Investors Reward Automotive Suppliers for Managing Growth
8 November 1999
Investors Reward Automotive Suppliers for Managing Growth
DETROIT, Nov. 8 -- As consolidation within the automotive
industry continues, investors are rewarding companies for the way they manage
growth rather than for growth itself, and a correction is taking place,
weeding out low performers, according to a new study of automotive suppliers
by the Automotive Consulting Group.
"Many companies are showing rapid growth, but are having difficulty
managing that growth, so it is not translating into profitability," said Hiro
Mori, a manager for the Ann Arbor-based research and consulting firm.
He said the pace of supply-base consolidation is accelerating in both the
number and size of deals, citing "mega-mergers" among billion-dollar-plus
suppliers. The study also showed a wide disparity between high and low
performers in the cost of goods sold, a key performance indicator looked at by
investors.
Included in the study were 53 publicly traded automotive suppliers
headquartered in North America, in all vehicle areas and at all levels --
component, subsystem and system suppliers.
The sample group for the study, which used financial data for 1998, is
slightly different than a similar study in 1997 because some companies ceased
to exist.
"A correction -- the process of weeding out under-performers -- is
occurring within the industry," said Dennis Virag, president of the Automotive
Consulting Group. "Three of last year's nine low performers have undergone
restructuring while another was acquired. Two of this year's low performers
already are being restructured."
Median income for the sample group continued to grow in 1998, almost
tripling from $403 million in 1992 to $1.1 billion. Much of that growth was
by low performers.
"Median revenue of both groups was roughly the same, at about $800
million, in 1997," Mori said. "The low-performing group continued its
exponential growth and its median revenue reached almost $1.4 billion in 1998.
The high-performing group basically stayed the same."
Growth is necessary to fulfill expanding supplier responsibilities, he
said, but growth should come hand-in-hand with development of capabilities and
competitiveness based on a clear strategic vision and strong management.
Virag said the difference between the two groups is high performers have a
clear vision of what will make them profitable. They make fewer acquisitions,
allowing them to better manage the integration of the companies, and are more
selective in their investment strategy.
"The high performers are interested in more than just buying market
share," he said. "They know where they want to go and they have a strategy
for getting there. Most important, they have the ability to execute their
strategy. This vision, strategic focus and ability to execute separates the
high performers from others."
An analysis of the overall median cost of goods sold (COGS) indicates that
industry-wide cost containment efforts are beginning to take effect and was
reflected in the improved profitability trend of the industry as a whole.
Aggregate profitability for the study group was 8.6 percent in 1998 compared
to 8.4 percent the previous year.
"The cost of goods sold remains the most striking differentiator between
the two performance groups," Virag said. "The high-performing group
drastically reduced cost from 81 percent of revenue in 1992 to 71.1 in 1998.
During the same period, the low-performing group ballooned from 77.2 percent
to 85.5 percent."
The Automotive Consulting Group is recognized as a leading management
consulting firm serving the global automotive industry. Specializing in
strategic business, market and technology planning, the company helps clients
through a combination of project consulting, industry analysis, and management
support.