Working capital results for automotive supply mask variations over time.
Working capital performance was unchanged from 2003 to 2007 and then affected by the global economic downturn in between 2008 and 2009, with regions and companies responding differently. 2010 saw significant improvement in performance.
Between 2002 and 2010, working capital levels fell by 7%, with each region reporting differing results. Both payables and receivables contributed to the improved working capital performance since 2002, with days payable outstanding (DPO) rising by 8% and days sales outstanding (DSO) falling by 5%. By contrast, inventory performance deteriorated; with days inventory outstanding (DIO) up 9%.
WC trends by metrics, 2002-10
Source: EY analysis, based on publicly available fi nancial statements
The global downturn of 2008 had a considerable impact on working capital performance. At the end of 2008, suppliers were left with "excessive" inventory, when sales plunged and severe cuts in production and supply chain capacity failed to prevent inventory build-up.
With sales recovering gradually in 2009, production progressively ramped up allowing for reductions in "excessive" levels of inventory. At the end of 2009, inventory returned to slightly below that of the end of 2007.
In contrast with inventory, receivables and payables were better managed over the same period. For many years, automotive manufacturing has led the way with lean production techniques, leading to improvements in terms of quality, throughput and production costs. These latest results prove that the ability to move quickly is critical.
The strong working capital showing of 2010 (C2C down 13%) came from a combination of reduced receivables and inventories (DSO and DIO down 5% and 6%, respectively); while payables were lower (DPO down 2%). Increased production and build-up of inventories played catch-up with a swifter and stronger than expected recovery in global production, exceeding its pre-crisis peak of 2007.
Spotlight on North America
Over the past decade, a handful of trends have been profoundly reshaping the automotive supply industry in the US. These include:
- Market share losses for Ford and GM
- Intense competition
- Industry consolidation
- International expansion
- The impact of the global downturn
In 2009, GM and Chrysler filed for Chapter 11 bankruptcy protection. Several automotive suppliers implemented operational and financial restructuring actions, with a few turning to bankruptcy for reorganization.
North American automotive suppliers have been under intense pressure to increase efficiency, streamline processes and improve cash. While overall results improved, analysis reveals a contrasting picture of the industry's working capital performance in this region, with large variations over time and among companies.
For suppliers in North America, C2C in 2010 was 5% below that for 2002, but this was only achieved on the back of last year's gains, which more than offset the losses seen in the previous eight years. Only half of the companies surveyed managed to report a better performance.
Progress in working capital performance since 2002 came entirely from payables. Supply chain initiatives and higher levels of production, mirroring the increase in inventory, drove performance.
Spotlight on Europe
European automotive suppliers managed to report much lower C2C in 2010 compared with 2002. C2C was down 12%, with 11 out of 15 companies analyzed showing better results.
Progress in working capital came from a combination of sharply improved payables and receivables. Nine out of 15 companies analyzed in Europe reported a lower DSO, and 13 out of 15 a higher DPO. By contrast, there was a deterioration in inventory performance (DIO up 5%), with eight companies posting worse results.
There was a significant improvement in 2009, with C2C dropping by 22% in Q409 versus Q408, as inventory fell back. As a result, C2C fell by 11% between Q409 and Q407, with a combined reduction in receivables and inventories (DSO and DIO down 8% and 3%, respectively), while payables remained unchanged.
Performance improved in 2010, with C2C falling by 8% compared with the year before. Each working capital component contributed to these results, with DSO and DIO down 5% and 1%, respectively, and DPO up 3%.
Spotlight on Japan
Japanese automotive suppliers reported much lower C2C in 2010 compared with 2002, with six companies out of seven improving performance. C2C were down by as much as 19%, beating the results reported by its peers in both North America and Europe.
Progress came primarily from a large reduction in levels of receivables (DSO down 20%), with five companies improving performance. By contrast, payables performance was weaker (DPO down 8%), while inventory levels were down (-3% for DIO).
Working capital performance has been notably volatile through the different periods under consideration. Compared with other regions, C2C was still up 6% between Q409 and Q407, with receivables and payables showing deterioration (DSO up 3% and DPO down 4%). Results were strong in 2010, with C2C falling by 20% compared with 2009.
A note of caution, however, is required when reviewing working capital performance for Japanese suppliers, as volatility in the Japanese yen against other main currencies may have exaggerated yearly working capital variations. In 2008, for example, the Japanese yen was 14% higher than the US dollar and 19% higher than the euro at year-end compared with the average exchange rates for the year.
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