previous years
igns of a storm brewing - As it was, at the end of 2020, the year 2021 was not looking very promising. Despite a fundamentally positive outlook for the motoring industry, the uncertainties of 2018 and 2019 looked set to continue. Structural change, as well as consumer reticence and vehicle sales stagnation were harbingers of the end of a decade of strong growth.
The year 2019 also showed us that structural change would not proceed quickly – more likely step by step. The merger of Magneti Marelli and Calsonic; Continental’s founding of the company spin-off Vitesco; Tenneco’s takeover of Federal Mogul – all were signs of persistent, continual change for the car industry and its suppliers.
The German M&A market had hardly cooled off at all in 2019, with 293 transactions compared to 295 the previous year. But banks were already viewing credit payments to the car industry with concern, because of the difficult market setting. Despite cheap money and zero-interest policies, an icy wind was blowing around the financing of classical car manufacturers.
New technologies remained risky because of the uncertain market and legal position, as well as the halting monetization and sustainability of business models being trialed. At the same time, the traditional car business seemed to have an ever-closer expiry date. After a long period of growth, pressure for change grew strongly, and there was a push for appropriate investments and strategy changes in the supplier industry.
It took a little while for OEMs and suppliers to accept that they could only reach their targets in CASE technologies through collaboration, because the investments were too enormous for them to be able to manage on their own. But at the same time, political and social problems were destabilizing the market, and rapid change and monetization of new technologies – for example, connectivity services and cybersecurity – failed to emerge.
If we look at profit development in the last few years (-1.5 percent in 2019 compared to 2018, for the biggest 100 suppliers), we can see that there were numerous companies in the lower third of the supply industry which had slipped into the loss zone even before the Covid-19 crisis began in 2020. This alone would be manageable in the short term, but with structural change, the question arises as to whether or not many business models will be sustainable in the future. If old business is wobbling and new business is not yet firmly established, tensions arise and all participants need great skill and dexterity to adopt a clear plan out of the crisis and avoid insolvency.
If we look at the history of how insolvencies develop in the car industry in German-speaking countries, the number since 2010 has involved around 20 (±10) companies a year. However, the global financial crisis of 2008/09 demonstrates that this number can rise sharply in an economic crisis: there were over 80 insolvencies in 2009. Every percentage point of negative development in gross domestic product (GDP) leads to a proliferation in the number of insolvencies. In 2009, the GDPs of major automobile markets fell by between 2 percent and 6 percent (for example, in Germany, Japan, Great Britain and the US), whereas China showed strong growth of around 9 percent.
When it came to vehicle sales in 2009, Great Britain were particularly badly affected, with declines of between 10 percent and 20 percent. Thanks to an environmental bonus, Germany was able to generate a sales surplus of around 20 percent in 2009 compared with 2008, and in this way fended off a deep crisis. However, sales volumes decreased significantly in 2010, to significantly below the pre-crisis level (down 6 percent compared with 2008) and it was not until 2011 that they reached comparable levels again. All these figures are intended to give an idea of the future direction of sales after the Covid-19 economic crisis.
The current situation shows a similar picture for GDP forecasts as for sales. In April the IMF forecast declines of 6 percent for the US, 7 percent for Germany, Great Britain and France, 5 percent for Japan and a rise of 1.2 percent for China. If we line up the numerous crystal balls showing sales forecasts for 2020 and hazard a glimpse into an uncertain future, we will see a corridor reaching from declines of 20 percent to 25 percent for the global car market. There are pessimistic scenarios which paint an even more dismal picture.
Despite support measures for the DACH region – D (Germany), A (Austria) and CH (Switzerland) – Berylls is forecasting a sixfold increase in average insolvency figures for the period March 2020 to mid-2021. Altogether this will probably result in around 120 automobile companies sliding into insolvency. According to Berylls’ forecasts, up to 100,000 jobs will be affected.
Given that the automobile world was a very different one in 2009, after 2020 it will be more difficult to realize a similar story of successful recovery. On the contrary, Covid-19 could accelerate structural change in the German-speaking/European supply industry and even drive insolvencies above 120. The structural damage caused by this insolvency tsunami would be more significant, and the development of new structures would take considerably longer, prolonging the recovery phase. It is also unclear to what extent the banks are prepared to pay out money for the development of new motoring areas after the painful reduction of credit to car suppliers.
The same applies when we look at private equity companies, which can currently find better opportunities for ambitious returns in other industries. Rescue by investors and M&A activities looks difficult; on the one hand, sales prices have risen too high in the last few years while on the other, many financial investors are anxious either not to advance into sectors which they will not be able to sell later, or be unable to handle high expectations of returns. Strategists will proceed very carefully, for the moment preferring to keep hold of their money and wait for better times to make strategic acquisitions.
For takeovers out of insolvency there will be strategists who will have had wish lists for a potential expansion of their own portfolio for quite some time. So the following years could bring further insolvencies, perhaps above the 20 per year mark, and accelerate consolidation. In terms of sales, currently around €12 billion are in play, which come from suppliers who have got into difficulties this year and become insolvent. Reliable forecasts for the actual extent of this will not be calculated until the third and fourth quarter, by which time the number of notable insolvencies can be better quantified and described. We already have some notable examples: Veritas, DGH Druckguss Heidenau and Finoba.
One of the lessons from 2009 should be to avoid a downward spiral of continual pessimistic forecasts. It was such a spiral that tore through the car industry and led to the situation in 2009 in which significantly fewer vehicles were being produced globally than were required on the market. Whereas global demand only reduced by almost three million vehicles, almost nine million fewer were produced than in the previous year. A lack of communication and transparency over highly complicated supply chains made planning more difficult for all concerned, and it was existing vehicles which finally had to fill the trade gap.
If the industry does not manage to make a better job of orchestrating the ramp-up this time, and if participants do not read market opportunities properly, more damage could be done than in 2009. We must avoid a situation where capital is gained from the financial stress suffered by normally solid companies. In the medium term this would be alleviated if transformation was actually abandoned altogether. This is the reason why people are increasingly calling for structures to be created in which companies in trouble can find a safe harbor (e.g. takeovers using a fund created by banks, investors or unions). However, OEMs have an interest in keeping their highly complex supply chains stable and carrying out the supplier transformation in coordinated channels. It is not known whether “problem companies” might also land in this safe harbor – companies which would have been better wound up – otherwise the pace of this wise change in the industry will be slowed down.
The market will be reassessed, and it must be steered with measured judgement and supported at the right point. Alongside investments for CASE, other investments are needed to rebuild the supply chain, ranked in a similar way. The top priority at the moment is to secure liquidity, especially as many car suppliers in the supply chain are system-relevant. This alone is a mammoth task for the industry, and it is not enough on its own. New ideas are needed, for example the transparency mentioned earlier, to steer the ramp-up on the basis of demand.
In addition to all this, a mixture of purchase incentives to support the industry, including sustainability and environmental demands, needs to be provided through hybrids, battery electric vehicles (BEVs) or fuel cell electric vehicles (FCEVs). However, structural problems should not be concealed, and short-term purchase incentives should not again lead to medium-term over-capacity and an incorrect vehicle portfolio that runs contrary to long-term climate goals.
When it comes to rescue funds for suppliers, we should proceed with clear criteria for system relevance, continuation of structural change and a clear central control body, compatible with the market reassessment of “zombie firms.”
The setting of these parameters will define whether or not we will see an even higher number of insolvencies. There should be opportunities for all participants (including suppliers, banks, private equity firms, OEMs and politicians) to continue the change which has been set in motion, to transform the car industry. Powerful waves seem unavoidable, but they must be prevented from getting bigger and forming a tsunami.
Dr. Jan Dannenberg (1962) has been a consultant for the automotive industry since 1990 and became a founding partner of Berylls Strategy Advisors in May 2011. Until spring 2011, he worked with Mercer Management Consulting and Oliver Wyman in Munich, Germany, on international projects – for five years as Associate Partner, and another three years as Partner. He is a recognized specialist in innovation and brand management in the automotive industry, and primarily advises suppliers and investors on strategy, M&A and performance improvement. In addition he is Managing Director at Berylls Equity Partners, an investment company that specializes on mobility enterprises.
Bachelor of Arts in economics at Stanford University, USA; business administration and doctorate degree at the University of Bamberg, Germany.
