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CONTENTS PAGE
The challenge – Pressure on automotive suppliers has further increasedover the past months
Looking back – Despite a challenging environment, automotive supplierprofitability has further improved
A
B4
8
2
This document was created for the exclusive use of our clients. It is not complete unless supported by the underlying detailed analyses and oral presentation. It must notbe passed on to third parties except with the explicit prior consent of Rothschild and Roland Berger Strategy Consultants.
p y p
Looking ahead – Suppliers need to master 15 main levers in order to reachand secure above-average profitabilityC
D Definitions and Contacts
8
20
46
Management Summary
• Automotive suppliers are facing one of the most competitiveenviron-ments ever (increasing raw material prices, low cost competition,…) – and pressure will further increase
• Nevertheless global profitability continued to improve further in 2007
33Source: Roland Berger/Rothschild
Nevertheless, global profitability continued to improve further in 2007(average EBIT margin 2007: 5.4%, average ROCE margin: 11.9%)
• Mid-sized and large suppliers based in Europe, Japan and India havebeen particularly successful
• We identified 15 main levers for the future success of automotivesuppliers
• Overall, many suppliers are not prepared well enough for the upcomingchallenges
The pressure on automotive suppliers has further increased –Suppliers are in a "sandwich" position
The automotive powerplay
S li• Stagnating
demand in triad• Shift of investment
focus to emerging• Drastic raw material
price increases
Raw material markets/Financial markets
Consumers OEMs
5Source: Roland Berger/Rothschild
Suppliers
Furtherincreased
marginpressure
demand in triadmarkets
• Reduced brandloyalty
• Increasing pricesensitiveness
• Increasingenvironmentalawareness
focus to emergingmarkets• Structural overcapa-
cities• Growing trend to
low cost/low techconcepts
• Large purchasingcost reductionprograms
• Pressure on "green"innovations
price increases
• High bargainingpower (consolidation)
• Supply shortages
• Financial marketcrisis
• Shareholder returnexpectations
Given this environment, we have taken a closer look at historicalfinancial performance and future success factors for suppliers
LOOKING AHEADLOOKING BACK
• Success factors for future supplierperformance (revenue structure, coststructure, balance sheet structure)
• Strategic readiness check
6Source: Roland Berger/Rothschild
How has your company performed compared to its peer group – and is it wellenough prepared for the future?
• Historic supplier profitability• Profitability trends by region, company
size, product focus and business model• Top and low performing suppliers
8% 4%5%
32%
Our study results are based on the largest automotive supplierbenchmarking database worldwide
• Analysis of financial and operationaldata of >400 automotive suppliersbetween 2001 and 2007
DATA BASIS – split by region1)STUDY APPROACH
Western EuropeAsia other
ChinaOther1)
7
8%
14%
29%
32%
Source: Roland Berger/ Rothschild
1) Based on location of headquarter
• Interviews with ~100 supplierexecutives
• Desk research
• Incorporation of Roland Berger andRothschild project experience
Japan
NorthAmerica
Korea
∑ = 410suppliersglobally
8
BLooking back –Despite a challenging environment, automotivesupplier profitability has further improved
Profitability of the global automotive supplier industry has furtherimproved in 2007
Profitability of automotive suppliers 2001-2007 [%]
12 2 11 9
EBIT margin ROCE
9Source: Roland Berger/Rothschild Supplier Database 2008
Basis: Revenue-weighted average of performance-rated suppliers
'01 '02 '03 '04 '05 '06 '07 '01 '02 '03 '04 '05 '06 '07
5.44.64.7
3.75.1 5.44.8
7.9
11.312.2
10.610.9 10.711.9
Also compared to other industry sectors, automotive suppliersgenerate an attractive Return on Capital Employed
Global profitability of industry sectors, 2007 [%]
13.114.4
12 4
EBIT margin ROCE
10Source: Bloomberg; Roland Berger/Rothschild
5.47.1
9.7
17.1
23.1
10.4
OEMsSuppliers Telco Pharma HightechConsumer
11.9
9.310.0
12.4
OEMsSuppliers Telco Pharma HightechConsumer
However, not all automotive suppliers benefited from the positivetrend in the same way
Analysis of global supplier profitability
1 2 3
Region Size Product focus Business model
4
11Source: Roland Berger/Rothschild
WINNERS(> averageROCE)
LOOSERS(< averageROCE)
1 2 3• Western Europe• Japan• India
• North America• China• Korea
• 2.5-10 bn EURrevenues
• <2.5 bn EURrevenues
• >10 bn EURrevenues
• Powertrain• Chassis
• Exterior• Tires
• Suppliers focusedon modules
• Suppliers focusedon innovativeproducts
• Suppliers focusedon systemsintegration
• Suppliers focusedon commodities
4
Profitability varies strongly across regions – European andJapanese suppliers are in pole position
10.37.3
12.89.0
12.7
6 5
Key performance indicators by region – ROCE 2001-2007 [%]
North America Western Europe Japan
1 REGION
12Source: Roland Berger/Rothschild Supplier Database 2008
Basis: Revenue-weighted average of performance-rated suppliers
7.3
2007 2007
6.5
20072001 2001 2001
6.1
15.7
2007
11.015.7
2007
13.3
6.1
20072001 2001 2001
China Korea Rest of Asia (esp. India)
German suppliers clearly outperformed global competitionregarding profitability
Key performance indicators 2001-2007 – German suppliers
Revenue growth [2001=100] EBIT margin [%] ROCE [%]
5 76.0
5.8 5.8 13.8 13.7 13.5 13 1 13.3 13.9
1 REGION
13Source: Roland Berger/Rothschild Supplier Database 2008
Basis: Revenue-weighted average of performance-rated suppliers (subset of 21 Germany-based suppliers)
'01 '02 '03 '04 '05 '06 '07 '01 '02 '03 '04 '05 '06 '07 '01 '02 '03 '04 '05 '06 '07
142
110
100107
120
128
137
2.9
4.2 4.4
5.7 5.8
9.6
13.1 13.3
Industry average
We identified strong differences regarding company size as well:The smaller the company, the less profitable
14 5
Revenue growth2001-2007 [CAGR %]
ROCE change vs.2001 [%-pts.]
6.8 9.8 7.2 7.9 5.7 7.3
-0.6 +4.1 +0.5 +4.1 +8.2 +3.6
Key performance indicators by company size – ROCE 2007 [%]
2 SIZE
14
Ø = 11.9
Source: Roland Berger/Rothschild Supplier Database 2008
11.311.1
14.5
10.2
13.1
8.6
1,000-2,500 2,500-5,000 >10,0005,000-10,000<500 500-1,000
Basis: Revenue-weighted average of performance-rated suppliers
2007 Revenue[EUR m]
Suppliers with a business focus on Powertrain, Chassis andInterior achieved above-average profitability in 2007
Key performance indicators by domain1) – ROCE 2007 [%]
3 PRODUCT FOCUS
16.5
Revenue growth2001-2007 [CAGR %]
ROCE change vs.2001 [%-pts.]
4.8 4.3 8.8 7.3 7.1 9.3
-1.3 +4.8 +5.7 +5.1 +7.4 +6.7
15
Ø = 11.9
Source: Roland Berger/Rothschild Supplier Database 2008
Basis: Revenue-weighted average of performance-rated suppliers (subset of 204 suppliers); excl. domain “Others”, e.g. engineering services1) Allocation of companies based on domain with highest revenue share in product portfolio; total company revenue allocated to that domain
11.110.4
7.1
14.513.1
InteriorElectrics/Infotainment
Exterior Tires PowertrainChassis
Module suppliers have been more successful than systemsintegrators – and a high degree of innovation pays off
Key performance indicators by business model – ROCE 2007 [%]
CAGR 5.7%
12 413.5
12 5
System/Module vs. component focus Innovation vs. Commodity
CAGR 6.9% CAGR 7.5%CAGR 6.3%CAGR 9.1%
4 BUSINESS MODEL
16Source: Roland Berger/Rothschild Supplier Database 2008
Basis: Revenue-weighted average of performance-rated suppliers
Systemfocus
8.2
10.9
2001 2007Component
focusModulefocus
8.0
12.4
7.4
2001 2007 2001 2007
Revenue growth
7.1
11.7
8.9
12.5
2001 2007 2001 2007Commoditysuppliers
Innovationsuppliers
Across the automotive supplier industry, we have identified groupsof ~50 top performers and ~50 low performers
Key performance indicators by supplier 2001-2007
TOP performers
30354045
Ø = 10.5
17
Basis: Revenue-weighted average of performance-rated suppliers 1) Additional criterion: above-average ROCE in 2007
Source: Roland Berger/Rothschild Supplier Database 2008
Revenuegrowth2001-2007[CAGR %]
Average ROCE 2001-20071) [%]
LOW performers-15-10-505
10152025
-15 -10 -5 0 5 10 15 20 25 30 35 40
Ø = 7.1
The gap between top and low performers is permanently widening
Key performance indicators by supplier 2001-2007
Revenue growth [2001=100] Return on capital employed (ROCE) [%]
16 4 17.5 17.919.2
205 TOP
18
Basis: Revenue-weighted average of performance-rated suppliers
Source: Roland Berger/Rothschild Supplier Database 2008
Industry average
10.7
3.3
14.3
5.9
15.2
3.9
16.4
7.5
4.1
0.82.9
3.3x
6.6x
186166
145123
111100
110109109108103101100
TOP
LOW
LOW
'01 '02 '03 '04 '05 '06 '07 '01 '02 '03 '04 '05 '06 '07
Most top and low performers stay in their performance group overa longer period of time
Development of top and low performers 2004 vs. 2007 [# companies]
TOPperformer
2004 2007
74%
Rising suppliers1):
• Aisin Seiki• Brembo
Continental
19Source: Roland Berger/Rothschild Supplier Database 2008
LOWperformer
performer
Averageperformer
24%
52%45%
76%15%
9%
• Continental• Cummins• Denso• ElringKlinger• Fuyao• Keihin• Leoni• Mann+Hummel• Toyoda Gosei• Yutaka Giken• ZF• ...
Basis: Revenue-weighted average of performance-rated suppliers 1) Medium/Low performers 2004 who achieved top performance in 2007
2%
3%
20
Looking ahead –Suppliers need to master 15 main levers in order to reachand secure above-average profitabilityC
Automotive suppliers need to master 15 levers to reach/secureabove-average profitability
Levers to maximizesupplier value
Revenue structure Cost structure Financial structure
1 Focus on profitable and growingsegments/customers 6 Globally optimized footprint 11 Optimized working capital
management
21Source: Roland Berger/Rothschild
g
2 Focused product portfolio
3 Diversified customerportfolio (globally)
4 High share of innovativeproducts/solutions
5 Customer focused salesorganization
7 Lean overhead structures
8 Strong and global Purchasing
9 Effective R&D spending
g
13 Adequate leverage
14 Optimal use of capitalsources
Revenue growth Cost leadership Financial sustainability
10 Process excellence
15 Attracting and retaining excellent people (enabled by company culture, management style, incentive systems, …)
12 Efficient asset management
2530354045
Measured against this set of 15 strategic levers, many suppliersare not prepared well enough for the challenges ahead
Revenuestructure
High Future TOPperformers
Strategic assessment of future supplier performance
22
-15-10-505
10152025
-15 -10 -5 0 5 10 15 20 25 30 35 40
Basis: Revenue-weighted average of performance-rated suppliers
Source: Roland Berger/Rothschild
structure• Segments• Focus• Client base• Organization• Innovation
Cost structure• Footprint• SG&A
• Purchasing• R&D
Low
Low High
Europeansuppliers Japanese
suppliers
Rising starsuppliers
North Americansuppliers
Future LOWperformers
• Processes
Automotive suppliers need to be present in future growthsegments like Powertrain, Electronics, or low cost cars
1
Global parts sales by productgroups [EUR bn]
Global part sales by OEMgroups [EUR bn]
Global parts sales by vehiclesegments [EUR bn]
Products Customers Segments
591 591
CAGR [%] CAGR [%] CAGR [%]
591
SEGMENTS/CUSTOMERS
24
Chassis
Exterior
Interior
Power-train
RisingStarsEuropeanPremiumEuropeanVolume
Detroit 3
Japanese/KoreanOEMs
77
8218
115
121
162
49330
135
143
201
2008
Areas with above-average growth rates
2020
Elec-tronics
78
95
87
16
147
165
49331
104
155
206
4.30.5
1.4
1.4
1.8
5.61.7
1.5
0.4
1.8
4.61.1
1.8
1.2
Low costPremium
Low end
Volume
2008 2020
63
7219
103
308
49335
127
357
2008 2020
Source: Roland Berger/Rothschild
Four main activities required in order to optimize the product/customer portfolio over the long term
1 SEGMENTS/CUSTOMERS
Recommendations for suppliers
1 Assess portfolio: Systematically screen product/customer portfolio and simulateimpact of different long-term growth assumptions
25Source: Roland Berger/Rothschild
2 Manage opportunities: Identify potential growth areas to be further exploited anddesign/implement/monitor dedicated growth initiatives (e.g. focused on low costcars or focused on Asian Rising Star customers)
3 Manage risks: Identify main risks caused by structural industry changes anddevelop defensive strategies
4 Evaluate financial impact: Aggregate financial implications of required actionsand identify potential financing gaps
The future development of Powertrain is driven by mainly threefactors: customers, legislation and enabling technologies
Overview of key drivers and their impact on Powertrain development
Customers
• Increasing focus on total cost of ownershipd t i i f l i b t t t i
1 • Ongoing optimization of ICE• Enhancement of gearboxes
( DCT 8 t t ti )
Future development of POWERTRAIN
tiona
ry
1 DEEP-DIVE POWERTRAIN
26Source: Roland Berger
due to rising fuel prices – but at a certaincomfort sensitivity
Legislation
• Legislative frameworks enforcing fuelefficiency and limiting toxic gas emissions
• Country, regional and local actions e.g.,con-gestion charges, tax incentives orpenalties
Enabling technologies
• Recent achievements in base technologies(e.g., Li-Ion batteries) enable new technicalsolutions
2
3
• Usage of alternative fuels(e.g,. bio fuel, syn fuel, CNG/LPG)
(e.g., DCT, 8 stage automatic)
• Increasing electrification androllout of Hybrid Powertrains
• Emergence and spread ofelectric vehicles
• Continued research on fuel cells(esp. for heavy duty vehicles)
• Improvement of exhaust gasaftertreatment systems
Rev
olut
iona
ryEv
olut
iona
ry
Conventional ICE technology will be further improved over thenext 15 years – Some examples
Diesel common rail (<2000 bar)
HCCI / CAI
SYSTEM Serial stage Prototype stage1) Concept stage
High pressure CR diesel (>2000 bar)Combustionprocess
Gasoline DI (homogeneous) Gasoline DI stratified (lean)
Powertrain technology roadmap (Extract)
1 DEEP-DIVE POWERTRAIN
27
VTG turbo diesel
Exhaustaftertreatment
DPF with regeneration
SCR (w urea)2)
HC-CO absorber
NOx trap 2nd genNOx trap 1st gen
Muffler integrated catalyst
Turbo charger
SCR integrated with cat
Camless / electric valvetrainContinous variable valve lift
Dual stage turbo diesel
Dual stage turbo gasoline
VTG gasoline
E-Drive Turbo
SCR (w/o urea)
Source: Roland Berger
1) First niche applications 2) Passenger cars
Electric Powertrain components differ substantially fromconventional ICE technology – and are much more expensive
Cost breakdown of EV and conventional Powertrain in 2010 [EUR]
Electric POWERTRAIN Conventional POWERTRAIN1)
2 000
1.20015.200
12 000
1 DEEP-DIVE POWERTRAIN
28Source: Roland Berger
2.00012.000
Battery Electricmotor
Powerelectronics
Total
2.860
1.550
Engine
370
E/E
430
Exhaust
510
Trans-mission
Total
1) Average Powertrain in Western Europe
But significant improvements in battery technology will result inincreasing battery power available at declining cost
Development of battery energy density and battery cost
Battery energy density [Wh/kg] Battery cost [EUR/kWh]1) Levers to achieve costreduction:
• Optimized product design• Less complex battery
400180+80% -50%
1 DEEP-DIVE POWERTRAIN
29Source: Roland Berger
1) Assumption: 100 k units p.a.; min. capacity 15 kWh
• Less complex batterymanagement
• Material substitution byusage of less expensivematerials (e.g., iron) –However, partly off-set byincreasing prices for majormaterials (e.g., lithium)
• Scale effects in purchasing,production and SG&A
200
300
2010 2015 2020
125
100
202020152010
Electric vehicles are therefore expected to have a lower lifecyclecost than a conventional ICE powered car in 2020
2010
47.7
ICE – EV lifecycle cost comparison1) 2010/2020 ['000 EUR]
2020
+2.3 -9.5
1 DEEP-DIVE POWERTRAIN
30
3.30.0
17.6
38.6
ICE
5.75.6
12.0
17.6
17.7
40.9
EV
Consumption
VATBattery
Vehicle Vehicle
0.0
17.6
ICE
26.8
3.3
10.1
4.56.0
17.6
38.2
EV
Consumption
VATBattery
Powertrain share 1) 12 years NPV perspective; discount rate: 6%; mileage of 180,000 km; vehiclepurchase price remains constant; increasing gasoline and electricity price with 6% p.a.
Source: Roland Berger
This will result in imbalanced growth opportunities for Powertrainsuppliers
Impact of "the future drives electric" scenario on selected Powertrain modules
E-components/batteries(enabling hybrids and EVs)Sensors
1 DEEP-DIVE POWERTRAIN
31Source: Roland Berger
(new functionalities)
Exhaust gas aftertreatment &EGR (particle absorption andDeNox solutions)
Turbo chargers(variable systems, high volume)
Ignition & cold start(commodization, less volume)
Drivetrain(commodization)
Engine(downsizing, less volume)
Crank system(downsizing, less volume)
Clutch & gearbox(DCT, new designs e.g. 8 speed)
Valve train (variablilization)
Fuel injection(injection pressure, stratified)
Air intake system(stratified)
Suppliers have to focus their product offering and broaden theircustomer portfolio. Objective: global market share of >20%
2/3 PRODUCT/CLIENT PORTFOLIO
Focused product portfolio Broad customer base
6054
46
32
Low performersTop performers
43
Revenue share of Top 3customers [%]
Global market share in 1-2 relevant segments: ~20-30%
46
Revenue share of Topproduct group [%]
Source: Roland Berger/Rothschild
Only innovative products will allow above-average margins. A widerange of new technologies plays a key role in the next few years
4 INNOVATION
Main automotive innovations in the next yearsEntire vehicle concepts
• Low cost cars• New crossover
vehicles Exterior• Lightweight body
Powertrain• New combustion engine
technologies• Hybrid drives• HCCI engine
33
g g yconstruction
• Plastics doors/closures
• LED front lights
Interior• Individual/ exchangeable
interiors• Variable instrument
cluster/HMIs• Advanced seat
climatization• Carbon dioxide HVAC
Electronics/ safety• Driver assistance
systems• Wireless communication• Li-ion batteries
Chassis• Fully integrated active
chassis• Electro magnetic suspension• Steer-by-wire• Electric brake/ brake-
by-wire
HCCI engine• Alternative propulsion
(fuel cell, e-car)• Electrification of auxiliary
drives
Source: Roland Berger/Rothschild
Automotive suppliers should implement customer focused salesorganizations with a high degree of back-end standardization
5 SALES ORGANIZATION
Characteristics of successful supplier salesorganizations
1 Global Key Account Management teamsat high hierarchical level (CSO – ChiefSales Officer – typically at Board level)
Benchmarks for top performing salesorganizations
[m EUR revenue per sales employee]
~20
34
2 Sales approach has to differ stronglydepending on customer needs (e.g. Europeanvs. Japanese OEM) and portfolio status ofcustomer (growth, stable, declining)
3 High degree of standardization ofback-end processes (e.g. offermanagement, sales controlling, …)
4 Effective link between sales and othercustomer relevant functions (e.g. applicationengineering, quality, logistics, …)
~5
12-15
Growthcustomer(>3-4%revenue
growth p.a.)
Averageacross entire
customerportfolio
Stablecustomer(<3-4%revenue
growth p.a.)
Source: Roland Berger/Rothschild
Supplier footprints have already changed significantly over thepast years
6 FOOTPRINT
Supplier footprint [% of all locations] Key driver: Personal cost reduction [EUR m]
Asia other/ROWChina 11%
3%11%
100%
13%
9%
100%
Delta [%]
+2SouthAmerica
30%39% +6 Others
1835
10031
114
Delta [%]
-12
36
Japan
USA/Canada
WesternEurope
11%5%8%
29%
33%
9%
9%
8%
10%
20%
31%
2000 2006
CEEAmerica 39% 6
-2± 0
+2
-20
-2
Logistics
Personnel
Material 5454
23
38
53
2
1) Incl. capital cost for increased stock 2) E.g. increased coordination and management cost, additional depreciation, increased scrap
Annual costat existinglocation
(Germany)
Reducedpersonnel
cost
Increasedlogistics
cost1)
Increasedother cost
items2)
Annual costat newlocation
(Romania)
+9
+4-79
± 0
Source: Roland Berger/Rothschild
But suppliers need to do more than just relocate products –Target: globally optimized footprint
6 FOOTPRINT
Characteristics of globally optimized footprint
1 Clear vision on future value add per mainprocess (based on make-or-buycalculations)
Example for supplier footprint
2 Cost/capex optimized plant/product
Components hub• Production of
components with lowcomplexity
• Supply of assemblysatellites
Assembly satellites with leadfunction• Launch of complex programs• Advanced manufacturing
engineering• Know-how transfer to
bl t llit
37
2 Cost/capex optimized plant/productallocation plan for the next 10 years
3 Each plant/R&D location with clear rolewithin footprint (e.g. component hub in LCCof each region, hub for aftermarket parts)
4 Precise implementation plans for locationsto be closed/to be opened
5 Central organizational unit in charge ofproduction planning (esp. plant/productallocation decisions)
assembly satellites
Assembly satellites• Customer oriented and
flexible final assembly/-inspection
• Production of complexcomponents
Engineering hub• Basic development• Know-how transfer to
engineering satellites
Engineering satellite• Localization• Application development
Concentrationsoftwaredevelopment
Source: Roland Berger/Rothschild
Overhead margins have slightly decreased – But there is still highpotential
7 OVERHEAD
Global SG&A1) ratio 2001-2007 [% of revenues] Main levers to reduce overhead cost
1 Increase efficiency in servicesthrough optimized processes (e.g.standardization) and optimalallocation of tasks and responsibilities
6.7 6.7 6 7 6.8 6.8 6 7 6 6
38
2 Reduce services along all dimen-sions: quantity, quality, frequency,complexity, response time, …
3 Turn fixed costs into variable coststhrough outsourcing, cost sharing andmake-or-buy
4 Systematically revise underlyingpractices and procedures for indirectcost, e.g. site management, IT,security, training, etc.
1) Selling, General and Administration
4.5
6.7
5.5
6.7
5.6
6.7
5.35.1 5.1
6.7
5.0
6.6
Industry average
TOP
LOW
Source: Bloomberg; Roland Berger/Rothschild
'02 '03 '04 '05 '06 '07'01
Dramatic raw material price increases require new activities onthe purchasing side
8
Price development of selected raw materials1)
[USD/mt]Levers to reduce raw material cost
1 Reduce usage of raw materials(change of product specification,waste avoidance, recycling)
PURCHASING
June ’08June ’05 +146%
39
2 Systematically hedge all raw materialcontracts
3 Ask own suppliers of sub-components to carry burden
5 Ask OEMs to share cost increase(at least 50:50); train sales force innegotiation techniques
Source: Bloomberg; Datastream; Roland Berger
Steel Aluminum Copper Magnesium
5581,134
1,703
3,0653,540
8,693
1,555
5,700
+103%
+80%
+267%
1) MB Steel HR Coil EU Domestic, LME Aluminum Spot Price, LME Copper Spot Price, MB Magnesium
4 Bundle purchasing volume with othersuppliers
Other important Purchasing levers include material groupstrategies, design-to-cost, and stricter negotiation management
8 PURCHASING
Procurement survey results and design-to-cost example
Levers Priority of suppliers
Material groupstrategy 69%
Example: Impact of Design-to-cost approach
Passive safety product: Driver airbag for Western OEM
29 08 16%
40
"High"/"very high" in % of all respondents 1) Not included in survey (derived from project experience)
Design-to-cost(D-2-C)
Negotiationmanagement
Suppliermanagement
Organization/processes1) 28%
42%
47%
53%
58%
Sourcingstrategy Main cost cutting levers:
• different cushion folding• low cost contact unit of
supplier• different assembly, less
material
Part costdevelopment[EUR]:
Serial cost "savings": EUR 5.9 m
General success factors:• Involve strategic
suppliers• Start at ~SOP-24• D-2-C management/
monitoring
29.0824.47
Initial SOP -24 Final SOP
-16%
Source: Roland Berger
R&D efficiency has – on average – increased, but with largedifferences across suppliers
9 R&D
Global R&D margin 2001-2007 [% of revenues] Levers to optimize R&D cost
1 Strict R&D portfolio management(project simulation, evaluation,planning)
3 4 3 4 3 4 3 5 3 4 2 Implement lean standardized
41
3.4 3.4 3.4 3.5 3.43.3
3.1
'02 '03 '04 '05 '06 '07'01
2 Implement lean standardizedengineering processes and projectmanagement (e.g. removal of admintasks, leveling of workloads …)
3 Improve resource planning andallocation
4 Install transparent performancemanagement system (KPIs)
5 Manage product complexity throughbetter definition of product variants
Source: Roland Berger/Rothschild Supplier Database 2008
Top performing suppliers are characterized by constantexcellence in working capital management
11 WORKING CAPITAL
Net working capital [% of revenues] Comments/recent developments
14.5
12 9
13.913.5
14.114.3 1 Expanded manufacturing presence ofsuppliers close to the OEM’s internationalproduction locations boosts local storage costs
43Source: Roland Berger/Rothschild Supplier Database 2008
12.2 12.0
11.4
12.9
11.211.7
12.2
11.611.8
3Restrictive changes in payment termsproposed by strained OEMs drive receivablesposition of suppliers
2 Inventories are minimized by just-in-timebusiness models
5 Regarding payables, the extension of creditperiods and a strict usage of discountsreduces the cash flow needs for suppliers
4Factoring is more commonly used and helpsto stabilize cash flows and cut short-termfinancing costs
'02 '03 '04 '05 '06 '07'01
TOPLOW
Continuous decrease in average industry leverage as a result ofrestrictive bank financing
13 LEVERAGE
Leverage 2001-2007 [Net Debt/EBITDA]
1 Some suppliers have used the period of highcredit market liquidity to extend maturities,reduce interest costs and improve terms
2 Lenders now increasingly evaluate the1.9
4.8
1.5
4.5
1.4
5.4
1 1
4.0
1 1
5.7
1 1
4.9
1.6
3.3
Banks' view on leverage capacity
TOP
LOW
44
2 environment for suppliers as critical
3 A diversified customer portfolio, a low-costproduction base and capex flexibly adjustable to arecession/ sales drop scenario are regarded ascrucial factors for the future perspective ofsuppliers by their banks
4 Banks are cautious on automotive assetsfollowing a large amount of credits coming to themarket over past 12 months; leverage levelsreduced by ~1.0x EBITDA; stricter credit controlmechanisms
5 Lenders strictly separate between high-margin(EBITDA >15%)/technology-driven and commoditysuppliers
1.1 1.1 1.1
Credit rating of European suppliers
02468
AA A BBB BB B CCC2002 2004 2006
Source: Standard & Poors’s; Roland Berger/Rothschild Supplier Database 2008
Industry average
TOP
'02 '03 '04 '05 '06 '07'01
2008
The conditions for equity financing have become more difficult –Nonetheless, top performers maintain a high equity ratio
14 CAPITAL SOURCES
Equity ratio [%] Comments/recent developments
1 Investment volumes of private equity firmshave declined since 2003 – attracting privateequity as a source of equity has become morediffi lt
30.532.831.735.2
69.767.367.163.160.757.657.040.035.2
44.1TOP
LOW
45
difficult
2 Public equity markets coming underpressure over the last 12 months have madeequity raisings more difficult for suppliers
3 In addition, since the credit market crisis,markets appear reluctant towards mezzaninefinancing for automotive suppliers
4 Equity ratio of top performers has constantlybeen approx. 20% higher than of lowperformers over the last years
5.9
1.61.21.9 1.4
3.94.5
Source: Thomson SDC; Roland Berger/Rothschild Supplier Database 2008
'02 '03 '04 '05 '06 '07'01
Private equity transactions [USD bn]
'02 '03 '04 '05 '06 '07'01
Definitions of key financial ratios and terms
Capital employed Short term debt + Long term debt + minorities + pension provisions + book equity – cash &equivalents
Days sales Accounts receivable / revenues * 360
Days payables Accounts payable / Cost of sales * 360
RATIO/TERM DEFINITION
47Source: Roland Berger/Rothschild
EBIT margin EBIT/revenues
Interest cover EBIT/net interest
Leverage Net debt/EBITDA
Net debt Short term debt + Long term dept – cash & equivalents + minorities + pension provisions
Net gearing Net debt/book equity
Performance ratedsuppliers
Performance rated suppliers are defined as suppliers rated according to the criteria averagerevenue growth 2000-2007 (CAGR), average ROCE 2000-2007 and ROCE 2007. In the casefinancials for financial year 2000 were not available, the relevant time frame was reduced to2001-2007, and to 2000-2006, if 2007 financials were not available. In other cases, thecompany was not performance rated
ROCE EBIT / Capital employed
Revenue growth Revenuest / revenuest-1 -1
Abbreviations
bn – BillionCAGR – Compound annual
growth rateCAI – Controlled auto-ignitionCEE – Central and Eastern
EuropeCNG – Compressed natural gasD 2 C D i t t
Excl. – ExcludingHCCI – Homogeneous charge
compression ignitionHMI – Human machine
interfaceHVAC – Heating, ventilation and
air conditioningICE – Internal combustion
PHEV – Plug-in hybrid electricvehicle
pts. – PointsR&D – Research and
developmentROCE – Return on capital
employedRoW – Rest of world
48
D-2-C – Design to costDCT – Double clutch
transmissionDeNox – Reduction of nitro oxidesDetroit 3 – GM, Ford and ChryslerDI – Direct injectionDPF – Diesel particulate filterEBIT – Earnings before interest
and taxEBITDA – Earnings before interest,
tax, depreciation andamortization
e.g. – For exampleEUR – EuroEV – Electric vehicle
Source: Roland Berger/Rothschild
ICE – Internal combustionengine
Incl. – IncludingKPI – Key performance
indicatorKwh – Kilo watt per hourLCC – Low cost countryLED – Light emitting diodeLi-Ion – Lithium ionLPG – Liquified petroleum gasm – Millionn/a – Not availableOEM – Original equipment
manufacturerp.a. – Per annum
RoW – Rest of worldSCR – Selective catalytic
reductionSG&A – Selling, general &
administrative expensesSOP – Start of productionSyn fuel – Synthetic fuelTriad – US, Japan, Western
Europevs. – VersusVAT – Value added taxVTG – Variable turbine
geometryWh – Watt hour
Authors of this study
Marcus BerretPARTNER
+49 89 9230-8737marcus_berret@de.rolandberger.com
Thomas KästeleMANAGING DIRECTOR
+49 69 2998-8435thomas.kaestele@rothschild.de
49
Sebastian ReineckeANALYST
+49 69 2998-84186sebastian.reinecke@rothschild.de
Felix MoggePROJECT MANAGER
+49 89 9230-8346felix_mogge@de.rolandberger.com
Victor Silveira CamargosSENIOR CONSULTANT
+49 89 9230-8469victor_camargos@de.rolandberger.com
Svyatoslav LyepyeninANALYST
+49 69 2998-84192svyatoslav.lyepyenin@rothschild.de
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