Press Release

Auto industry needs to improve returns dramatically to weather upcoming spending for new-mobility programs, says AlixPartners analysis

August 2017

Capital spending, already equal to about half of available cash, to take a quantum leap upward: the ‘CASE Bump’

TRAVERSE CITY, Mich. – Automakers, which are already seeing their capital-spending levels average nearly half of available cash per year, are likely about to be hit with a big incremental increase in spending for the “new-mobility” programs that are revolutionizing the automotive industry today. This could potentially strain the industry’s cash reserves in ways not seen since the Great Recession, and should prompt companies throughout the industry to focus on return on invested capital (ROIC), the metric often said to be the one best for determining how big a financial moat a company has around itself. And improving ROIC while at the same time paying for new-mobility programs will likely require such things as “asset-light” business models and “NIH-free” partnerships. These and other topics were presented to hundreds of industry executives here today at the non-profit Center for Automotive Research’s (CAR) annual Management Briefing Seminar by Al Koch, vice chairman at the global business-advisory firm AlixPartners.

Koch, who has more than four decades of experience in the auto and other major industries, drew upon his skills in evaluating companies’ business models and balance sheets in his speech, “Rewired for Success—Is the Industry Sustainable Going Forward?” His general conclusion: Sustained success will likely come only if companies in the industry adopt a laser-like focus on ROIC, not just profitability or sales.

Koch declared that ROIC levels in auto are under attack by the industry’s massive capital demands today. These include, he said, “ongoing” capital requirements (which alone historically equal about 10% of a company’s sales), such as for maintenance and R&D; “cycle-related” requirements accompanying the cyclical industry downturn that many see approaching, such as the need for higher payables-funding and the cost of capacity misjudgements due to uncertain sales volumes; and, importantly, the incremental funding requirements for what AlixPartners has dubbed “CASE”—the connected, autonomous, shared and electric vehicles of the not-too-distant future.

The “CASE Bump”

Koch said that AlixPartners analysis shows that capital spending by the world’s top 20 automakers by revenue rose to an average of $12 billion last year, equal on average to more than 47% of available cash at those companies. However, both those numbers are about to rise significantly, he said, as the race to new mobility takes a quantum jump in the next few years in terms of the need for funding. Overall, he estimated that the auto industry will have a bill awaiting it of “several incremental billions” in CASE-related costs—and that that new obligation will potentially start coming due almost immediately, and could really take off around 2020.

“The coming ‘CASE bump’ is probably not the kind of bump the auto industry is looking forward to, as it could strain balance sheets in a way not seen since the crash preceding the Great Recession,” said Koch. “The industry endured a lot of pain back in those dark days, but a lot of financial discipline has ensued. However, the real test will be whether the industry can maintain its financial discipline in the face of the needed incremental spending for the conversion to new mobility coupled with what certainly looks to be a cyclical industry downturn.”

Returns in Auto “Pale in Comparison”

In his speech, Koch noted that the auto industry will also be facing fierce competition from the technology industry in the race to new mobility. As an example, he said AlixPartners’ research reveals that there are now more than 50 “big-name” companies working on autonomous vehicles or autonomous-vehicle systems, along with dozens more smaller companies and start-ups. He went on to note that ROIC in auto industry pales in comparison with that in the technology industry—which, he said, greatly aids the tech industry’s competitiveness, including giving it options for cheaper capital-raising. He noted that last year in the information-services sector of tech ROIC averaged 36%, in computer services it averaged 30%, and in computers and peripherals it averaged 24%, while automakers’ ROIC averaged just 6%.

Koch went on to say that the “ROIC considerations” companies should make when strategizing their place in the new-mobility landscape boiled down to what he called choosing among the “3 P’s”: “participate,” as in adopting a go-it-alone strategy; “partner,” as in team up in some fashion with other players; or “purchase,” as in acquire tech companies or pieces of them.

“Asset-light” Is Key

No matter which strategy is chosen, Koch urged his audience to stay “NIH-free” and, perhaps most important, to develop “asset-light” approaches in dealing with the challenge of the conversion to the new-mobility future, to improve ROIC and maintain the health of their balance sheets.

“Efficient use of capital suggests that the industry keep ROIC in the forefront, including developing ‘asset-light’ approaches to everything from products to plants to partnerships,” said Koch. “In a low-growth, capital-intensive industry like auto, that’s the only way to ensure success, especially when you now also need to compete with the high-growth, historically low-capital-intensive technology industry. To do otherwise is to risk falling into a vicious cycle of low shareholder returns, higher costs of capital and, eventually, becoming irrelevant in tomorrow’s new automotive ecosystem.”

###

Media Contact

Tim Yost
+1.248.227.1694
tyost@alixpartners.com

About AlixPartners

In today’s fast paced global market timing is everything. You want to protect, grow or transform your business. To meet these challenges, we offer clients small teams of highly qualified experts with profound sector and operational insight. Our clients include corporate boards and management, law firms, investment banks, investors and others who appreciate the candor, dedication, and transformative expertise of our teams. We will ensure insight drives action at that exact moment that is critical for success. When it really matters.

alixpartners.com

Read More About

For more information, contact: