GUEST COLUMN
The Yellow Lights Are Blinking Fred Hubacker Managing Director Conway MacKenzie, Inc.
The automotive industry might be characterized a little like the Michigan weather; if you don’t like what you see today, hang around and tomorrow might be worse. Or better if you’re the optimistic type. The point is simple, we live, work and manage a business that is so utterly dynamic it’s almost unparalleled in complexity, challenges and in opportunities. Back in December/January we saw almost unprecedented swings in the equities markets, and general enthusiasm for automotive products and 2019 sales at the NAIAS. And we listened to and digested every auto industry expert forecaster for the year ahead with some forecasting a US light vehicle market at 17.2M, others at 16.5M, and many somewhere in between. Disaster? Certainly not but clearly the years of steady growth, not only here in the US but also in the world’s largest market, China, are over. At least for the time being. The “smart” money on Wall Street was already telling us that with the OEM’s and major suppliers all losing significant market capitalization value in the 12 months dating back to early 2018. So, now we’re well into 2019 and the Yellow Lights are blinking, maybe even brighter than a few months ago. The question becomes, what must you and your company do, now, to preserve value? As a member of the C Suite team at your company, you need to be aggressively managing your current business, and your future book of business, to mitigate the effect of the blinking Yellow Lights. Yes, the lights might turn Green again because there’s enough favorable economic news and political pressures to make that happen. But, the lights might turn Red, however, and you need to be prepared. A few thought starters; • CAPEX – Capital and tooling are two of the most significant demands for cash in this business and many companies don’t manage either very well. It’s critical to recognize and thoroughly analyze the needs for CAPEX when you have existing unused capacity, are not taking full advantage of shift pattern opportunities, have not absolutely maximized output through productivity analyses, and, explored opportunities to acquire used equipment. Capital is very expensive and over spending and misspending can destroy a healthy balance sheet. It’s best managed with a rigorous analytical process that thoroughly examines the necessity for additional capital, the alternatives to additional capital and the financial returns of additional capital. Does an investment today with the appropriate WACC, yield a positive NPV in the future? The tooling spending/recovery model in the automotive industry is archaic and needs to be changed. Suppliers investing significant sums in tooling that will be owned and (eventually) paid for by their customers is a real threat to liquidity and the financial health of many suppliers. Consider negotiating milestone or progress payments on tooling rather than lump sum payment at PPAP. It’s not popular, but very necessary if you want to keep and maintain financial flexibility. • Launch Readiness—The auto industry is awash in stories of companies that have fallen off the ledge because of poor product launches. With an unprecedented number of new vehicle launches scheduled in the next several years; mostly CUV/SUV’s, it is paramount that your company has an effective program management system that can ensure a successful launch at required quality, volumes and costs. This takes a lot more than just good planning. The OEM’s are now launching vehicles at greatly accelerated volume curves than ever previously thought possible. Your organization must have dedicated teams, and a stage gate launch process that fully understands the complexities and the difficulties of major issues that occur during product launches and how to solve those issues; quickly. The launch gate process should be in place with financial controls that are used to measure anticipated production launch at or above the forecasted margins in the original quote. The questions that must be addressed include; equipment capability, demonstrated process capability, workforce training, product complexity issues, raw materials/ component suppliers and logistics suppliers readiness, dunnage etc. Failure in any of these elements will result in an expensive lesson both in terms of financial results and in the reputation of your company 17 │ OESA News - 2019 Second Quarter