KPMG : Restructuring to gather pace

Facing overcapacity issues and financial underperformance, automotive executives expect a continuing industry shakeout over the next five years, says a survey resently. The annual KPMG survey of the global automotive industry, based on interviews with 150 senior executives at vehicle manufacturers and suppliers, reports an overwhelming expectation that alliances, mergers and acquisitions among vehicle manufacturers and tier 1–3 suppliers will increase globally over the next five years.

When viewed by region, 81% of Asian executives expect global consolidations and alliances to increase over the next five years, followed by 58% of North American executives and 56% of Eastern European executives. Only in Western Europe did a 32% minority of respondents expect an increase in global alliances, mergers and acquisitions.

Mike Steventon, Head of Automotive at KPMG in the UK, commented on the findings: "With global overcapacity still to be a major concern, a reduction in car production capacity and developing competitive cost structures are the key priorities for the industry. The majority of the auto industry expects to see an increase in rationalization, alliances, mergers and acquisitions. The reasons for this consolidation are clearly cost reduction and perhaps new business opportunities. It is also indicative of the industry's determination to tackle the fundamental problems which have resulted in the industry collectively, and the US manufacturers and suppliers in particular, not generating an adequate financial return. This is likely to be a painful journey in the short term but absolutely necessary to build a long term, sustainable industry."

For the fourth consecutive year, slightly more than half of the executives surveyed (57%) agreed that alliances will be more important than mergers and acquisitions in the auto industry over the next five years.

Not surprisingly, a majority of executives (87%) believe the level of bankruptcies in the industry will increase or remain the same over the next few years, while only 10% see a decrease.

In the KPMG survey, 47% of auto executives globally see non-competitive cost structure as the driving force of bankruptcy. But the story is different when broken down by region:

- 70% of European executives cited non-competitive cost structure as the greatest cause of bankruptcies in the industry with the second most popular response, pensions liabilities, trailing well behind at 18%;

- Only 46% of Asian execs cited cost structures, with excess debt being the next most popular answer with 17%;

- American executives were less clear on what the key driving force is. Thirty percent chose cost structures, along with a declining revenue base (30%) and health care benefit costs (28%).

In terms of profitability, 42% of executives are predicting that industry profits will be flat or generally rise over the next five years, showing marginally high optimizer compared to last year's 39%. Asian executives (43%) and their European counterparts (45%) are more positive about profits increasing over the next five years than North American executives (38%) who feel the industry will continue to be volatile and unpredictable.

Meanwhile, 54% of vehicle manufacturers and 41% of tier 2-3 suppliers believe profitability will remain flat or rise, compared to only 37% of tier 1 suppliers.

Steventon concluded: "Last year, expectations for profitability were low across the industry. This year, there are early signs of improving optimism driven by a real sense that the industry, and particularly the US manufacturers, are finally addressing their overcapacity issues and uncompetitive cost structures. This can only bode well for the long term health of the automotive industry." (To be continued)

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