FW: What advice would you offer to automotive sector companies on reimagining their business strategy to meet future demands?
Bennett: Be flexible. We have seen significant investment in new technology as consumers’ interest in electric and autonomous vehicles grows internationally. Many traditional automotive companies have also begun partnering with companies that have not traditionally played in the automotive space. And others have spun off or wound down increasingly obsolete product lines to proactively adjust their product portfolio in light of customer and OEM industry trends.
Steinberger: It sounds easy and could be oversimplified but the advice is to focus and prioritise. The industry needs to do the following. Shift from long-term capacity increase to short- and mid-term capacity management. Shift from a planned and long-term financing of the transformation to cash-containment with shrinking revenues. Shift from parallel investments in computer-aided software engineering technologies to prioritising e-mobility and digital investments. Finally, recognise the disruption which will come from changing customer needs and customer structures. Recent months have shown that the crisis did not lead to a softening of emission standards or widespread stimulus for traditional cars. Even more, the shift to hybrid and full-electric powertrains has accelerated, and the push for net-zero carbon emissions will reach the industry and the supply chain. The cost-effective management of R&D will also differentiate future winners, since R&D spending will certainly have to increase. The industry has only been moderately successful so far in transferring that into better margins, especially in the supplier segment.
Cooper: Consumer demands and regulatory requirements regarding automotive production were shifting on a global basis long before the pandemic. Governments in Europe, Asia and the US have demonstrated a willingness to hasten the auto sector’s transition away from gas-powered engines. For instance, the European Union has included stricter emissions regulations as part of its climate plan. The incoming Biden administration has said it plans to make significant investments in the electric vehicle industry, such as through creating 500,000 new electric vehicle charging stations and by increasing federal incentives with respect to electric vehicle manufacturing. Japan plans to ban gas-powered cars by 2035. A successful business strategy, whether for an OEM, supplier or dealer, will take these shifts into consideration. Additionally, successful automotive sector companies can benefit from lessons learned during the pandemic, including improving the reliability of supply chains focusing on online ordering and services to consumers.
Borthwick: The era of the internal combustion engine seems over. Being connected, automated and electric are clearly important at present, and shared ownership may remain a trend. Also, it seems that the underlying concern among customers driving many of these trends is concern for the environment. Reduced or zero emissions and minimised carbon footprints seem likely to be the keys to success in the 2020s and beyond. However, the COVID-19 crisis can also offer opportunities. Tools to implement a restructuring, which might not otherwise be available, can also be used to expedite reorganisation of a business model that might otherwise take many years to achieve.
FW: In the wake of COVID-19, how confident are you that the sector will rebound to pre-crisis levels? What factors will separate those automotive companies that survive from those that fall behind?
Steinberger: We expect a slow rebound to pre-crisis levels for 2023 or, in a more optimistic scenario, for 2022. But even in a positive scenario, the industry has only a little chance to overcome this crisis through growth. The adaption of the production network to the ‘new normal’ of little to no growth, combined with fluctuation demand, until at least the end of 2021, will be a key differentiator in the industry. With the pre-crisis focus on new plants and new standard operating procedures, we have seen several cases in which the traditional ‘homework’ has shifted out of the strategic focus. Even if it sounds boring, operational excellence and best-in-class cost management will become increasingly important, since an environment with little growth and slow demand will create further cost pressure down in the Tier 1 to Tier 3 segment of the supply chain.
Cooper: The industry is fairly confident of a rebound to pre-crisis levels. However, rating agencies have noted that it may take a couple of years for the industry to reach those levels. In Q3 and Q4 2020, we saw the beginning of a recovery in the US, however certain manufacturers and suppliers have been harder hit than others. The ability to rebound is bounded by supply chains, and the continued shortage of semiconductor chips has caused Volkswagen, Ford and Honda to announce production reductions and temporary factory shutdowns in China, Mexico and the US. In the end, OEMs and suppliers that have amassed sufficient liquidity to avoid near-term financial stresses, have business plans that reflect the changing dynamics of the marketplace and have protected themselves against supply chain disruptions are going to be more successful than those that have not taken those measures.
Borthwick: If the end of lockdowns produces a surge in spending of cash saved during the pandemic period, heralding a new ‘roaring twenties’ as some have predicted, then there is potential for recovery. In the UK, the pandemic has seen an increased preference for commuting by car rather than public transport, and if this trend proves to be sustained it will also fuel a rebound. The marked contrast between the fall in sales of diesel and petrol cars in the lockdowns and the increase in sales of electric vehicles suggests that those OEMs with the most developed hybrid, as well as electric vehicle offerings, will benefit most from the rebound. Hydrogen fuel cell offerings may also prove to give an advantage. Conversely, OEMs that have underinvested in alternatives to petrol and diesel may well find themselves falling behind.
Bennett: OEM customers have spared most of their supply base by shouldering much of the near-term burden associated with the pandemic. But the same factors that would have been at play before the pandemic will be relevant going forward, namely to what extent a supplier is relevant in terms of its product offerings, innovation and reliability. The industry is ripe for consolidation given the various macro-influenced technological factors at play and, ultimately, OEMs’ willingness to support a particular supplier through pricing and new sourcing will be tied to whether that supplier has kept up with the curve or fallen behind.
Richard J. Cooper is one of the preeminent cross-border bankruptcy and restructuring lawyers in the US and is the recognised leader in cross-border and sovereign restructurings involving companies and countries in Latin America and other emerging markets. His practice focuses on domestic and international corporate, municipal and sovereign restructurings, and he has advised clients involved in some of the most prominent and noteworthy restructurings in the US and Latin America over the last 20 years. He can be contacted on +1 (212) 225 2276 or by email: email@example.com.
Ryan Blaine Bennett is a partner in Kirkland & Ellis’ restructuring group. He focuses his practice on protecting and advancing the financial interests of corporate debtors and secured and unsecured creditors in the various transactional and litigation-related aspects of the debtor-creditor relationship. He can be contacted on +1 (312) 862 2074 or by email: firstname.lastname@example.org.
Trevor Borthwick is a partner in the banking and finance practice of Mayer Brown’s London office. He represents banks and borrowers on large and complex financing arrangements, debt special situations and restructurings across a wide variety of sectors. He can be contacted on +44 (0)20 3130 3556 or by email: email@example.com.
Thomas Steinberger has worked in the business recovery services team at PwC since 2005 and currently leads PwC Europe’s automotive transactions and restructuring practice in its Munich office. He has more than 20 years of experience in industry and advisory. Additionally, he has broad experience in the execution of complex restructuring projects in medium-sized and listed enterprises. He holds degrees in electrical engineering and business administration. He can be contacted on +49 89 5790 6443 or by email: firstname.lastname@example.org.
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