewed toward the performance of certain industries, such as telecommunications equipment and oil, with the former reporting an improvement and the latter a deterioration in performance.

Overall performance was flat, with a significant deterioration in inventory performance (DIO up 4%), fully offset by a similar increase in levels of payables (DPO up 4%), while receivables performance was unchanged.

In other regions and countries, Benelux and Switzerland were the leading WC performers, with C2C down 8%. Results were driven by strong showings from consumer products and oil companies. For Switzerland, there was the additional benefit of a stronger currency at year-end against the average for the year.

France reported strong results (C2C down 4%) with good performance of electric utilities, telecommunications operators and oil companies. Each WC component contributed to it, with DSO and DIO down 1% each and DPO up 2%.

The UK managed to reduce C2C by 3%, partly reversing the deterioration in performance seen in the previous year (when C2C was up 6%). Both DSO and DIO fell by 2%, but DPO remained unchanged. Aerospace and defense, oil and pharmaceutical companies were among the leading performers.

In Southern European countries, performance was also improved. C2C was down 7%, driven by a drop of 2% in both DSO and DIO, while DPO remained unchanged.

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