Press release

Automakers facing declining profitability

  • Share
  • Suppliers and dealer networks also affected due to idle assets and declining profitability

New Delhi, 28 October, 2013: As the automotive sector addresses tough market conditions, implementation of strategic and tactical action could determine companies’ sustainable competitive advantage, suggests EY’s latest study, “Changing lanes - The automotive C-suite’s agenda for 2013–14.” The report forecasts an 8% growth in vehicle density in BRIC markets vis-à-vis only 0.4% in G7 countries (the US, the UK, France, Germany, Italy, Canada and Japan) in 2012–22. Moreover, it also predicts that 32% of 11.3 billion daily urban trips will be by public transport in 2025 - up from 16% in 2005.

According to Rakesh Batra, Partner and National Leader — Automotive practice, EY, “Despite the overall grim environment in the economy, there have been some bright spots like the significant growth in rural sales on the back of a good monsoon this year, has meant that a few automakers’ sales to rural India has grown by more than 10%. As we enter the festive season, the performance during the months of October and November is very critical for the industry. To lure buyers, automakers are resorting to huge discounts, lucrative financing schemes, vehicle exchange programs, and also introducing new models or refreshed versions of their existing vehicles.”

He added, “However, we anticipate FY14 to be one of the most challenging years for the industry, with Passenger Vehicle (PV) sales likely to decline by around 5% on a YOY basis. We expect the PV industry to return to growth during FY15. Thus, the automakers and suppliers need to adopt several cost-cutting measures and tighten their working capital management.”

The report identifies five themes that are expected to dominate the boardroom agenda for the next 18 months:

  1. Mind the gap — state of competition as winning companies move ahead:
    In terms of profitability, market leaders are achieving the right balance across a wide range of value drivers, particularly in their success in emerging markets, in making collaborations work (also in emerging markets) and in reducing their exposure to weak markets. According to the report, 35% of the sales volumes of the top five carmakers emanate from emerging markets. However, achieving profitability in markets such as India poses a challenge, and requires a different cost and business model, which ensures profitability of their extended supply chains and dealer networks.
  2. Steering through fog — winning in new operating environment by successfully navigating volatility and low visibility
    With significant economic uncertainty and high volatility ahead, the executives of automotive companies not only need to cope with high variability and their inability to predict demand, but also with intensifying competition in flat or contracting markets. The report highlights the fact that 33 countries (out of 58) reported a decline in consumer confidence in 4Q12, while in 1Q12, 38 countries (out of 56) witnessed a rise in consumer confidence. The key risk is the increasing volatility of individual markets, whether it is in China, India or Europe. Consequently, automotive companies need to be very flexible in their operating practices and be globally connected to offset unpredictability in certain markets.
  3. Plotting the route — connecting with customers by re-inventing the value proposition
    In order to deepen the consumer-brand connect and create new value propositions for connectivity and mobility needs, 104 million new cars are expected to have some kinds of connectivity devises by 2025, thereby converging technology and automobiles.
  4. Tune the engine — achieving organisational efficiency and flexibility by remodeling business and cost structure
    Almost 68% of the respondents from the automotive industry expect the downturn to continue for more than a year. The threat of a deepening recession is now leading automotive companies to not only drive increased efficiencies and flexibility in their organizations, but also leverage data to make enhanced and informed decisions across their businesses. IT-related security is another major concern for the, particularly in emerging markets.
  5. Watch the dial — managing resources across the value chain
    Managing key inputs — from ensuring availability of talent and credit to procuring supplies and scarce raw materials — seems to be a nightmare for automakers. Almost 68% of the automotive respondents indicated that there was no improvement in availability of credit in 2012; only 16% expect to increase their leverage (debt-to-capital ratio) over the next 12 months.

In this report, EY recommends a range of performance- and capital-related considerations for automakers. According to the firm, while performance-related considerations range from companies undertaking strategic technology alliances to implementing new business models, capital-related ones include refinancing of debt, equity and other obligations; stress testing of investment and implementing a cash culture, among others considerations.

    -ends-

    About EY

    EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

    EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

    This news release has been issued by EYGM Limited, a member of the global EY organization that also does not provide any services to clients.

    EY has more 7,500 employees across offices in Ahmedabad, Bengaluru, Chandigarh, Chennai, Gurgaon, Hyderabad, Kochi, Kolkata, Mumbai, New Delhi, Noida and Pune.

    Today, we are recognized as leaders among professional service organizations. The accolades we receive encourage us to continue in our focused effort on striving for excellence.