Arthur Andersen on the Automotive Industry: Creating Value Envy

    DETROIT, Feb. 22 The widespread realization that value is
no longer encapsulated on the traditional balance sheet has turned the
business world upside down -- or perhaps it is right side up, according to
Arthur Andersen.

    During the past 20 years, intangible assets have become increasingly
important as wealth creators, while physical assets have diminished in value.
As with Covisint and other forums of information exchange, this new-age
thinking will dramatically impact the automotive industry -- especially as it
relies more and more on intangibles like skilled employees, CRM, leadership,
and patents.

Noting this trend, Arthur Andersen recently conducted a study with over 34
automotive suppliers to find out how their companies compare to the average
automotive industry supplier in value creation through tangible assets -- like
land, buildings, and financial capital -- and intangible assets -- like
customer channels and organizational leadership.

    What is Value Creation?

    Sources of value are becoming significantly more intangible -- with the
intangible portion of the market capitalization growing from 6% in 1981 to 74%
in 2000.  Companies that leverage more intangible assets became an average of
eight times more valuable than companies that tend to rely on their more
tangible assets.

    For the automotive industry, which Wall Street traditionally has not
rewarded (the market to book value for OEMs is 1.79 and for suppliers is 1.3),
better use of intangible assets may be one of the keys to increasing and
optimizing value in the automotive sector.

    Companies Manage what they Measure

    Companies manage what they measure.  Russell Hensley, who leads Arthur
Andersen's Automotive Competency Center, says "Based on the survey results,
automotive suppliers focus on their tangible assets, namely physical and
financial assets, and focus significantly less on customer, employee and
supplier relationships.  The investment community will only begin to recognize
the automotive supply base when it starts to focus on the less traditional
measures and when the industry as a whole measures a calendar year based on
the number of consumer relationships developed and not the number of units
sold!"

    Managing Assets, Managing Risk

    Many companies focus their risk management process on physical assets and
financial capital.  Risk, however, occurs across the entire base of assets --
tangible and intangible.  In today's world, risk from intangible assets, both
the downside threat and the upside opportunity, may be much more important and
much harder to identify.  As Randy Miller, Arthur Andersen Business Consulting
partner noted, "the ability to master risk also depends on the quantity and
quality of the information available to the risk taker."

    What should the automotive industry do to create wealth in our new
economy?

Hensley adds, "view your organization as a total of all relationships,
considering what assets you are using and the value they contribute,
historical investments in those assets, where the assets reside, how they are
managed, and what assets are needed in today's economy."

    About the Automotive Best Practices Forum

    In January 1997, Arthur Andersen established the Automotive Best Practices
Forum.  Its mission is to bring together automotive professionals to share
knowledge, evaluate best practices and understand the changing dynamics of the
automotive industry.  Arthur Andersen and the Original Equipment Suppliers
Association (OESA) have teamed together to jointly sponsor the Automotive Best
Practices Forum and explore and understand the changing dynamics in the
automotive industry.  This partnership gives automotive suppliers, Arthur
Andersen and OESA the opportunity to create new benchmarks for the automotive
industry.  Participants include executives from over 120 automotive companies.