Turnaround & Restructuring Survey:
focus on the auto industry
It may be spring in North America, but for the automotive industry, winter is coming. The industry is on the cusp of a potential cyclical slowdown, which is compounded by changes in technology and evolving consumer preferences. For automotive players—particularly suppliers—it’s critical to start examining worst-case scenarios in their planning and taking decisive action today to ensure that they can ride out the storm.
In AlixPartners’ recent Turnaround and Restructuring Experts survey1, automotive was cited as the third most likely industry to face distress in 2019, with 34% of respondents expecting an increase in restructuring activity. That was a fivefold jump over the number of respondents who said the same of automotive in the 2018 survey.
Why the pessimism? Cyclical factors are one big reason. In macro terms, the global economy is nearing the end of a very long expansion, and while it’s impossible to predict this cycle’s turn, it’s a question of “when” and not “if.” The auto industry is more cyclical than the overall economy—with higher highs and lower lows—and the North American market is in the early stages of a cyclical downturn. This cycle is expected to trough near 15.1 million US sales, nowhere near the previous 10.4 million bottom in the 2009 financial crisis, but it’s still painful and requires prudent preparation.2
A second contributor to industry stress is the ongoing disruption from technology. The shift to a “C.A.S.E” ecosystem—vehicles that are connected, autonomous, shared mobility, and electrified—is the biggest disruption in the auto industry since the Model T. Between 2012 and 2017, capex and R&D spending for the industry grew by $72 billion—an increase of roughly 50%, in line with volume growth during this time period.3 Automotive companies have to invest enough for future C.A.S.E. vehicles in order to stay relevant, even if the market for that technology is still in its infancy, and so the mid-term returns from these investments cannot be counted on.
Lastly, increased leverage concerns our survey respondents, particularly among certain segments of the supply base. Overall, leverage among suppliers is still low compared to the financial crisis, but 2018 saw an increase, with a few large suppliers piling debt on top of weaker EBITDA. Several have already seen credit downgrades, earnings misses, or revisions to their earnings projections for 2019. The coming volume declines may leave some vulnerable suppliers unable to cover their debt—leading either to balance-sheet restructurings or more chapter 11 filings. Strong demand covers up a lot of issues, but in the current market, even a small drop in demand will have a dramatic impact on a capital intensive sector like automotive.
1AlixPartners 14th Annual Turnaround and Restructuring Experts Survey was conducted in Dec. 2019 and surveyed more than 300 lawyers, investment bankers, financial advisors and other turnaround and restructuring industry experts
2The AlixPartners Global Automotive Outlook, published in June 2018, was based on months-long analysis of data from public and proprietary sources and included two online consumer surveys of Americas aged 18 and older
3The AlixPartners Global Automotive Outlook