Depending on the financial position of the supplier, varying degrees of interventions may be necessary. Some will be able to rely on careful cash management and long-term financing, while others will need to draw on all readily available sources of cash, such as revolving credit facilities, now. Stronger measures will be necessary in some cases, including asset sales or even restructuring inside or outside of bankruptcy. Management teams should have a clear understanding of the business conditions that would make these contingencies necessary, and prepare accordingly.
Operations and supply chain teams will also play a critical role, as they help manage both short-term disruptions and possible aftershocks as we move into the fall (Refer to the 'Survival to Revival Playbook', Section 3). The complex nature of the automotive supply chain means that a shutdown of activity in even one country can create broader disruptions across the network. Teams must be prepared to both ramp up and ramp down production with agility, while securing the integrity of their own supply base. Importantly, suppliers must be prepared to sustain this survival mindset for at least the next 12-18 months as they weather the immediate storm and move towards something resembling normal operations.
NEXT: Preparing for revival and future growth
In parallel, suppliers should prepare for what’s next – revival and future growth in an industry transformed by both new and existing pressures. Technology shifts in the industry will continue, but their trajectories may be altered by the crisis. Regulation plays a key role in driving adoption of electric powertrains and in the evolution of active safety features towards autonomous driving. Governments will likely emerge from the crisis saddled with debt and distracted by the consequences of the pandemic across many sectors of the economy, creating more uncertainty around policies relevant to the automotive industry.
This makes it essential for suppliers to refine or re-affirm their strategic positioning – to be clear on both short and medium-term actions to adjust their portfolio (Refer to the 'Survival to Revival Playbook', Section 4). With this clarity, suppliers should move quickly to redeploy resources across functions in support of this strategy (Refer to the 'Survival to Revival Playbook', Section 5). A whole-of-business approach is needed to redirect spending across all functions in a transformational way, including both digital and traditional levers. Correctly sequencing and managing the transformation across functions and initiatives will also be essential to realize its benefits.
Leading suppliers will emerge stronger than before
Those that successfully manage both the crisis and the recovery can encounter historic opportunities to transform their portfolios along the way. Suppliers with stronger financial positions and strategic clarity will likely be able to acquire at a lower cost – whether this means taking share within their existing portfolio, buying new technology capabilities, or even expanding into new industries (Refer to the 'Survival to Revival Playbook', Section 6).
For leaders at automotive suppliers, the next 18 months could be the most important moment of their careers. Rarely does a deep economic crisis coincide with a historic technological shift within an industry. Now is the critical time that will decide who will survive, who will revive and become stronger, and who will change the game for their business. Take decisive and bold action now.
(i) LMC Automotive. January 2020. Available on this link.
(ii) Examples of automotive suppliers cutting costs to fund investment in future technologies, and anticipating a downturn:
Financial Times. “Volkswagen chief warns ‘sacred cows’ need slaughtering.” 16 January 2020. Available on this link.
Automotive News. “GM sounds the alarm, in advance.” November 2018. Available on this link.
(iii) Bloomberg. “Economists Are Losing Hope in a ‘V-Shaped’ Post-Virus Recovery.” 31 March 2020. Available on this link.
(iv) Examples of production shutdowns and volume impacts of the pandemic:
Automotive News. “Ford Indefinitely Delays Reopening N.A. Plants; Fourth Worker Death Reported.” 31 March 2020. Available on this link.
IHS Markit. “Coronavirus Impact on Global Auto Demand.” 25 March 2020. Available on this link.
(v) Financial data and calculations are from S&P Capital IQ, accessed April 2020. Analysis covers 56 large automotive suppliers.
Operating profit refers to Earnings Before Interest and Taxes (EBIT), compared over the past two fiscal years.
Days of cash to cover financial obligations refers to the Basic Defense Interval [ = (Total Cash and Short Term Investments + Total Receivables) / (Total Operating Expenses + Interest Expense + Income Tax Expense) * Days]
Credit ratings are from S&P.
Statistical measure of bankruptcy risk refers to the Altman Z-Score. An Altman Z-Score below 1.8 indicate elevated bankruptcy risk.
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