Saving Cash, Cutting Inventory, and Reducing Cost

China's economy is like other countries struck by the worldwide financial crisis which burst out in the second half of the year 2008. Many enterprises, especially those manufacturing enterprises, have found themselves in operational hardship. From my point of view the current situation is not optimistic: financing becomes tighter, and asset-liability ratio is getting worse; most factories are cutting their output, and some have already stopped production; the supply chain of automotive sector has also become vulnerable under the price pressure. Many Chinese auto enterprises will be confronted with throat-cutting challenges and tests in the year 2009. Who will finally survive the storm?

For auto manufacturers, the primary principle to survive in 2009 shall be: saving cash, cutting inventory, and reducing cost.

Under the current situation, more and more manufacturers and suppliers hope to get rid of the difficulty or to realize expansion by means of loan credits. However, they should understand that loaners and creditors will be more cautious than before, and are likely to adopt stricter loan and credit restrictions for risk control. It is certain that the government's stimulus policies may gradually adjust this trend. With bank loans and other conventional sources of fund becoming insufficient or expensive, it is, or will soon be an issue to find alternative floating capital for the payment of reward, interest or to suppliers. Cash flow will now be even more crucial to Chinese manufacturers comparing to any other occasions before. This proves the Chinese saying "Cash is king", which emphasizes the significance of healthy cash flow for conventional development and acquisitions as well. Under the circumstance of economic crisis, finance is the first and foremost among various factors for the survival and development of an enterprise. In the times when cash is idolized as the "king", conventional means of credit are fading and alternative ways must be found to maintain cash flow.

Inventory management and control is usually deemed in China as the most important link for performance improvement. The increasing pressure of asset-liability ratio has forced many Chinese manufacturers to be more concern about this significant link. Chinese companies are averagely far behind their counterparts in other industrial countries in terms of inventory turnover ratio, and the Chinese manufacturing enterprises still need to make efforts to "improve their inventory management" compared with Korean, Japanese, European and American . Normally an enterprise with higher turnover rate tends to have better operation. As shown by BBK Consulting, the average turnover rate of Chinese companies is about 3 (inventory turnover ratio = annual sales / inventory). The statistics shows that the 3.1 average turnover rate of Chinese enterprises is far less than 13.4 of the Korean, 9.7 of the Japanese, and 12 of the American and European. Inventory actually conceals bad business performance, but the average statistics also shows the comparatively big potentials and possibilities for most Chinese companies to improve their inventory management and control.

I visited many workshops of Chinese enterprises before, and found a high proportion of waste products. Most Chinese enterprises are more open-minded to the idea of Total Quality Management (TQM). Customer satisfaction is concerned, but the western idea of lean production has not been deeply rooted in the minds of Chinese enterprises. Moreover, Chinese auto enterprises also lag behind their competitor in respect of reducing waste product rate. Under the current economic situation, it is no longer possible for China's auto enterprises to solely rely on export growth and low cost of labor to offset their shortcomings of poor operation and management in terms of production and supply chain. The status quo of many Chinese auto part enterprises can be vividly described by another Chinese saying "slapping their own faces till they are swollen in an effort to look fat and imposing", which means "puffing themselves up to their own cost". Those enterprises are continuing over-expanding their sizes and increasing their production, but their products may not really demanded by the market. Something must be done to make a change, or otherwise those Chinese auto part enterprises will doom to be bankrupted.

A Chinese proverb of three monks shows that: "One monk will shoulder two buckets of water, two monks will shoulder one bucket of water, but add a third and no one brings back any water." Nowadays under the most urgent situation, all the "monks" must rise up and cooperate for fire fighting. As for the Chinese auto enterprises, it is not difficult for catching up with the sales, but for narrowing the additional gaps beyond the sales. This global crisis has really brought unfavorable conditions, but China is still a market with huge domestic demand. It is still possible to rescue China's auto enterprises from the crisis if appropriate means are adopted. Meanwhile, perhaps they can still maintain their competitiveness if they successfully enhance the efficiency and reduce the cost of their supply chain.

About the author: Duane Bolinger, Gasgoo's columnist, is Managing Director of BBK Consulting Co., Ltd. of Asia Pacific. Prior to BBK, Bolinger's senior roles with automotive companies have included Managing Director of ASIA Pacific, Corporate Finance Director, Business Line Executive, and Director of Strategic Planning for General Motors Worldwide Purchasing and Production Control.