Andersen Consulting Launches Supplier Index
8 March 2000
Andersen Consulting Launches Supplier Index
Faced with Intensifying Value Squeeze - Handful of Tier Ones Come Out on Top
DETROIT, March 8 A handful of U.S. auto suppliers are far
outperforming their peers in coping with increasing demands from car
companies, according to the new Andersen Consulting Supplier Index. The
Index, unveiled at the annual Society of Automotive Engineers Congress,
examines the health of individual suppliers and the industry as a whole as
they wrestle with the "value squeeze" of producing more complete vehicle
systems at lower prices.
Of the 20 publicly traded suppliers included in the Index, Tower
Automotive, Hayes-Lemmerz and Federal Mogul ranked as the top performers. The
Index evaluated and averaged the suppliers' performance from the first quarter
of 1997 through the third quarter of 1999, based on three key metrics: a
rolling twelve-quarter average growth rate, operating return on assets (ROA)
and operating return on sales (ROS). The index showed that the industry's ROA
fell 20% while ROS was flat and revenue growth rate began to slow during the
last few quarters of the period studied.
"Several leading suppliers have been extremely effective in delivering
greater value to carmakers while still significantly growing revenues and
mitigating the OEM value squeeze," said Randy Barba, partner, Andersen
Consulting Automotive, Industrial and Transportation (AIT) group. "Overall,
however, we found that Index companies are becoming more asset intense -- and
are not getting the returns they once enjoyed because of the value squeeze."
Tower Automotive was at the top of the Index ranking -- beating the Index
by a factor of five. Tower's success has been achieved through strong revenue
growth, a rapid and robust return to strong margins after its major
acquisitions, and improved ROA.
Hayes-Lemmerz and Federal Mogul finished second on the Index ranking --
out-performing it by a factor of two-to-one. Hayes-Lemmerz's showing was in
part due to strong growth in revenue and product demand. It led all suppliers
in the Index in return on sales, in part because of its ability to
successfully integrate its newly acquired businesses. Further, while the
Index shows ROA numbers declining for most big suppliers, Hayes-Lemmerz
demonstrated better ROA numbers as well, suggesting it has the ability to
create and maintain asset-based synergies.
Federal-Mogul performed well because of an aggressive acquisition strategy
by its new senior management team. In addition, it steadily increased margins
despite adding more than $5 billion in revenue through these acquisitions.
For the industry overall, the Index shows that ROA declined 20% since 1997
-- suggesting that companies are becoming more asset intense -- highlighting
the challenge of the value squeeze.
Fueled by the surge in automotive production worldwide and the
consolidation wave that hit the industry in the late 90s, quarterly revenue of
Index suppliers grew 52% from first quarter 1994 to fourth quarter of 1998.
But revenue growth began to decline in the first quarter of 1999 as merger and
acquisition activity slowed.
The Index showed flat return on sales through the same three-year period.
This indicates that suppliers balanced the pricing pressure by OEMs with the
realization of acquisition synergies.
Andersen Consulting has identified three key reasons for the industry's
less-than-stellar performance: the difficulty in achieving asset-based
synergies, the need to take on more assets to support the development of
increasingly complex modules and systems for automakers, and the difficulty in
achieving asset productivity while expanding their global presence.
"Since the environment in the coming months promises to become even
tougher for some Tier Ones -- these companies need to take steps to improve
asset productivity while holding the line on operating costs," said Andersen
Consulting's Barba. "One key to doing that is to 'virtualize' operations --
creating shared services, and taking advantage of business process
outsourcing. New solutions in supply chain optimization can reduce
inventories and increase plant productivity."
The Andersen Consulting Automotive, Industrial and Transportation (AIT)
group partners with the world's largest automotive OEMs, suppliers and
industrial equipment manufacturers to deliver value and provide financial
management and business solutions. The company links people, processes and
technologies to strategies through its expertise in the areas of mergers and
acquisitions, product differentiation, customer relationship management,
channel management and eCommerce. Andersen Consulting is an $8.3 billion
global management and technology consulting organization whose mission is to
help its clients create their future. The company employs 65,000 people in 48
countries, including more than 4,000 AIT employees, and can be found on the
Internet at http://www.ac.com