Automotive now oct-2010

AutomotiveNowSummer 2010

Value Chain Crash – New Business Models for the Automotive Industry

Rethinking fleet managementExploring the trend towards environmentally-friendly mobility alternatives in travel management

The US – the rise after the fall Automotive industry quickly adapts to the challenges of the new global economy

Flexible and mobile – that’s how we describe the current spirit of the times and the pressure to change it brings with it – if you don’t move, you get left behind.

In this issue we highlight the future changes in the automotive industry’s value creation chain and focus our view on the shaping of future business models in particular. Will mobility service pro-viders with flexible usage and financing packages meet the requirements of a younger target group better than “traditional” car dealers in the future? Forward looking concepts and foresight on societal developments are now required. Anyone that is not caught up in their existing business model can score points where the readiness to be creative in competition was previously lacking.

Some of the discussion surrounding the automotive value creation chain deals with the role of “brand manage-ment”. We took a look at Formula 1™ and asked ourselves what role brand management might play in the future for this business segment.

Another area of focus: the requirements of corporate fleets of the future. What are the future requirements for vehicle fleets? Should they become greener or simply more efficient? In our country focus we discuss basic value creation chain changes in a global context.

We look beyond the European horizon and, with our articles on the develop-ment of the Chinese car trade and the US’s comeback as a competitive inter-national production site, we also show that established structures in particu-lar offer more and more new opportu-nities when seen from other perspec-tives.

The foundation of an international orientation must, however, be laid by sustainable cash and corporate capital management, because future challenges can only be overcome with a sound and solid base. The magazine’s final article shows the way to build that solid foundation. With this issue of AutomotiveNow we want to transparently, actively and insightfully inform you about current trends and events in the automotive industry.

On that note then, I wish you an interesting and stimulating read, and we hope this AutomotiveNow opens up new perspectives for you. Sincerely, Dieter BeckerGlobal Head of Automotive,KPMG in Germany.

Dear Readers,

2 Automotive – Summer 2010

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Contents

09 Rethinking fleet management In Q1 2010 almost one in three

new motor vehicle registrations in Germany was a company car.

12 The US – the rise after the fall The world economy is starting to

show signs of recovery, but the economic landscape has changed dramatically.

16 Fast lane or hard shoulder? There are contradictory views on the pros and cons of a commitment to Formula 1™.

20 The future of China’s auto dealership market Last year was a great year for auto sales in China, as it overtook the US to become the world’s biggest car market by sales volume for the first time. But, paradoxically, it was far from the best of years for the coun-try’s auto dealers.

25 Sustainable cash and working capital management

It is an understatement to say that the credit crunch has had a major impact on the automotive industry.

28 Current Studies 29 Contacts

Lead article

Business Models on the Test StandYour car is no longer as important as it once was as a status symbol – in the saturated markets at least. Both young and urban drivers in par-ticular now prefer time-limited use of a car to meet their mobility needs. Mobility service providers have an opportunity to capture the previously car manufacturer-dominated individ-ual mobility market.

3Automotive – Summer 2010

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Business Models on the Test Stand Your car is no longer as important as it once was as a status symbol – in the saturated markets at least. Both young and urban drivers in particular now prefer time-limited use of a car to meet their mobility needs. Mobility service providers have an opportunity to capture the previously car manufacturer-dominated individual mobility market.


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so to consumers in the emerging markets.

Can a mobility service provider that offers the customer a usage and financing package satisfy mobility requirements better than a car dealer? This kind of service menu could include the use of one or two city cars during the week, a sports car at the weekend, and an SUV for vacations. The package would then also be sup-plemented by combination options with other modes of transport, such as public transport, rail and air. Billing would then be at a flat rate for the city, fuel included, and a time tariff for the weekend.

If these kinds of offers establish themselves on the market, this will influence business models and estab-lished automotive industry brands. As with mobile phone makers, manu-facturers could lose their interface to the customer to direct sales in the car fleet business and the associated sale via the car dealer. This of course has effects on the manufacturers’ entire value creation chain. They could, how-ever, position themselves as mobility service providers – with or without cooperation partners. Branding and brand management are important suc-cess factors here.

The trend towards complete solu-tions for automobility was started by the manufacturers themselves – together with their internal finance ser-vice providers. Financing and service packages, which, in addition to a leas-

ing contract or car credit, also include usage services such as mainte-nance, insur-

ance, damage management and refuel-ing, have been on offer for many years now. The private driver is offered everything that is the norm in fleet management. Manufacturers’ advertise-ments therefore frequently focus on monthly car costs instead of purchase

appropriately satisfy people’s mobility requirements. On the whole this trend towards increased mobility will continue – because, for example, workers will always be asked to pro-vide more spatial flexibility. Technical innovations do not solve problems, even if micro-cars and the generally smaller electric cars can alleviate con-gestion and environmental impacts in cities. Nowadays it is far more about a basic reorientation that sees the car as part of a complete solution for mobility, and also incorporates alternative modes of transport and new financing and usage concepts. This includes realignment of the car brands.

A look beyond the scope of one’s own sector is always worthwhile in the search for solutions. Buyer behavior in the mobile communications industry, for example, shows that in the bottom to middle price segment at least, the complete package of mobile communi-cation services and device applications is more important for the customer than a specific mobile phone model. A mobile phone or netbook contract with flat rate, fast Internet access, Facebook networking and music subscription is the new status symbol. To satisfy their communication requirements the cus-tomer does not turn to the manufac-turer and their sales department – but rather to a mobile service provider.

Is the automotive industry on the threshold of a similar development? A Vocatus survey of 500 car buyers from Germany, France, Italy, Spain and Sweden shows that the car brand is replaceable for every second buyer. One in three said that the car’s func-tionality is more important to them than its appearance. Nonetheless, having one’s own car is still considered indispensable for flexibility reasons. But this could change if there are

attractive alternatives to car ownership. Trend researcher Peter Wippermann: “It is not the product as such, but rather its benefits for the ‘life feeling’ that determine our relationship with ownership.” This also applies to Japa-nese consumers, for example, but less

»The car is no longer necessarily a part of the family today, and nor is it a symbol of

freedom and independence«

The car has been the symbol of mobility and indepen-dence for more than a hundred years now. It gives us access from our front

door to a global road network. And the car is not merely a means of transportation – it also represents an emotionally populated brand world. Every car driver that can afford it finds a suitable brand for their personality. Or at least that’s how it used to be! Climate change, traffic problems in urban centers and new social values have changed the car’s image and use. Having one’s own car no longer means that one has such an exclusive claim to flexibly and cost-effectively meeting one’s own personal mobility requirements. This applies in particu-lar in cities where traffic chaos and parking problems turn many people off driving. The German pollution badge or London congestion charges are the frontrunners of regulatory inter-ventions to restrict car use in the future. Paris is also planning a city toll, and parking spaces for new commer-cial properties will only be approved there in exceptional cases. So can we actually be more mobile in the future without our own cars?

“The car is no longer necessarily a part of the family today, and nor is it a symbol of freedom and independence,” says Jörg Plathner, Automobile Division Head at Motor Presse Stuttgart. Your first car has lost some of its significance for personal development. The number of people that choose not to own a car is growing in northern Europe in particular. In Stockholm it is consid-ered chic not to do your driving test. Martin Verrelli, Head of Remarketing at VW: “The car is losing its hold on young people.” Experts believe the future is in new mobility concepts, combined with new technologies that draw people away from car ownership through classic financing options. In southern Europe, and in Asia’s emerging mar-kets in particular, your own car and the car brand still play a more central role than in the mature markets of the industrial states.

Car manufacturers and suppliers must find new answers to continue to


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prices. Car drivers are steered towards asking themselves: “How much car do I want to allow myself each month?”

Mobility service providers such as carsharing companies have ad-dressed this trend. “Carsharing and similar mobility concepts are becom-ing more influential,” says brand expert Michael Trautmann. The im-proved offering in rail and air travel and public transport networks provides attractive alternatives to the car – for specific mobility requirements at least. German Automotive Industry Association (VDA) President Matthias Wissmann emphasizes: “There is no longer any antagonism between the car and public transport networks. The car is still important, but net-working with other transport means is also important.”

The approaching electrification of road traffic, in which, for example, electricity suppli-ers, suppliers of big components and mobile com-munication operators invest, will increase the competition pressure from non-automo-tive industry companies. With the elec-tric car in particular, the mobility service consisting of car use, power supply and battery change is a key decision-making criterion. High procurement costs mean that, at first, only very few users will choose to buy an elec-tric car. The car therefore becomes a mobility carrier – similar to Amazon’s Kindle reading device for books: it is about the content and the brand.

The automotive industry’s tradi-tional business model is therefore called into question at several points, and the manufacturers are faced with the challenge of repositioning. Should they leave their current value creation chain untouched; should they extend them with mobility services; or must they redefine their key competencies and adjust their branding policy?

In the first case the manufacturers’ value creation would shrink in the

long term. Car sales today are already driven by discounts – at least in the mature markets. And the suppliers’ value creation and innovation share has also been growing for some years now. With most vehicles it has already reached 75 percent, if not more. Suppliers develop into system providers; the step towards the com-plete car is no longer so great. Magna International Inc.’s ambitions with Opel proved the point here. Car makers would evolve such that sup-plier relations management became a core competency. Model and brand management and sales could shift towards mobility service providers. Similarly, mobile phone manufactur-ers have lost a degree of their impor-tance in recent years.

With the introduction of electric cars the suppliers’ value creation potential increases significantly, as the electrics industry has a clear

competitive advantage over combus-tion engine manufacturers. Coopera-tion projects with electricity suppliers and other infrastructure companies will contest car makers’ business interests. Ex-SAP Board Member Shai Agassi shows how this is done with the “Better Place” brand: The company provides a complete service for electro mobility. With the aid of sophisticated software the customer only pays for kilometers traveled, a pricing model that is similar to mobile phone contracts. And Renault pro-vides the cars for this.

To offer mobility services in addi-tion to the existing value creation, car makers must first expand their ser-vice expertise. Internal financing companies and brands such as the Volkswagen Bank GmbH or BANQUE PSA FINANCE are good examples of this. Their range of offers can be beefed up with carsharing, short-term leasing and renting, as well as combi packages in cooperation with other modes of transport. The exist-ing authorized dealers could possibly come in as points of sale. With its prepaid mobility offering with the

“Mu” brand, Peugeot Motor Company PLC, for example, uses authorized dealers as pick-up and drop-off sta-tions. This could be supplemented by additional cooperation partners to guar-antee full-coverage mobility. Mu cus-tomers can download “mobility

units” on the Internet and book a convertible ride, a moving truck or a rooftop box for their vacations.

Alternatively, companies could also realign their business mod-els and brands to become mobility service providers that offer their cus-tomers comprehensive solutions as globally as possible. Car production would then no longer be a core activ-ity. Supplying complete systems, or even final assembly, could be out-sourced. The new business model’s core element is service quality – high availability, flexibility and benefit- oriented prices for mobility offers across and beyond all modes of transport. And since cooperation proj-ects are success-critical for mobility offers, manufacturers could integrate their existing expertise in managing supplier networks.

Car makers have practically no competition in today’s individual mobility brand world. They can easily transfer their brand strengths to new model families, or even to neighbor-ing product segments, such as bicy-cles or car financing services. But how will car brands assert them-selves in the new mobility services competition? They might very well see competition from new mobility brands and from service brands in

»The car is still important, but networking with other transport means is also important«


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other transport areas, and less so from the suppliers. Even the brands of major system integrators such as Robert Bosch GmbH, Continental AG or Magna have, so far, represented technology more so than mobility. Car rental agencies, rail companies and airlines or automobile clubs have a significant head start here.

But car makers must also realign their brand manage-ment, which has so far mostly been based on technical differentiation. High technical quality and good design are par for the course today and products can therefore be replaced, with one exception: the ‘Green’ factor or the vehicles’ envi-ronmental friendliness, which is totally different, at least for now. In the future, services, especially mobil-ity services, will be far more image-building than technology. A combina-tion of sustainability and service quality is provided to attractively boost brands. For many manufactur-ers this means a new beginning, especially when they cooperate with other companies. The introduction of a new mobility brand reduces the risk of diluting the resident brand or of damages with the offer’s failure; can-nibalizing the existing car sales.

Daimler AG is testing a mobility offering under its Mercedes-Benz label with the Smart in Ulm and in Austin,Texas but under the new brand, car2go. Environmental friendli-ness and service are the load-bearing

brand features: the customer joins in, uses the car as long as they want, and returns it at any parking space in the business district. The provider takes care of refueling and cleaning. Unlike classic carsharing there are neither basic charges nor membership contributions. Billing is per minute – mileage, fuel and insurance are in-cluded. The Smart models used are especially low in emissions, which is why car2go 2009 won the ÖkoGlobe for mobility projects and visions. CEO Robert Henrich intends to ex-pand after the successful test phase in Ulm: “Market launch in other coun-tries is the next logical step.”

If expectations on the mobility mar-ket are met and an image change can be introduced in parallel, many manu-facturers won’t have to do without

strong car brands in their mobility offers. In the growth phase it is about occupying market segments and securing your position for future cross-selling offers with a strong brand. The specific mobility features are success-critical, as demonstrated by the incredibly successful iPhone: design, operability and innovation were the driving forces during its market launch and growth phase. “Apps” will mostly ensure sales with increasing market saturation. Apple®’s crystal clear branding is the driving success factor in both product lifecy-cle phases.

The model families and the associ-ated brand features play a pivotal role with manufacturers‘ mobility offer features. The organization of new services must be adjusted to this branding – sustainability, premium, driving fun, sportiness, family-friendli-ness, discounts and combinations of these, for example. The social trend

towards individualization, which has even taken hold in Asia, may also produce a wide variety of mobility brands. The challenge will be to bundle sub-brands into strong brand families. The manufacturer brand has a lighthouse function here.

These features are decision-critical for the long term, as shown by the iPhone success.

New drivers are the first important target group. Favorable introductory prices and environmentally friendly means of transport are important brand features. In Ulm every third driver’s license holder between 18 and 35 is already a car2go customer – the users identify with the brand image. Combination offers of driver’s license and mobility are conceivable to stimulate reluctant car users such as those in Stockholm. The Swedish automobile association, Motorbran-schens Riksförbund, is already con-sidering a subsidy program for driver’s licenses.

A premium brand in this respect excels with optimum availability, best pos-sible flexibility and first-class service. Included is the use of specific road sections, such as in the US or even in big cities such

as Bangkok, convenient parking options and waiting lounges at mobil-ity interfaces. Furthermore, the vehicle must provide comfort, but in special situations the requirements can be better met by small models. Individu-alization options, such as seat set-tings, air con and infotainment sys-tem, for example, are a matter of course – and can be easily retrieved via electronic customer cards. Sus-tainability can be added as a further element – with its “Efficient Dynam-ics” BMW AG (BMW) has created a platform from which suitable mobility services can be built up, such as flights with low emission planes, a feeder service for an electric vehicle and points of sale with modern, effi-cient building technology, for example.

Corporate customers will be the most important growth drivers when mobility applications are running reli-ably. These customers are already familiar with fleet management from

»High technical quality and good design are part for the course today and products can therefore be replaced, with one exception:

the ‘Green’ factor ...«


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their experience of car manufacturer service offers, and generally have extensive mobility requirements across and beyond all modes of trans-port. The range of offers must, how-ever, be expanded significantly.

The mobility service market’s focus will probably be Europe, Japan and

the US first, because the car still plays a greater role as a status symbol in the Asian and South American mar-kets. The German Institut für Automo-bilwirtschaft (Institute for Automotive Research), for example, expects China to be the biggest consumer of pre-mium brand vehicles up to 2015.

But the change could be completed rather quickly due to the acute traffic problems in the big cities. Public transport networks with electro mobil-ity, for example, are probably a lot closer to reality in China than many western experts think. The massive support by the Chinese Government has generated a head start. “In five years,” says Shai Agassi, “the Chi-nese will no longer be accepting cars with combustion engines.” And it is in the emerging markets in particular that manufacturers have the opportu-nity to experiment with new mobility concepts – and quickly produce major scale effects. By Eric Czotscher, Head of the “Branchen- und Managementdienste” department of the F.A.Z. Institute

»The organization of new services must be adjusted to this branding – sustainability, premium,

driving fun, sportiness, family, discounts and combinations of these, for example.«

There can be no doubt that the automotive industry has reached a water-shed point. Increasing vehicle electrification and drastic changes in con-

sumer behavior in the saturated markets will result in a redistribution of the automotive value creation chain. Exactly what this will look like – whether OEMs will be the mobility providers of the future or whether suppliers in the module sector will develop into mass providers as part of a concentration wave, and what business model will be the most successful in the future – all remains to be seen. One thing, however, is already clear today: whoever welcomes these changes as an opportunity and positions themselves early on, will push to the fore in the long term. The ability of the automotive indus-try to learn from other industries that have already undergone similar changes will be critical to its success. Direction could be taken, for example, by busi-

ness models from the IT or tele-communications industries, which have already shown how success-ful brand management boosts leadership in a highly developed technological market.

Comment

Automotive industry at the crossroads

Dieter Becker is Global Head of Automotive, KPMG in Germany.


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Rethinking fleet management In Q1 2010 almost one in three new motor vehicle registrations in Germany was a company car. Within the medium to luxury classes, every second car was registered by a company. Incor- porating green strategies in corporate vehicle fleet management therefore poses new challenges for the automotive industry.

In Germany the company car is still an important status symbol used to attract employees to higher positions. Ultimately the company car provides indisput-

able benefits for both employer and employee. Employers save on their labor costs and the associated high social security contributions, and at the same time also secure a powerful price leader into the bargain. The employees save on taxes and social security contributions – and can also use their company cars for private purposes. The car – truly a German status symbolThe figures are impressive proof of the real incentive of a company car for many employees – it allows them to drive a car that they couldn’t normally afford in their private life. In a country that is primarily defined by its premium brands, Mercedes-Benz, BMW and

Audi AG (Audi), this is an invaluable benefit for high-end vehicle manufac-turers. The situation is most compara-ble in Belgium; whilst in other Euro-pean countries the company car is far less widespread due to lower social security contributions for salaries and luxury taxes on high-end vehicles. “Germany is the manufacturing coun-try with the largest premium seg-ment, which is why the employee’s image is so closely connected with their company car. In other European countries such as the Netherlands or France, the car is far less image-bound than it is in Germany,” says Marketing Manager Bettina Heinen from LeasePlan Deutschland GmbH.

How “green” will fleets become? “The climate change debate won’t spare the so highly valued company car in the long run,” says a quite con-vinced Bettina Heinen. Vehicle fleet consumption in companies was first

regarded as a problem in 2006 and 2007 against the backdrop of explod-ing fuel costs as the price of regular gas rose to EUR 1.40 per litre. “This allowed cost reduction measures to be nicely ‘green’ packaged. Over the course of the financial crisis the vehi-cle downsizing issue was tackled, without company-internal discussions,” says Thilo von Ulmenstein, Managing Director of FleetCompany GmbH, a TÜV SÜD subsidiary, which presents the annual ‘Green Fleet Award’ to companies with especially ecofriendly vehicle fleet management.

A large-scale changeover of com-pany fleets to vehicles with alternative drives is, however, still a long way off. “Of the approx. 87,000 vehicles that we provide to companies, only 37 of them are natural gas, and a couple are electric vehicles,” says Bettina Heinen from LeasePlan. To date practicality in daily use is still the main missing ele-ment. “Alternative drives can only be


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used on a large scale by companies when the right maintenance and filling station network has been put in place. And of course alternative drives are mostly installed in small cars, and not in the higher vehicle class model series that are most attractive to employees.”

Sustainability grows in importance To date very few companies are changing over their vehicle fleets because of a clear sustainability strat-egy, instead of purely economical rea-sons. One example is the global US chemical group, DuPont™, which made its name back in the day with products such as nylon and Teflon®, and now intends to improve its image with a green vehicle fleet. With its ‘Fleet Fuel Efficiency Program’, the group has obliged itself to change all of its vehicles to leading technologies with combustion motors and alterna-tive drives by 2015. This will help sup-port the right kind of innovations, while reducing the fleet’s consump-tion levels.

The English office furniture manu-facturer, ‘The Commercial Group’ in Cheltenham near Gloucester, has also introduced a series of measures with its vehicle fleet to achieve the compa-ny’s ambitious climate protection objectives. An elaborate system con-stantly monitors the company fleet’s mileage and gas consumption. Drivers and employees are also trained how to drive more economi-cally, which results in gas savings of up to 20 percent. Various options were tested before the decision was made in favor of biodiesel vehicles.

Fuel is provided by a local supplier who extracts biodiesel from various waste sources from within the region. The fleet’s CO2 emissions were consequently reduced by more than 50 percent from 910 to 435 tons between 2006 and 2008. A goal of saving 75 percent of CO2 for the entire company over 3 years by the end of 2010 was announced, of which 57 percent has already been achieved.

Challenges for manufacturersThese two examples clearly show that sustainable strategies are not about new materials in car manufac-turing – it is actually about reducing CO2 emissions with thriftier models and alternative drives. “A growing number of companies with a highly developed CSR are implementing sustainability in their fleets, too. And with absolute conviction! Companies are therefore increasingly setting CO2 upper limits for their vehicles,” says Thilo von Ulmenstein. And this has effects on model ranges. “Manufacturers in particular have to adapt their range of models towards achieving CO2 reduction due to this changing behavior patterns of fleet operators. This is already in full swing, and is very necessary, because the trend towards sustain-ability is currently being spearheaded by big companies and is emanating outwards more and more all the time. Without alterations manufac-turers will no longer be able to place entire model series in company fleets, where the most important sales market is right now.”

“Whoever gets into gear here the quickest will be able to achieve real competitive benefits,” says Bettina Heinen. “Employees will also attach more importance to the fun and image factor connected with choosing the company car than they will to environ-mental protection. Companies will restrict the selection with appropriate CO2 limit values to match their hierar-chy. Those who want to stay in the running must be able to offer the right kind of vehicles.”

A review of the changes in new company car registrations between Q1 2009 and Q1 2010 shows who the current winners and losers are. While upper medium class and luxury class new registrations remained stable, the three bottom segments (mini, small car and compact class) enjoyed signifi-cant increases in places of up to 30 percent. SUV new registrations also increased by 17.2 percent. Large vans and medium class cars, on the other hand, both fell by 13 percent.

A market for mobility providers?“Total Cost of Ownership” – the total purchase price and running costs over the entire service life – remains the key sales argument for manufacturers when selling company cars. And yet it is precisely here that lower gas con-sumption and therefore lower costs and reduced CO2 emissions go hand-in-hand. In addition to downsizing engines, technical advances are there-fore especially important for sales in this area. “Employees are loath to accept reductions in their vehicle’s performance, but on the other hand must make their contribution to meet-ing the company’s climate protection targets, it really is all about being able to provide lower consumption vehicles with the same performance,” says Alexander Bilgeri, BMW Group Busi-ness and Financial Communications. The trend towards more environmen-tal friendliness within fleet manage-ment at companies is matched at BMW, as the Munich-based manufac-turer has a good sales pitch for fleet managers with its ‘Efficient Dynamics Program’. “In some companies employees are rewarded by a bonus scheme when they contribute to achieving the company’s climate pro-tection objectives and stay below the


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12 % Mini and small cars

23.4 % Medium class

27 % Compact class

10.1 % Upper medium class and luxury class

11.7 % SUVs and sports cars

7.7 % Vans

8.1 % Other

New registrations 2009

28 % Company cars

Approximately 50 million vehicles are approved for road use in Germany, of which 5 million are registered to legal entities. Arranged according to fleet size, approximately 80 percent of company cars are in fleets with less than 10 vehicles; 5 percent are in fleets between 10 and 49 vehicles; and 15 percent are in fleets with more than 50 vehicles. In large-scale companies, more than 80 percent of the vehicles are from German manufacturers.

Source: German Federal Ministry of Finance

Facts and figures

set CO2 limits. This allows them to choose more optional extras, which they might otherwise have done with-out because of cost reasons.” Expen-sive vehicles will remain placeable within companies and their employees in the future, as long as they can score fuel consumption points.

It is not only manufacturers who are faced with challenges in view of the growing importance of sustainability strategies for companies. Fleet man-agement service providers are also challenged; “To date we haven’t really noticed any trend in this direction,” points out Bettina Heinen, “but for fleet managers, the mobility and travel

management issue – and considering mobility options other than the car – is also a very important factor.” Thilo von Ulmenstein also sees a future here: “The trend in the travel management area is headed towards environmen-tally friendly mobility alternatives. Travel option comparisons will increase in the future on the basis of the com-pany’s CO2 performance. But a certain amount of individual mobility in com-panies will always remain – wherever the vehicle holds status.” The Germans certainly won’t bid adieu to their status symbol that easily! By Christoph Neuschäffer, Freelance Journalist


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Where low-cost sourcing in emerg-ing markets was once the mainstay of OEM manufac-

turing strategies, the appeal of these long, multi-tier supply chains is wan-ing. Leading OEMs are now taking a total cost and quality view of their manufacturing operations. They scru-tinize everything including product lifecycle costs, customer needs, qual-ity control and risk to improve effi-ciency and cost effectiveness without sacrificing quality. One of the key components of this process has been a reappraisal of the viability of tradi-tional business models, and some of the outcomes have been surprising.


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The world economy is starting to show signs of recovery, but the economic landscape has changed dramatically from what it was less than 24 months ago. In the wake of the severe economic crisis, the automotive industry is undertaking a critical re-appraisal of the way it does business.

The US – the riseafter the fall

Economic recession drives business evolution Since the economic recession that began in December 2007, consumer demand in the automotive sector has significantly declined and manufactur-ing overcapacity has reached unsus-tainable levels. Standing at the brink of insolvency, many of the world’s leading automotive manufacturers were forced to make unprecedented cutbacks and re-evaluate all areas of their operations. Perhaps more than any other industry, the automotive sector was quick to adapt to the chal-lenges of the situation by adopting

leaner manufacturing processes and dramatically restructuring activities. With national economies (and their currencies) in a state of constant flux, the ability to remove or minimize external risk factors has become a competitive advantage. From soaring oil prices to natural disasters the impacts of both financial and opera-tional risks on business operations can be catastrophic.Considering these and a variety of other risk factors, it makes sense for many companies to move manufac-turing closer to their target markets. The United States, consistently rated as one of the world’s most produc-tive markets in the World Economic Forum’s annual Global Competitive-

ness Report, is re-emerging as a competitive manufacturing destina-tion for automakers. The world’s larg-est car market in sales terms up until the recession hit, the US offers stra-tegic advantages as a manufacturing location that traditional low cost loca-tions cannot. In addition to gaining direct access to a large and relatively prosperous consumer base, US man-ufacturers benefit from: Reduced vulnerability to foreign

currency fluctuations Access to highly developed infra-

structure/transportation networks Access to skilled labor at competi-

tive wages High-performing capital market


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Intangible benefits include protection of intellectual property and continuity of business operations, which are sig-nificant factors that, although difficult to measure, have real value for busi-nesses.

The Wall Street Journal recently highlighted this trend of “onshoring or reshoring” in light of a decision being contemplated by Caterpillar Inc. whether to consolidate overseas pro-duction of its heavy equipment into the US. A Caterpillar spokesman shared his insight into the factors motivating the possible change: “Meeting anticipated demand in the US will outweigh other considerations, such as the strength of the US dollar,” comments Jim Dugan, adding, “It really is a long-term look at where we think this market and this product is going globally and how can we best position ourselves.”1

Currency hedging moves supply nearer to demand

In a market where affordability becomes one of the biggest consumer influencer factors, vehicle manufactur-ers cannot afford the risk of foreign currency fluctuations and transporta-tion costs taking their vehicle above their consumers’ price point. This becomes vital for a company like Volks- wagen AG (Volkswagen), Europe’s largest automaker, which has identi-fied the US as a key market in its long-term growth strategy. To access the US market, Volks-wagen has invested US$ 1billion in a new plant in Chatta-nooga, Tennessee, which is set to begin production of a new mid-size sedan specifically engineered for the US market in 2011. “This plant repre-sents a milestone in Volkswagen’s growth strategy,” says Volkswagen AG CEO, Prof Winterkorn. “We will be selling 800,000 Volkswagen a year in the US by 2018, and this new site will play a key role.” Volkswagen says the plant will help to permanently alleviate exchange-rate fluctuations. “This, along with our growth strategy, is a prerequisite for the company’s eco-nomic success in the dollar region.”2 The state of Tennessee helped make

the move even more attractive for VW, proposing to support the plant and surrounding development with government infrastructure, training and other incentives, the value of which could top $500 million over the next 30 years.3

Government incentives sweeten the deal

Volkswagen was not the only OEM to benefit from new tax incentive plans being offered by US local, state and federal governments in an effort to attract investors. Kia Motors Corpora-tion (Kia), for example, built its first North American manufacturing facility in West Point, Georgia. The selection of the location of the new US$1 billion plant was attributed to its proximity to parent Hyundai Motor Company’s (Hyundai) facility in the neighboring state of Alabama. According to West Point mayor Drew Ferguson, federal, state, and local incentives supporting the plant totaled US$ 430 million.4

Local government incentives aimed at retaining jobs are even discouraging OEMs from consolidating employees in-state. In the case of General Motors, the city of Detroit is said to have offered as much as US$221 mil-lion in incentives to keep GM’s global headquarters and 5,000 associated workers in the city rather than “reset-tling” these employees in a nearby suburb.5

Domestic OEMs also see the cur-rent economic environment as an opportunity to invest in their own country. In fact recent changes to union labor rates helped enable Ford to upgrade some of its existing plants in order to accommodate production of the 2011 Focus compact. Ford’s CEO Alan Mulally believes the com-pany can profitably build small vehicles in the US, indicating that labor “isn’t a competitive disadvantage for us.”6

Increasing responsive-ness while decreasing cost

More and more leading OEMs are find-ing that manufacturing in the US is

increasingly necessary to facilitate a quicker response to market needs as well as reducing the overall logistics cost and risk. Kia, Hyundai, BMW and Nissan Motor Company (Nissan) have steadily increased their capacity in the US over the past 10 years, whereas companies like Toyota Motor Corpora-tion (Toyota) and Honda Motor Co. (Honda) have been producing vehicles in the US for nearly 30 years. As recently as December 2009, Daimler announced plans to join the ranks of OEMs expanding production capacity in the US with its 2014 Mercedes-Benz C-class. It is a move not solely focused on alleviating Euro/US cur-rency vulnerability, but also aimed at improving responsiveness to custom-ers. “The decision to produce the C-Class closer to the [markets in which it is sold] will make Daimler more independent of exchange rates, will optimize its profitability in this price-sensitive segment, and will allow it to fulfill regional customer requirements even faster and more flexibly,” said the company in a press release.7

Being able to respond to customer needs is one of the steps that helped BMW avoid laying off permanent workers at their US plant in 2009. “Flexibility allows BMW to match pro-duction to customer demands, says President of BMW Manufacturing Co., Josef Kerscher. Customers can make


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changes to orders or add options in as little as five days before the vehicle is built, he adds and points out: “This level of flexibility is the best in the auto industry.”8 BMW has recognized the success of its US production strat-egy and has committed to making a further US$750 million dollar invest-ment to expand its Spartanburg/South Carolina plant to accommodate manu-facturing of the BMW X3, X5 and X6 models for world markets by 2012. “Centralizing our know-how for BMW X models in Spartanburg will enable us to work even more efficiently going forward,” says BMW AG Board Mem-ber Frank-Peter Arndt.9

Global automakers have been chal-lenged by the financial crisis to take a fresh look at the perceived benefits of low-cost sourcing across long and complex supply chains. Now more than ever, the risks of these business models (both operational and financial), outweigh the rewards.

The resurgence of automotive man-ufacturing in the US is another step in the on-going restructuring of the industry and its supply chain. Creating capacity in key markets is a natural hedge against the impacts of external events that might potentially cause business disruptions. When we add to this the extensive benefits of operat-ing in a market where companies have access to a deep resource pool of skilled laborers, extensive and well-

connected infrastructure, as well as sizable incentives from state and local governments, it becomes clear that not only is the US a key automotive consumer, it is also a competitive manufacturer.

While few might have expected this development, recent OEM invest-ments clearly show that this trend is here to stay. By Gary Silberg, Partner, KPMG in the US

1 “Caterpillar Joins ‘Onshoring’ Trend”, Article, The Wall

Street Journal, March 12, 2010. 2 “Volkswagen Builds Fac-

tory in Tennessee, US”, Press release, Volkswagen AG, July

15, 2008. 3 “Chattanooga: VW Incentives, Investment Records

In State”, Article, Chattanooga Times and Free Press, August

23, 2008. 4 “Kia Opens New Car Plant in Georgia”, Article,

Just-auto.com, March 1, 2010. 5 “Tax breaks sweetened to

keep GM at RenCen”, Article, The Detroit News, February 5,

2010. 6 “Ford’s Renaissance Man”, The Wall Street Journal,

February 27, 2010. 7 “Daimler to Shift C-Class Work to

Alabama From Germany”, Article, Bloomberg, December 2,

2009. 8 “Exports, flexibility help BMW’s US plant avoid lay-

offs”, Article, Automotive News, June 15, 2009. 9 “BMW

Group Invests US$ 750 million in US plant”, Press release,

BMW Group PressClub USA, October 3, 2008.

T he ability for an automaker to be responsive to consumer trends relies on greater responsive-

ness and flexibility in the supply chain. OEMs cannot do this if their vehicles have to travel halfway around the globe before reaching their target markets” says Gary Silberg, National Automotive Leader for KPMG in the US “With manufacturing capacity in the US, automakers will be able to anticipate and adapt to the continuously evolving needs of their consumers – this will be the key to suc-cess in a highly competitive market.

Comment

Short transport routes increase competitiveness

Gary Silberg is an Advisory Partner and Head of Automotive Network at KPMG in the US


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There are differing views on the pros and cons of a commitment to Formula 1™. While three of the big car manufacturers have turned their back on the racing circuit, Mercedes-Benz have launched a massive offensive with their Silver Arrows and Michael Schumacher. AutomotiveNow examines the effect the different strategies have on brand image, and how brands can benefit from car racing events.

Fast lane or hard shoulder?

Formula 1™ – crème de la crème or dead end? The answer seemed quite clear in late fall of 2009: Honda, BMW and Toyota bid adieu

to Formula 1™, and even Renault was ready to leave. Further negative headlines followed including scandals surrounding the President of the FIA (Fédération Internationale de l‘Automobile). But on 16 November 2009 Mercedes-Benz surprised the motor racing world with a coup that seemed to say: “If you’re going to do it, do it right!” The news of its first own Formula 1™ team after 55 years, the return of the legendary Silver Arrows, raced around the globe. This was then surpassed when Michael Schumacher’s return gained interna-tional headlines. So is Formula 1™ really “hip” again?

“This is the crème de la crème of racing sport with the biggest media

presence and an enormous multipli-cation factor,” says Professor Willi Diez, Head of the Institut für Automo-bilwirtschaft (Institute for Automotive Research) in Geislingen (southern Germany). “Added to this of course is the glamour factor and the sport’s emotional hero content.” The fact that Formula 1™ is extremely victory-oriented can, however, have adverse effects. Even if you are second or third you are treated as a loser. “The positive image is then gone, and at best you are left with a neutral effect,” says Mr. Diez. Lutz Fügener, Professor for Transportation Design at the School of Design in Pforzheim, who also recognizes the problem of being subjected to the win-lose mind-set in the sport. “BMW saw that it could neither win the world champi-onship nor win races. So they hit the emergency brakes to avert damage to the company.”

Formula 1™ versus sustainability? Naturally enough the Bavarian car maker gave different reasons for its withdrawal – for which it earned plenty of applause up and down the country. BMW CEO Norbert Reithofer announced a step consistent with the company’s realignment course. “Pre-mium is also being increasingly defined by sustainability and environmental compatibility.” Commitment to For-mula 1™ therefore no longer corre-sponded with the companies’ main objective and the freed up resources flowed into the development of new drive technologies and projects in the sustainability area. Willi Diez puts it into perspective: “I don’t see any major conflict between environmental compatibility and Formula 1™ participa-tion. It is a straightforward sporting event that does not seriously damage


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the company’s eco-audit.” The fuel consumption of all of the racing cars added together over an entire season equals about as much fuel as a Boeing 747 making a transatlantic flight.

By contrast Frankfurt-based analyst Jürgen Pieper from Bankhaus Metzler underscores the Bavarian company’s position: “Broadly based companies such as BMW or Mercedes-Benz can’t get away from the environmental trend, which plays an especially big role with young people.” BMW have already managed to achieve what Mercedes-Benz still needs to do here: “An un-mistakable brand image that unites driving pleasure and an ecologically clear conscience, is precisely what the customer wants.” “Basically, BMW and Mercedes-Benz work with the same motto,” says Mr. Fügener, “but with different conclusions.” It is about the brand image for both of them. BMW considered itself to be endan-gered; Mercedes-Benz wanted to pol-ish up its world class star – make its image fresher and more dynamic. Paolo Tumminelli, Professor for Design at Cologne University and Head of the Goodbrands Institute, is not, however, thinking about an immediate correla-tion between Formula 1™ activity and manufacturers’ car sales: “Series cars are just too far away from Formula 1™ machines. And this didn’t function at BMW either; or at Toyota and Renault for that matter.” Industry expert Willi Diez says that the Ferrari sports car stable is a special marketing-policy case: “Formula 1™ is part of the brand value here. When we ask students what comes to mind when they think about Ferrari, they say: ‘red, motor sports, Formula 1™.‘ If Ferrari were to leave Formula 1™, it would lose part of its brand value. There’s no way they can leave!”

Lean management instead of hierarchiesToyota announced its withdrawal in November 2009 for cost reasons. They said Formula 1™ was just too expensive in view of the difficult finan-cial situation. By the end of 2010, only 350 employees will be allocated per team. Toyota had approx. 800 employ-ees in its Formula 1™ factory in

Cologne, but – mass didn’t equal class. “Death of a dinosaur” com-mented Spiegel Online. Toyota failed in particular because it didn’t manage to set up the necessary structures to enable quick decision making. After eight years they still hadn’t had a sin-gle win, despite the biggest annual budget in the sport with an estimated EUR 400 million.

Mercedes-Benz sports boss Haug’s recipe for success, by contrast, is called “lean management”. A small control center with flat hierarchies and tight teamwork has been based in Stuttgart-Fellbach for 20 years now. Mr. Haug prepared his coup right in the middle of the wave of pullouts, in con-sultation with and supported by Group boss, Dr. Dieter Zetsche. Together with major shareholder, Aabar, they bought 75.1 percent of the 350-strong Brawn GP team, which had just been pro-claimed world champion, for an esti-mated EUR 120 million. For the icing on the cake, Mercedes also secured world record champion Michael Schumacher for the bargain price of another seven million EUR (which the main sponsor paid anyway). “The fact that Aabar is also on board as an inves-tor,” says Mr. Zetsche, “only goes to show how advantageously we share risks. Above all it is a signal of how money should be earned with a For-mula 1™ team.”

Sporting image can also be transferred across other racing seriesAudi’s 25-year plus commitment to rallying shows how a sporting image doesn’t always have to be obtained via Formula 1™. Audi is active in the German Touring Car Championship (DTM) and the Le Mans 24 Hours, where two of the four car classes are the LMP1 and LMP2 prototype series with specific technical guidelines, with which new drive technologies (and others) can be used. Because sportsmanship, progressive technol-ogy and emotional design form the core of the Audi brand, motor sport commitment is also far more than just a marketing tool. “Truth in Engi-neering” was the secret behind the company’s motor sport successes often enough, whereby the technical developments that this involved were also implemented later on in series production. Examples include the quattro transmission, which revolu-tionized the rally world at the begin-ning of the 80s, or the TFSI technol-ogy introduced in 2001, a combination of turbocharging and direct injection, which is now standard in Audi’s sporty series models. “In 2006 we were the first car manufacturer ever


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to win the Le Mans 24 Hours with a diesel car. And in the future we will also use our LMP1 cars to try out ground-breaking technologies,” says Wolfgang Ullrich, Head of Audi Motor-sport. “So we very much wel-come the fact that Automobile Club de l’Ouest has announced the first international racing series for LMP1 cars this year. We are completely convinced that this especially inter-esting technical motor sport cate-gory has a very bright future, and it very much suits the times,” says Mr. Ullrich.

Trying out the latest technologies is essentially also possible in For-mula 1™. When BMW returned to Formula 1™ in 2000, the declared goal was to establish synergies between Formula 1™ and series development. The knowledge devel-oped in Formula 1™ for processing different materials and components, such as cylinder heads and crank-cases, was used for both series pas-

senger cars and BMW motorbikes. The company’s mastery of CFEP1 materials and their use in body man-ufacture, the development of hybrid components for Formula 1™ and der-ivations for series production are also good examples of this knowl-edge transfer. High hopes were also connected with the introduction of the KERS (Kinetic Energy Recovery System) hybrid technology, which was approved by the FIA after the 2009 season, but was put on ice only a year later by the team associa-tion, FOTA. There are considerations being made for a reintroduction, but BMW will no longer be in Formula 1™ when it happens. The Munich-based company, whose board member responsible for development, Dr. Klaus Draeger, was still enthusiastic in summer 2008 about “transferring the know-how gained in the BMW Sauber F1 Team directly to series vehicle development,” pulled out completely about a year later.

Formula 1™ and brand image must match “Essentially”, emphasizes Sven Reinecke, Marketing Professor at the University of St. Gallen, “a company must ask whether the Formula 1™ image suits the image of the compa-ny’s own brand, and whether this suits the primary target group (visitors) and the secondary target group (media audiences).” Mr. Reinecke believes the fact that Mercedes has been active in Formula 1™ for almost 20 years with its cooperation with the Sauber and McLaren teams is significant: “Conti-nuity always pays off in marketing.” A Formula 1™ commitment, he says, is international marketing and must not be interpreted as national. The Profes-sor from Switzerland therefore doesn’t think the enthusiasm in Germany is only a “nice side effect”, given that almost half of all Formula 1™ races are now held in countries that qualify as highly attractive emerging markets – and the fascination for the best sport in the world remains intact here. By Eva-Maria Burkhardt / Christoph Neuschäffer, Freelance Journalists

1 = Carbon Fibre-Enhanced Plastics

»Trying out the latest technologies is essentially also possible in Formula 1«


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Last year was a great year for auto sales in China, as it overtook the US to become the world’s biggest car market in volume terms for the first time. But, paradoxically, it was far from the best of years for the country’s auto dealers.

Vehicle sales in China (in million units)

Source: China Automotive Dealership Association

2.12000

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The future of China’s auto dealership market

20 Automotive – Summer 201020 Automotive – Summer 2010

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After a golden age in the late 1990s and early “naughties” when demand for new cars far outstripped supply,

today’s car market is experiencing both a huge surge in the number of dealerships and the bringing on-stream of a vast new swathe of pro-duction capacity. As a new customer base emerges – one that is con-cerned with small, low-cost cars – the viability of China’s ever-expand-ing auto dealer industry is being questioned.

Car sales take off – but profits lag behind

Despite a huge rise in total car sales over the last decade (see table, page 20), dealer margins have plummeted. According to Zhao Hao, a professor at Beijing’s Cheung Kong Graduate School of Business, in the mid-2000s, profits on a car sale were commonly around Rmb 30,000, and could be as high as Rmb 100,000; that figure today is typically less than Rmb 3,0001 (or approx. US$ 442).

This poses a dual problem for OEMs: how to expand their dealer-ship networks and improve profitabil-ity at the same time.

Over time the solution is likely to become the same as in the world’s mature markets, where money is made from financing, insurance, extended warranties, after-sales ser-vice and spare parts – not from new car sales.

To a degree, this approach is already being recognized in China, with full-service dealerships – known as 4S businesses because they pool showroom, sales, service and spare parts – becoming widely popularized.

But establishing a 4S dealership can cost as much as Rmb 20 million and many of these businesses are struggling to survive. Media reports suggest that more than 80 percent of dealerships in the richest part of China – its eastern coastal strip – are losing money.2

Their problems can partly be attributed to market immaturity. In 2009, some 8.6 million of the 13.6 million autos sold in the country


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went to first-time buyers. While sales have taken off, much of the support-ing infrastructure has yet to be put in place. After-sales and spare part ser-vices are underdeveloped industries, largely handled by small and far cheaper garages or repair shops, many of them using counterfeit or low-quality components.

The dealership debate: size or service?So far, dealers’ efforts to recover their profitability have focused pri-marily on increasing their scale by establishing mega-dealerships, auto trade markets and auto sales parks, and less on creating a value-adding customer service portfolio.

Mega-dealerships – large-scale businesses selling multiple brands – are the most prominent model found, accounting for 44 percent of all auto sales in 2008.3

Auto trade markets cluster sepa-rately owned dealerships, thereby reducing dealer operating costs and allowing them to offer lower prices to customers. China’s largest auto trade market, the North Asia Car Market in Beijing, brings together more than 160 dealers. Used-car consumers are showing a preference for this model as auto trade markets allow car own-ers to trade in old cars and receive a discount on new purchases.

Regional auto parks are a variation on the same theme, comprising clus-ters of 4S dealerships with repair and service outlets, beautification stations for second-hand autos and, in some instances, insurance and auto finance centers.

Offering competing brands at a single location presents challenges to the OEMs. Finding reliable deal-ers has long been a problem, while ongoing relationships are often diffi-cult to monitor and manage. The mega-dealerships, that offer the vehicles of a range of makers, have little brand loyalty, while the 4S out-lets, which are popular with custom-ers looking for a one-shop stop to make their purchase, tend to cater to immediate local, often short-term needs. Often they don’t share the same long-term strategies and regional or national objectives of the OEMs.

There are advantages and disad-vantages with all of the current dealer frameworks – what is needed is a Next Generation Network Model as described in KPMG’s 2009 Global Dealership Survey, which asked car sellers around the world where they saw their industry heading. The answers indicate a need for dealers to develop a Next Generation Net-work Model. This model highlights the need for longer-term thinking around demand – 15 to 20 years out – not just over the next three to five years. In China, this will include fig-

uring out the best way of penetrat-ing lower-tier markets in regions away from the coast – understanding what sort of distribution and infra-structure is necessary, and whether retail models that work in one region can be transferred to another, or will have to be modified.

The OEMs are also going to have to spend more time looking at the kind of dealer relationships they want to sustain over the long term. Until now, dealers have largely been financially focused – looking at how they can sell as many cars to first-time car buyers as quickly as possi-ble. In the future, however, they will have to possess a far broader range of skills, including an ability to draw on best practices from other areas of retailing; an in-depth understanding of the automotive industry in general and the new directions it is taking in areas such as electric and hybrid cars; and – perhaps most impor-tantly – the ability to nurture cus-tomer loyalty, so buyers keep return-ing for other products and services as well as their next new car. These loyal buyers are also more likely to recommend their trusted dealership to their social network.

Only with such brand champions in place will both the dealerships and the OEMs be able to answer ques-tions such as how best to build brand reputation through strategic vehicle display, promotion and mar-keting.

We have been working with many of China’s largest auto dealership networks to help release hidden cash from the business and

improve profitability. One of their biggest challenges is maintaining the right level of inventory with the right products; accurate forecasting can

relieve a significant component of that financial burden. We work with our clients to get a clear view of their cash posi-tion so that they can make it work for their business.

Comment

Financial strains can be reduced with more precise forecasts

Michael Jiang is an Advisory Partner at KPMG China


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A continuing evolu-tion: what’s next for China’s auto dealers?In the immediate future, collabora-tions between the big OEM car mak-ers and independent distributors to develop integrated networks should alleviate some of the financial burdens on dealerships.

Beyond this consolidation is a given. As with many sectors in China, the creation of a market opportunity has led to a flood of new entrants, transforming what was a profitable sector into one that costs money for many businesses in almost no time at all. With profits shrinking and competi-tion growing fierce, it is a challenging environment that is certain to lead to a host of business closures in the next few years.

Scale, however, is only part of the equation. Customers are becoming increasingly savvy – using new media to gather information about the vehi-cles they are considering to make an evaluation about what they want before they even walk into a dealer-ship.

In China, with around 400 million people connected to the internet, pro-spective car buyers have access to a host of information sources about cars, their strengths and weaknesses, and what buyers can expect to pay. Dealers have an opportunity to use their online platforms to feed this

appetite for information and position themselves as a preferred resource for consumers’ car choice and pur-chasing decisions.

The development of leasing is another area of untapped potential. Leasing practices are currently almost unknown in China, yet in the US they account for more than half of new vehicle sales. Establishing a leasing market in China will necessitate the development of two related busi-nesses: a sophisticated used-car mar-ket, where cars that have been leased can be sold on to other buyers, and new financing capabilities, that allow dealers to offer cars at less than their factory price.

Managing the shift to a used-car market, however, will pose its own challenges for dealers. Although some dealers are already talking about entering this sector in China, the busi-ness remains very different from that of selling new cars. Going down this route will add another level of com-plexity to what is already a difficult period.

Defining success: what does it take to win in China’s car market?

In 2009, some 8.6 million of the 13.6 million autos sold in China went to first-time buyers.4 The challenge and

the opportunity for the automotive industry is how to find the best way to convert the rush of sales from first-time buyers into sustainable long-term business relationships.

For dealers this will mean reorient-ing themselves away from their reli-ance on new car sales. In the mature markets of developed countries, deal-ers typically only make between zero and eight percent margin on new sales; so they focus extensively on extended warranties and other means of bringing back customers that gen-erate higher margins such as servicing (up to 65 percent) and spare parts (27-35 percent) and on-selling finance and insurance products. China will inevita-bly go that way too, and the dealers that survive will be those that adapt to this model quickest.

Total sales volume in China will continue to rise and, while first-time purchasers will continue to have their purchase decisions driven by cost, repeat buyers will be drawn to buy proven products from trusted suppli-ers. Inevitably dealers will have to put more effort and investment into mar-keting, working more closely with the OEMs to develop and maintain the brand image of the models they offer and to tailor the buying experience to suit evolving customer needs.

It is possible that the luxury cars makers will show the way. Despite the overall growth in car sales, these brands still view China as an untapped market. Their targets aren’t the first-


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It is clear that the mega dealerships have established a very successful niche in the earliest stages of the car market boom in China. But they

are expensive to build and maintain, and the consumer base is widening, both in terms of customer demographics and in terms of geography. Because they require such a substantial initial investment to build, estab-lishing a mega dealership in a burgeoning car market does not always make sense in the short to medium term. Alternative automotive retail formats such as “pop-up” stores selling a limited range of products tar-geted specifically at a particular customer demographic, for example, could offer the agility that is necessary to capitalize on emerging oppor-tunities. Dealers that can break away from the crowd at the high end of

the spectrum are also more likely to be successful; offer-ing “VIP” treatment aimed at creating an exclusive retail experience could be a win-ning strategy.

Comment

Winning over consumers with an exclusive shopping experience

Aaron Low is an Advisory Partner at KPMG China

time buyers, but those who are look-ing to upgrade. And when they do, the upmarket brands will want to cap-ture profit across the value spectrum – from financing and insurance, servic-ing and spare parts, as well as the ini-tial sale – by targeting customer loy-alty and retention in particular. The dealer of the future in China puts the customer first; and when that hap-pens, profits are sure to follow. By Andrew Thomson, Partner, KPMG China

1 “Riding the auto wave: car dealerships in China”, Cheung

Kong, Winter 2010, pages 45-7. 2 “Riding the auto wave: car

dealerships in China”, Cheung Kong, Winter 2010, page 46.

3 “Overview of the PRC Automotive Retail Document”, US-

China Business Council, March 2010. 4 “Carmakers to vie for

repeat customers”, Tian Ying and Stephanie Wong, China

Daily (Hong Kong Edition), 11 March 2010.


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Sustainable cash and working capital management

It is an understatement to say that the credit crunch has had a major impact on the automotive industry. Rapid changes in sales volumes have had a consequential impact on the cash cycle, and in order to manage this nearly every auto company has had to implement emer-gency measures to ensure their own liquidity. These measures were often unsustainable “squeeze and stretch” practices to solve a short- term issue.

Now that financing is more stable and volume growth is returning in some mar-kets and segments, it is time to consider the les-

sons from the last 18 months in order to make sustainable change. Business must ensure that any growth in vol-ume does not lead to a working capital bubble as tight controls are relaxed. This becomes critical when you con-sider that some of the strategic trends within the sector are driving greater cash absorption:

Changes in market mix: European manufacturers may experi-ence increasing complexity in the supply chain over time as overseas markets increase in importance on the customer and supply side. Further complexity is introduced as markets move away from production sites. This requires careful planning and monitoring to ensure proactive management of cash resources.


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influence cash. Overall responsibility for an area of working capital should be with one member of the senior management team in order to resolve conflicting functional objectives. Cash-focused performance targets must be set and cascaded to the operational level: These should have incentives and con-sequences. To sustain cash release it is often necessary to change behav-iors and working practices. Change can be difficult to achieve where an organization has gotten used to oper-ating with a stable set of incentives based on volume and profit. Targets that are set need to be aligned at a functional and individual level; conflict-ing goals and incentives will prevent any initiative from gaining momentum. In our experience, incentives work and are important to sustain benefits. The more they seek to measure specific operational performance the more useful they will be – from what we

have seen, many businesses do not have the right cash-focused KPIs for their activities.

Accurate operational cash forecast-ing is at the centre of improving cash. Daily or weekly cash flow forecasting is vital for operating a business. For this to be successful it must involve the key operational areas of the busi-ness. Forecasting is vital to manage all available cash effectively. Without vis-ibility and control, improvements are very hard to identify and sustain.

In our experience, the key points to improve cash forecasts are: Demand forecasting, Complex multi-national and multi-currency supply chains,

Complexity as a major driver of corporate equity,

Trapped cash in overseas markets and

Long finished vehicle inventory pipe-lines that can easily build up without proper focus.

Financing: Car manufacturers can receive finance for finished vehicles after a variety of “trigger” points depending on the sales market. This availability of cash may diminish the desire to undertake a full review of processes and practices. Is this short-sighted? A business that fails to maximize the use of its cash will limit its ability to compete in the longer term.

Alliances and joint ventures: The significant investment in both finance and working capital required to develop items such as platforms, electronics and power trains is lead-ing to more cooperation. While coop-eration should lead to a reduction in development costs, it introduces additional complexity to cash flows.

So how do organizations move to sustainable cash management? Cross-functional involvement along with dedicated and sufficient resources are vital to improve cash: Working capital crosses the business and all its key functions and geogra-phies. This can lead to a reluctance to dive into an issue that is so cross-func-tional. While finance staff may monitor performance, operational staff make the decisions that impact most on cash flow. This is why it is necessary to involve areas ranging from sales and marketing as well as procurement, pro-duction and logistics to bring about the necessary operational and commercial changes. How is this achieved on a sustainable basis? This is the multi-mil-lion euro question! Clear roles and responsibilities are necessary for performance: Who is responsible for the finished vehicle inventory? At any car manufac-turer there are a number of people that have some degree of ownership but often there is no single point of con-trol. Roles and responsibilities need to be understood across the cash cycle to ensure that all individuals expected to deliver understand how their functions


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State of the art management reporting systems are not key to the success of improving cash flow: It is often said by management that poor systems prevent effective cash management. We have found that it is not the information contained in the system that prevents performance improvement, but it is the attention to detail in an organization’s policies and processes. Operating procedures have to be clear and involve regular reviews to ensure they remain effective. Good sales and credit policies, procurement, supplier selection and receiving pro-cesses, for example, will be far more effective in improving cash flow.

Communication: The means and frequency by which the business communicates the activities, progress and achievements of initiatives plays an important part in its success. Sustainability requires the business to understand, help and accept revised working practices.

Hell hath no fury like a shareholder scorned: For organizations that continue to focus on profits it will take a major change to incorporate cash into the decision mak-ing process. Shareholder expectations mean that it is unlikely that this will be tolerated in the long-term. Cash is a far scarcer resource than it was two years ago, so a more efficient process of turn-ing profits into cash will improve share-holder value disproportionally. Compa-nies will need to look up and down the supply chain to identify opportunities to release cash.

Continuing to have cash locked up in working capital results in less available for investment. An organization that finds its ability to invest in new markets and product lines limited, will not only see interest in its products falling – shareholder value will also fall. An enduring and disciplined focus on cash will be one of the underlying differ-ences between the winners and losers in the auto sector over the next ten years. By Roger Bayly, Advisory Partner, KPMG in the UK, and Martin Flint, Senior Manager, KPMG in the UK

A recent example of a stressed cash and working capital management engagement is an international automotive company that was experi-

encing severe cash difficulties as a result of reducing sales and an inflex-ible cost base. As the overall automotive market declined the business suffered further and, with the deteriorating global economic situation, they found that new financing was not available within the timescale required; the business was facing site closures in the near future.

A structured response to the crisis was initiated, engaging functions across the business to ensure that cash management was a priority for senior management right across the business. The response included:

Reviewing short term cash flow forecasting processes and implement-ing a robust forecast involving significant cross-functional input. Ensur-ing the right people from across the business provided input into the forecast. This new cash flow forecasting process delivered greater trans-parency with the timing and scope of future problem situations at indi-vidual sites on a daily basis. This sustainable process also utilized mod-eling teams to implement an automated and consolidated short term cash flow forecast, saving significant management time.

Working alongside management we set up a daily program to facilitate the implementation of controls and changes to core cash management processes.

Managing a multidisciplinary team to develop and implement tactical cash management actions that generated over € 500 million in cash. Actions included supplier term extensions, credit term reductions, wholesale financing and indirect tax initiatives.

Learning from the short term actions meant that the business was able to deliver sustainable process improvements and benefits via root and branch changes to the way the Group manages its cash and working capital. This included leading the development of market cash targets, market key performance indicators, mapping working capital responsibility, and cash manage-ment training for key finance staff.

Comment

Cash and Working Capital management in action

Roger Bayly is an Advisory Partner at KPMG in the UK


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Current studies

Order: If you would like a print copy of the abovementioned publications, please contact:

Stephanie McCardle: [email protected]

You will find further publications at: www.kpmg.com

KPMG member firms are proud sponsors of Racing Green Endurance – an initiative by 11 enterprising students of Imperial College London to transform one of the world‘s

fastest petrol powered racing cars, Radical SR8, into a high performance electric vehicle and drive it across the Americas from Prudhoe Bay, Alaska to Ushuaia, Argentina. The road trip began in July 2010; visit their website to find out more about this ground-breaking project and to follow their journey.

www.racinggreenendurance.com

Now in its eleventh year, the 2010 survey reports on an in-dustry emerging from one of the most turbulent years in re-cent decades. Manufacturers and suppliers forecast that profit-ability will be lower than before, investment growth will decline, and that market share for some of the biggest manufacturers will continue to shrink.

Consumers are increasingly opting for more environmentally-friendly vehicles. Governments and regulators are also imposing stricter guidelines for emissions control and fuel economy. This KPMG survey explores the proposed regulations and incen-tives affecting the global automotive industry and suggests ways that manufacturers can respond.

KPMG’s Global Auto Executive Survey 2010 / Industry Concerns and Expectations to 2014 (English, January 2010)

The Transformation of the Automotive Industry: The Environmental Regulation Effect(English, January 2010)

This report explores consolida-tion trends in the automotive industry across Europe from the last 90 years and identifies determining factors behind those trends. A model is developed to forecast the future of the auto industry in Europe and in China.The industry model enables a forecast of what a possible consolidation process might look like by 2025.

Brand and Ownership Concentration in the European Automotive Industry: Possible Scenarios for 2025(German, English, May 2010)


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Dieter BeckerGlobal Head of Automotive,KPMG in GermanyT +49 711 9060 [email protected]

Stephanie GoeringGlobal Executive, AutomotiveKPMG in GermanyT +49 711 9060 [email protected]

Stephanie McCardle, Senior Marketing Manager, Global AutomotiveKPMG in CanadaT +1 416 777 [email protected]

ASPACChang Soo LeeSamjong KPMG in KoreaT +82 (2) 2112 [email protected]

The AmericasGary SilbergKPMG in the UST +1 312 665 [email protected]

EMADieter BeckerKPMG in GermanyT +49 711 9060 [email protected]

Global Automotive Contacts

Regional Automotive Contacts

Imprint

Published byKPMG AG Wirtschaftsprüfungsgesellschaft Klingelhöferstraße 18 10785 Berlin

Editorial Office KPMGLogo WerbeagenturMiriam LeypoldtChristoph Neuschäffer Michael Offtermatt

Project Management Carmen Borges, KPMG in Switzerland T +41 44 249 20 51 [email protected]

Design/layout Logo WerbeagenturT +49 711 211 [email protected]

Translation OfficeDr. Billaudelle & PartnerT +49 89 41 07 35 [email protected]

Print OfficeDruckerei Memminger GmbHT +49 7141 791 [email protected]

Photo Credits

Title page: composing: logo and iStockphoto/Onur Döngel. p. 2: KPMG. p. 3: iStockphoto/Grafissimo, Shotshop/Thorsten Nieder, Shutterstock/Olly. p. 4-8: iStockphoto/Pixdeluxe, composing: logo/iStock-photo/BookMama. p. 9-11: composing: logo und iStock-photo/Alle, iStockphoto/Grafissimo, iStockphoto/Ictor. p. 12-16: Shotshop/Thorsten Nieder, composing: logo und iStockphoto/Andyworks, Shutterstock/Leva Vincer-zevskiene. p. 17: composing: logo/Shutterstock/Aspect3D/Argus. p. 18-19: Shutterstock/Jaywarren79, photocase/Bratscher. p. 20-21: Shutterstock/Olly. p. 22-23: iStockphoto/Chrisgon, Shutterstock/Rosamund Parkinson, Shotshop/Nieder. p. 24: Shutterstock/Zhuda. p. 25: iStockphoto/DNY59. p. 27: iStockphoto/Graffiti-zone. p. 28-29: KPMG.

kpmg.com

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Any trademarks identified in this publication are the property of their respective owner(s). KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.

© 2010 KPMG International Cooperative (“KPMG Interna-tional”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

All rights reserved. Printed in Germany.

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