Lessons From Change Auto Industry

Lessons from change A roadmap to sustainability for the automotive industry

Contents 2

That was then … this is now Opportunities in adversity gave us a glimpse into the challenges companies were facing in the automotive industry as they confronted the implications of an economic downturn. Lessons from change goes deeper, exploring what companies are learning and how they are using their new knowledge to prepare for their recovery ahead.

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Introduction: automotive’s rough road

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Securing your present: survival is the rst imperative

Automotive companies may have been caught off guard, but the weaknesses and exposures present in the industry were there all along. The nancial crisis merely hastened an overarching risk. While the prospects for the automotive industry may seem dubious, all is not lost.

Most companies in the value chain must rst ensure their survival before undertaking discretionary operational improvements.

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Protecting your assets: unidentied risks ahead

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Improving your performance: optimize, not minimize

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Reshaping your business: it's time to change

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Sustaining your future: innovate or become irrelevant

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Conclusion: who will survive?

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The automotive industry faces myriad risks. While the recession may have brought most of these key risks forward, more counterparty risks are ahead.

Optimizing your company’s speed to respond to market forces is an essential step toward future growth.

While companies across industries are faced with “doing more with less,” many automotive companies are trying to meet the minimum requirements with what very little they have left. In this dramatically changed environment, a little unconventional thinking may be the best strategy to not only stay relevant, but gain a competitive edge.

It is time to be bold. Companies that take advantage of the turbulence will emerge well positioned to capitalize on future growth opportunities.

Automakers and the entire value chain have been carrying too much capacity, with too little regard for cost consciousness. The companies that learn the lessons from change will become exible, dynamic, market-focused competitors that will outmaneuver and outperform their rivals.

A new business agenda is emerging Lessons from change comprises a series of 14 sector-specic white papers, based on more than 40,000 client meetings, and has produced more than 500 cross-industry insights. Studying this material, we see a new agenda for success emerging.

That was then ... In January 2009, Ernst & Young published Opportunities in adversity,1 a study that provided insights into the issues executives were facing as they grappled with the implications of the economic downturn. We suggested that every company falls somewhere on a stress pendulum between cash burn and cash earn, and for every business there is an appropriate course of action. By executing that course of action quickly and effectively, management teams can seize a potential source of competitive advantage. The automotive industry is in the most precarious state it has been in since the rst mass-produced model rolled off the assembly line. It is facing unprecedented challenges and turmoil in the wake of the prolonged global nancial crisis. The senior executives we interviewed admitted a fundamental shift in mindset, from an industry-wide focus on prots to one focused on liquidity and cash-ow management and forecasting. While they were troubled by the impact the downturn has had on their businesses, there were positive signs about the sector’s willingness and ability to implement swift and decisive actions.

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1. All survey data referenced within this report, unless otherwise noted, is from Ernst & Young’s Opportunities in adversity survey.

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... this is now Opportunities in adversity gave us a glimpse into the challenges automotive companies were facing, but we wanted to know more. We wanted an in-depth understanding of the specic challenges executives were experiencing, as well as the lessons they were learning and applying to prepare their companies for the recovery ahead. And so we went back to our automotive leaders to gain their insights. In total, Ernst & Young’s automotive partners from our member rms around the world conducted more than 1,300 client meetings. These conversations revealed a series of strategic actions the industry is taking to position itself for success. Not all of their lessons from change may be new, but they are taking on new importance as automotive companies strive not only to survive but thrive in the new economic environment.

Questions and considerations As you take charge of implementing change within your organization, we invite you to reect on the following questions and considerations: • No matter how dark things look, start to plan now for future growth. Where do you see your company in ve years? • Take immediate action to ensure the stability and durability of your organization. Do you have a strategy for cash preservation? • Reevaluate your business model and product mix. Are you focused on growth or protability? • Reassess your ability to manage risk. What steps is your company taking to protect assets? • Thoroughly assess your company’s business performance. How can your organization’s performance be improved? • Before making drastic workforce decisions, consider your management talent needs. What talent will you need in the future?

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Introduction

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Automotive’s rough road These are perilous times for the automotive industry. Protability is a fading memory and the industry’s new reality includes widespread supplier instability, plummeting sales, bankruptcy and severe nancial distress. The global recession blew through the automotive supply chain like a tempest, toppling the structurally weak and damaging even the strongest companies. The crisis exposed the critical faults of an industry that were either well hidden or long ignored.

A culmination of maladies According to Jay Young, an Ernst & Young LLP partner in the US serving the automotive industry, “The scale and depth of the downturn is affecting the industry in ways many might never have anticipated.” Indeed, the global nancial crisis led to enormous declines in new

vehicle sales. For example, relative to the same period in 2008, unit sales in the rst six months of 2009 for 8 of the world’s top 10 automakers declined anywhere from 10% to 31% (see Figure 1). The ripple effects from these declines extend upstream throughout the supply chain and downstream into dealer networks.

Figure 1 Global sales — 6 months, 2009 6 months 2009

6 months 2008

% change

1

Toyota Motor Corp.

3,564,105

4,815,442

-26%

2

General Motors Co.*

3,552,722

4,541,125

-21.8%

3

Volkswagen AG**

3,100,300

3,265,200

-5.1

4

Hyundai-Kia

2,153,000

-

-

5

Ford Motor Co.***

2,145,000

3,093,000

-30.6%

6

PSA Peugeot-Citeroen

1,586,900

1,844,700

-14%

7

Honda Motor Co.

1,586,000

2,022,000

-21.6%

8

Nissan Motor Co.

1,545,976

2,013,611

-23.2%

9

Suzuki Motor Corp.

1,152,000

1,283,000

-10.2%

Renault SA

1,106,989

1,326,164

-16.5%

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* Includes Wuling ** Excludes Scania *** Wholesale only Source: Automotive News Data Center, Reuters (Hyundai-Kia sales)

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Too much went wrong for automotive at the worst possible time. A brief spate of higher oil prices suppressed demand for larger and more protable vehicles. On the heels of the energy price spike, the credit market collapsed, leaving consumers without access to credit for the nancing of new vehicles. Further declines in industrial and other output affected sales for heavy equipment manufacturers. Add to this the growing list of government mandates that the industry produce smaller, greener cars — meaning heavy investment in both R&D and retooling. The industry’s nancial underpinning has also changed dramatically. Some have received injections from sovereign wealth funds and more such capital may be on the way. Others have received government bailouts. Governments and unions are now principal owner-investors. And with private capital still scarce, governmentoffered incentives, grants, loan guarantees and other programs are now more prominent in nancing decisions. The sum total is an industry facing severe distress — with many participants still in a relative tailspin.

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Securing your present

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Survival is the rst imperative With further government bailout and stimulus measures unlikely, automotive companies up and down the value chain must adopt scal prudence as their new ideology. Difcult, yet well thought-out decisions must be made so businesses see a future. The industry itself may be in need of transformation. However, for those caught in the thick of the economic downturn, a number of more immediate actions must take priority. The speed and the severity with which the crisis landed caught most of the industry unaware, resulting in waves of severe nancial distress. Many rms in the industry have already gone out of business or into bankruptcy. And though many have been bailed out by their country’s taxpayers — or have benetted indirectly from the bailouts of others — many are ghting to survive.

Cash preservation is self preservation Cash preservation is the foremost priority. Companies throughout the automotive supply chain must take pains to optimize their capital availability. Time is of the essence. Reinventing processes is not a luxury most companies in the sector can afford. Instead, immediate actions should target all aspects of working capital management, such as minimizing both productive and nonproductive inventories and aggressively managing accounts payable and receivable. Attention to detail is essential. Regardless of inows or outows, the level of inefciency that distressed companies can accommodate in their cash management systems is exceedingly low. Collection systems serve as a key example. Since

customers often pay according to xed cycles, any delays or errors in invoicing can easily slow receipts by a month or more. In addition, companies need to take a close look at their processes for major disbursements to avoid early payment or overpayment. They should also review the method of making these payments. Now more than ever, companies need to take command of their cash ows. The continuous need for improved working capital management and for developing a culture of cost consciousness cannot be overstated. Improving cash forecasting can help companies get a much needed handle on this precious resource. To improve visibility and management of their cash position, companies should develop rolling forecasts of cash inows and outows. Though nding the right intervals will be dependent on individual circumstances, conducting one-week, two-week, monthly and quarterly forecasts continues to be a leading practice. Cash forecasting should also support the modeling of debt covenants to help avoid noncompliance.

Cut carefully While cost reduction “is nothing new to the industry,” according to Automotive Global Markets Leader, Jeff Henning, the current situation “carries added risks.” In particular, because the cost reductions had to be implemented with little time for

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redesign, they may give short shrift to key control or decisionmaking processes. In addition, says Henning, “when protability returns, there is a real risk that waste and inefciency will likely return.” Companies should tread carefully in their cost-cutting programs. There is a ne line between running lean and underinvestment. Any further cost-cutting measures should be undertaken with an eye for the future. Reductions conducted overzealously may actually do more harm in the long run. While downsizing the workforce tends to be a common cost-cutting activity, at this stage, it’s likely that headcount has already been reduced as much as possible. Any further workforce reductions could translate to a competitive disadvantage in a future recovery, as skeletal operations are unable to adapt to increasing demand. Ultimately, while survival is key, don’t forget the reason for these survival activities is an ultimate return to protability. R&D expenditures should be handled carefully. The future health of the business depends on having a relevant and useful product line. However, these R&D activities should consider both the present market demand and future industry trends. R&D activities cannot afford to be hobbled by cost-cutting measures. Our recent Opportunities in adversity survey revealed that in many cases, these expenditures are growing.

Figure 2 Respondents who have indicated a decrease in investment

Respondents who have indicated an increase in investment

39%

Human resources

Operations

Information technology

11%

36% 7%

36% 11%

32%

Sales and marketing

14%

Research and development

14%

Source: Opportunities in adversity

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29%

Negotiate for savings Renegotiation could prove to be the most useful weapon left in the arsenal for companies in the automotive value chain. Everything from leases to state and local taxes should be examined for possible savings. Companies should also be prepared to renegotiate within — more and more companies are looking at salary givebacks, deferrals, rolling salaried-employee furloughs and reduced hours for their workers. Where possible, debt covenants should also be reviewed. The weight of existing loans can prove suffocating for businesses given their reduced volumes and cash ows. Now is the time to be frank with creditors. A degree of consideration today could help the business get by until the automotive sector begins to recover. Negotiating with local or national governments may also prove valuable. Likely, there will be plant closings. However, to the extent the business has options relating to which plants or facilities it might close, this can be used as negotiating leverage. Be polite — you will have to deal with these authorities well into the future. But don’t be shy about asking what tax abatements, grants, infrastructure upgrades or other benets might be made available should the facility remain open. And while this can be useful in a domestic setting, it can also apply to an international setting. As Ernst & Young’s Automotive Tax Leader Dan Kelley explains, “To cut costs, a lot of automotive companies and their suppliers are shifting their manufacturing overseas — to Eastern Europe, Russia, China and elsewhere.” Along the way, says Kelley, companies should take care “to explore the various — and often competing — incentives available.”

Uncover hidden sources of cash Balance sheets often have hidden assets waiting to be monetized. Companies are learning they may have left cash on the table in areas that can include aging VAT refunds, customer deposits, insurance claims, state or federal incentive receivables or even warranty reimbursements. Often this lack of focus is a symptom of a larger issue — lack of clear information into these balance sheet accounts and lack of ownership of managing the balance sheets. Another avenue is the divestiture of noncore assets. But exercise care: don’t sell off the IP of an essential component.

Above all, be realistic Sometimes there is simply no other course of action than to enter into bankruptcy discussions. Restructuring is proving essential for many OEMs and suppliers alike. In many instances, out-of-court settlements or prepackaged deals are proving the most effective at realigning businesses for the future. But be mindful that in the current environment, there are no guarantees. As Jeff Ficks, a senior manager in Ernst & Young’s Transaction Advisory Services explains, “Bankruptcy is traditionally an avenue to reorganize.” But the reality today is that with so much overcapacity in the industry, “not everybody is going to be afforded the opportunity to survive.” As such, a signicant number of executives will need to ask themselves the most difcult question of all: do their companies have a real future in the industry? Or does it make more sense to simply sell off their book of business and move on?

Automotive pursues liquidity The industry is taking a number of steps to extract cash from operations. Key actions include: • Top-down reviews of working capital/cash management practices • Reevaluation of debt covenants and compliance • Closer communication with lenders, analysts and ratings agencies • Tapping short-term nancing facilities

Key considerations • Improve your cash preservation and management. Improved forecasting measures will help you gain a clear position of your present and future cash positions. • Embark on cost-cutting measures judiciously. With an eye to the future you will identify activities that won’t hinder your performance when demand increases. • Be honest with your stakeholders. Renegotiation of contracts can achieve the cost-savings you need to survive. • Be realistic. Sometimes reorganization really is the best, and perhaps only, option.

Figure 3 Which of the following steps is your company currently taking to maintain liquidity in light of the current market conditions? Automotive

All Industries

Top-down review of current cash management and of cash flows

61% 57%

Making an inventory of all debt covenants and monitoring covenant compliance

61% 30%

Considering alternate sources of liquidity (e.g. disposal of assets, shut down or sale of segments/revenue streams)

43% 35%

Obtaining access to short-term finance facilities/credit

43% 35%

Considering options to renegotiate debt covenants

43% 26%

Communicating with lenders, analysts and rating agencies proactively

None of the above, cash is not an issue

36% 34%

4% 16%

Shown: percentage of asset management industry respondents Source: Opportunities in adversity

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Protecting your assets

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Unidentied risks ahead The global recession has amplied the vulnerabilities of the automotive sector. According to The future of risk, an Ernst & Young a survey conducted with the Economist Intelligence Unit in June 2009,2 an overwhelming 91% of automotive executives indicated that they need to improve the alignment of their risk management approach with their broader strategic and business objectives. Similarly, over a third of the companies surveyed rated themselves as only moderately effective or ineffective in terms of managing operational risk. In essence, business managers see great shortcomings in their risk management programs. Companies experiencing nancial distress cannot afford to further erode their position by failing to identify and respond to critical near- and short-term risks. These companies need to move fast to implement more effective risk identication and management capabilities.

Start with your supply chain In an industry rife with disruption and bankruptcy, automakers and Tier 1 suppliers are learning it is important to take a close look at their respective supply bases. According to The future of risk survey, only 47% describe themselves as either effective or very effective at managing supply chain risk. Jeff Ficks points out that “the onslaught of supplier failures is teaching industry executives that they must commit more resources to supplier stability.” This begins with early-warning systems, where companies should implement routine monitoring of core metrics for key suppliers.

2. The future of risk, Ernst & Young, June 2009.

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Figure 4 How was your organization’s approach to your suppliers affected in the past six months? Automotive

All Industries

We have lost key suppliers to bankruptcy

43% 14%

We have negotiated longerterm contracts with suppliers

We have narrowed the supplier base to obtain more favorable prices or terms We have broadened the supplier base to reduce the impact of the failure of an individual supplier

36% 43%

29% 42%

25% 31%

Shown: percentage of automotive respondents compared with all respondents Source: Opportunities in adversity

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Maintaining close relations with suppliers is essential. The current state of affairs demands heightened visibility into the health of the supplier base at a level that is granular enough to drive timely remedial action. Companies should formulate contingency plans for likely supplier instability scenarios and be prepared to work with those suppliers should they nd themselves in distress. Ultimately, an ideal supplier risk management system generates just enough information to identify and address potential supply chain exposures. A lack of proactive risk management could lead to any number of unfavorable outcomes. These include unexpected requests for nancial accommodations in pricing and payment terms, or delays, disruptions and stoppages. There have also been cases where companies have been placed in the awkward position of serving as a lender to their suppliers, leaving them no choice but to weaken their own cash positions. Sometimes any of the above is unavoidable even with planning — but knowing how you would respond in advance provides the luxury of leeway. Companies should also be prepared to consider novel approaches to keep their businesses running, such as assuming critical operations of the supplier. Lastly, companies need to develop capabilities for managing relationships within bankruptcy proceedings — a key means of avoiding or mitigating supply disruptions.

Review counterparty risk and credit Counterparty risk remains a clear and present danger throughout the automotive value chain — and beyond. A common misstep is limiting the focus on just the counterparty itself. Companies that manage their counterparty risks well monitor the overall health of those with whom they do business. They also thoroughly examine the risks within the counterparty’s covenants and contracts for any potentially negative effects. Counterparty risk is often described as a contagion, with good reason. In precarious times, even a relatively healthy company’s fortunes can reverse with one negative outcome. Maintaining a frequent and thorough awareness of the credit position of customers is of the utmost importance. If the nancial crisis has taught us anything, it’s that circumstances can change rapidly. The concept of “recent information” has been redened. In all cases, it is important to regularly monitor payment trends and the overall exposure to individual customers.

Key considerations • Develop more effective risk management. Being able to identify the risks your company faces is the rst step in managing them. • Be vigilant about counterparty risks. Scrutiny of the companies you do business with should include their own counterparty exposures. • Keep a careful watch of your customers’ credit positions. Their credit health may be subject to change, so frequent monitoring is essential. • Divest carefully. By separating operations judiciously, you will be able to monitor all risks throughout the divestiture cycle.

Divest with care Companies are divesting to raise cash or perhaps only reduce cash drain. Still, several risks arise — particularly when disentangling operations that are highly integrated. Care must be taken to properly manage operational, nancial and compliance risks throughout the divestiture cycle. To avoid mistakes, companies are learning that transaction teams must include members from a cross section of the business capable of evaluating and managing this process from start to nish.

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Improving your performance

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Optimize, not minimize Finding the balance Cutting costs is a sound reaction when hard times hit. Unfortunately, many companies take it too far. Any cost-reduction program should be pursued with an eye toward future growth. There is a point of diminishing returns on cost-cutting measures, and in all probability businesses in distress are nearing this point. Past excesses in head count or other spending have likely been addressed long ago. As Ernst & Young LLP Advisory Partner Steve Patton explains, “reducing spend overzealously — without a plan for reengineering processes or considering the implications on the enterprise as a whole — isn’t sustainable.” In short, the objective is to optimize, not absolutely minimize, costs.

If not already the case, companies should resize the tasks that were the subject of the cost-cutting so that when business volumes return, creeping inefciency won’t. At the same time, this means balancing costs with performance. Patton continues, “Finally, the company should begin maintaining a dynamic portfolio of cost-reduction projects, implementing the most protable initiatives as resources and other constraints allow.” The goal: create a culture that relentlessly slices costs without failing to meet the needs and expectations of customers or other stakeholders.

Our June 2009 The future of risk survey showed that signicant numbers of automotive executives believe there are signicant opportunities for cost reduction in supply chain (45%), marketing (50%) and operations (68%).

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Improving the quality of information ows Companies need to develop a better means of seeing further down the pipeline. “The industry needs to do a much better job of collecting and analyzing the data it needs to drive success,” says Peter Fuss, Ernst & Young’s Automotive Industry Leader for Europe, Middle East, India and Africa. For example, any shortcoming in the ability to predict demand “results in excess inventories or lost sales and higher production costs,” elaborates Fuss. Similarly, the inability to equate all associated product costs with precise revenues can result in poor decision-making overall. “Automakers need to do a better job of gathering the inputs they need to make a better assessment of P&L on a product-by-product basis,” says Fuss. Companies should also rethink their processes for gauging customer needs. Companies that can get these and related fundamentals right “stand the best chance of rising in the industry ranks.” Addressing information ows should be a key objective for automotive IT executives. Today, according to The future of risk survey, only 25% of the automotive respondents indicate that they are effective or very effective at IT rationalization. Another 25% indicate that they are not at all effective in this area. Automotive companies have historically underinvested in IT infrastructure. Not surprisingly, these businesses face obstacles in accessing data and producing timely information for decision-making. Many of the information systems are older, so frequently the underlying data structures do not support access to data at a sufciently disaggregated level. This had led to maintaining large staffs of nance, IT and business analysts to access systems and manually compile reports and analyses. As those ranks have been reduced, companies must nd new ways to enhance IT effectiveness, especially given the growing need for more timely and detailed business intelligence.

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Tools such as risk mapping, robust scenario analysis and contingency planning can help an organization identify and respond more quickly and condently to both risks and opportunities. For example, a major US company has been able to minimize much of the pain of the current recession thanks to its early-warning systems and ready-made contingency plans. As Ernst & Young LLP Global Client Service Partner Randy Miller explains, “The company routinely monitors global business and economic conditions. When the recession hit, they had a plan ready.” Consequently, the company was able to move much faster than less-prepared rivals. Robust contingency planning, explains Miller, “can be a tremendous competitive advantage.” Not surprisingly, The future of risk survey found that 78% of automotive executives say that improvements in risk management lead to reduced costs, while 100% indicate that improved risk functionality would enhance business performance.

Key considerations • Think long term. Take the time to carefully review what would provide the most benet to your organization’s future health rather than reacting solely to the cost. • Balance cost cuts and containment. A company stripped to the bone with too few employees and antiquated systems is unlikely to survive, let alone grow. • Address IT issues. Pursuant to balancing costs, wise spends in your IT infrastructure will improve the quality of your information ows. This will make your business smarter and far more nimble in the future.

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Reshaping your business

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It’s time to change Had it not been for the cocktail of federal bailouts, forced and/or expedited restructuring and broader stimulus actions, a number of major automakers would have failed — perhaps catastrophically. Though such bailouts were most prominent in the US, European and Asian nations have also done their share of supporting their weak or failing auto and heavy-equipment makers and their suppliers. Had any of those at the top of this supply chain failed, the consequences would have been far more dire. More important than how companies got here, however, is what they do from this point. For a noteworthy few, restructuring gives a new lease on life. Their balance sheets are lighter, their workforces are streamlined and their costs, footprint and general capacity are more in line with demand. All is not perfect, but at least for now, these enterprises are on a healthier footing.

Realizing nancial exibility Financial exibility tends to be a critical vulnerability in the automotive industry. The sheer size of its xed asset and cost base is difcult to manage effectively. As such, the industry must continue to downsize to meet the new volume realities in each of its markets. While production can be adjusted, its lower limit is now higher than demand. The plethora of excess capacity translates to a punishing cost burden. Downsizing is not a suitable long-term solution, however. The industry

must nd ways to obtain greater cost efciency from its xed investments, including its investments in infrastructure and supporting corporate or administrative functions. Financial exibility cannot be realized unless the organization itself is truly exible. Automakers and related entities need to pursue innovation that can create greater operating exibility. The industry must become more adept at identifying and responding to real demand across all geographies.

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Collaborate with the value chain In addition to R&D investment, another means of achieving incremental — if not breakthrough — performance in technology is through greater degrees of supply chain collaboration. If there is anything that the recession has taught us, it’s that distress can have a profound ripple effect in the sector. As one automotive executive explains, “Survival and success for many will come only through true collaboration — where ideas are shared, prots are shared and the business model works for all parties.”3 Indeed, by coordinating efforts, consortiums of suppliers and vehicle manufacturers can reduce their investments as well as their risks. Closer collaboration can also lead to greater visibility up and down the supply chain and by natural extension, greater efciency and exibility overall. Of course, collaboration and partnership to this degree almost invariably lead to “coopetition,” or working with competitors toward common ends while still maintaining an appropriate competitive distance. While this shared approach might be relatively new for the automotive industry and well outside companies’ collective comfort zones, plenty of guidance exists in other industries. This is an area where industries like technology and life sciences excel. The automotive industry will likely take a greater and more in-depth look at such partnerships in the near future. Though it took a crisis to create this awareness, continues the auto executive, “at least now there is a strong business case for action.”

Key considerations • Retool your processes for enhanced exibility. Businesses in the sector can no longer sustain overcapacity and underleveraged xed costs. • Collaborate. There are opportunities for collaboration, not only up and down the value chain, but also with your indirect and direct competitors as well.

3. Ernst & Young interviewed a number of industry executives for this paper on a condential basis.

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23

Sustaining your future

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Innovate or become irrelevant It is time to be bold. Companies that use this turbulent environment as an opportunity to strengthen and build a sustainable and responsive organization will emerge stronger and better positioned to take advantage of future growth opportunities.

The future is green The industry is clearly picking up the pace on meeting the global demand for green products. Greater fuel efciency and cleaner exhaust emissions are being driven by increasingly strenuous fuel economy and emission standards across the globe. Incremental improvements in every component, from the smallest fastener to the heaviest transmission, have the potential to deliver on this objective. The pursuit for environmental sustainability is driving investments across a range of promising technologies. From batteries and fuel cells to power inverters and transmissions, the cars and trucks of the future will rely on countless thousands of advances. In short, R&D will soon prove to be a core differentiator of performance. Companies can choose to pursue such R&D investment on their own, but faster routes include partnership and/or acquisition. Opportunities to work with companies from other industries, such as utilities (state-run or otherwise) and energy producers should not be overlooked. In addition, governments all over the world have a vested interest in sharing IP that delivers greater energy efciency.

Many governments are now shifting taxpayer dollars, euros, yen, won or renminbi into loans, grants or tax breaks for green investment, research and development. Says Dan Kelley, “There are many incentives available — and companies need to do their homework to make certain they nd the ones that are most appropriate.”

Be ready to grow The future will bring new technologies and new demands. It’s essential to have a talent pool that is up for the task. As an organization becomes more dynamic, the value of key talent will increase. Companies should adopt leading practices to attract, recruit and retain a skilled workforce. Talent mapping, a means of assessing current and future gaps in the worker pool, is one such useful tool in this undertaking. Companies should also pay close attention to compensation trends and to new career development initiatives.

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Stay close to customers everywhere: invest for growth The industry needs to involve customers more intimately in design processes by developing products that meet both current and future demand. Companies should pay more attention to evolving customer needs and interests, respond quickly to trends and nd ways for more customization. The customer base is becoming more sophisticated in developed nations and emerging markets have changing needs of their own. The fact is, even as auto sales have been plummeting in most developed nations, demand remains strong in many of the emerging market countries such as India and China. In fact, last year, in spite of the global recessions, the China division for one major automaker experienced growth of over 40%. So even if a company’s sales are down overall, its emerging markets presence is or should be in high-growth mode. Growth rates in emerging markets will likely far exceed those in the developed nations well into the foreseeable future. In order to pursue this growth, industry participants must manage existing investments and relationships with an eye towards opportunistic expansion. In particular, companies should move now to build business platforms that will be capable of supporting high-growth operations amid intense competition. And at the same time, the industry should also be readying to capitalize on the next eleven (N-11) — the countries viewed as most likely to become the next high-growth emerging markets.

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Tomorrow’s automotive industry will need to stay close to customers globally through more robust market knowledge, as well as the technology required to support and analyze it. Generally speaking (as other industries have learned), if you ask consumers the right questions, they will tell you what they want. Moreover, the time has come to become a part of trends rather than committing time and resources toward redirecting them with little success. The prole of the automotive customer has changed dramatically since the rst “horseless carriage”: the industry should expect to change with it. But most of all, this is no time to get discouraged. When nobody is doing particularly well, the good news is that all industry players have, roughly, the same starting point. Right now the prevailing competitive advantage is survival. The environment is too adverse for new entrants and the road back to protability is still rather long. Companies have a golden opportunity to reinvent and indentify new business strategies. By doing so, they can gain ground in the competitive landscape of tomorrow.

Key considerations • Innovate and go green. If the market data seems at all ambiguous on the topic of energy efciency and green technology, global governments are not. Tax incentives are likely to continue for companies and customers. • Plan for new talent. As companies return to protability and growth, a new workforce with new skills will be needed. An evolving business model will require a different talent pool in the future. • Continue to invest in growth markets. China and India, for example, show massive growth potential. The business model that can successfully manage the intensely competitive landscape in those markets will thrive.

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Conclusion

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Who will survive? For now, the playing eld is relatively level — nearly all automotive companies are in comparable distress. The global recession has shown that automakers and the entire value chain were carrying too much capacity, with too little regard for exibility and cost consciousness. The question becomes, which companies will take the needed actions to create sustainable frameworks that can rise above the rest? As one senior automotive executive explains, “the industry has a habit of making meaningful change when times are tough but as soon as improvement returns, so do bad habits.” The companies that learn the lessons from change will become exible, dynamic, market-focused competitors that will outmaneuver and outperform their rivals. We are entering a new and changing world. Executives who show ingenuity, have the courage to make tough decisions and demonstrate the foresight to apply lessons from change will guide their companies to success in the automotive sector. And they will be the leaders who establish the foundation upon which our new global economy will rise.

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A new business agenda is emerging Lessons from change comprises a series of 14 sector-specic white papers based on more than 40,000 client meetings and has produced more than 500 cross-industry insights. Studying this material, we see a new agenda for success emerging.

The new normal While the intensity of concerns about credit availability and liquidity may be showing signs of diminishing, cash is still a critical issue for many organizations. Some have addressed their immediate nancial issues. Others are still in some stage of cash distress and may be challenged to survive in the future. The global economy may be back from the brink of disaster, but companies do not expect a return to the “normal” conditions we have experienced for much of the previous decade. Many executives feel that we will continue to see: • Depressed demand and increased price sensitivity • Increased taxes and regulation • Ongoing restrictions on accessing funding • Continued downward cost pressure across the value chain • Structural shifts to markets and sectors • A more global market • Renewed challenges to government models and calls for increased transparency

Emerging cross-sector insights We nd a striking similarity in the actions all companies across Lessons from change are taking as they prepare for success in the new economy. These actions, taken from the lessons these companies have learned, culminate in eight key performance objectives: • Reevaluate your business model. Embed innovation and constantly challenge your existing business models against the new business environment. • Optimize the exibility of your operations. Increase the responsiveness of your organization by emphasizing exibility and leveraging resources. • Optimize capital availability and deployment. Reect the continued importance of cash and constricted funding by optimizing the availability and deployment of capital for a more exible and robust balance sheet. • Optimize your market reach. Optimize your global market reach and product/service mix to exploit opportunities, achieve optimum returns and mitigate risk. • Accelerate your decision-making and execution. Make and execute decisions more quickly to take advantage of shorter windows of opportunity and respond more quickly to adverse developments. • Revitalize the way you manage risk. Identify the full risk complexity of the market and develop and align a strong control framework for your business. • Strengthen your management talent. Gain, retain and deploy a management team that is capable of addressing the complex market and organizational environment. • Strengthen your stakeholders’ condence. Regain and retain stakeholder condence through transparency and better communication on nancial and nonnancial performance.

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Automotive sector insights Looking at these cross-sector insights from an automotive perspective, we nd that four are key: • In the search for operational exibility, automotive companies need to balance cost cuts and containment. There must be a clear focus on redesigning business activities to support a new environment of restructured costs. A company stripped to the bone with too few employees and antiquated systems is unlikely to survive, let alone grow. And, while balancing costs, wise spends in your IT infrastructure will make your business smarter and far more nimble in the future. • This is the time to reevaluate your business model. A change of model for automotive companies could include “coopetition,” or working with competitors toward common ends while still maintaining an appropriate competitive distance. Collaboration outside of the traditional “automotive value chain” is becoming increasingly important as the industry and its future products require alternative sources of energy, more advanced componentry and different fueling infrastructures. • Cash preservation is the foremost priority. Companies throughout the automotive supply chain must take pains to optimize their capital availability. Time is of the essence. Stronger discipline to forecast and manage cash needs and adequate systems to support this effort are critical for future success. • Effectively competing in growth markets will help you optimize your market reach. As many automotive executives have learned, the entry into newer, emerging markets come with the promise of growth. But it is important for companies to have well-developed risk assessment, monitoring and communication processes in order to manage all aspects of the strategy to take advantage of expanded market opportunities.

About Ernst & Young’s Global Automotive Center Ernst & Young’s Global Automotive Center in Detroit, Stuttgart, Shanghai and Tokyo is focused on the mega trends in the global automotive industry. It brings together a team of professionals to help you achieve your potential — a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Center works to anticipate market trends, identify the implications and develop points of view on relevant industry issues. Ultimately it enables us to help you meet your goals and compete more effectively. It’s how Ernst & Young makes a difference.

Contacts Mike Hanley Global Automotive Leader +1 313 628 8260 [email protected]

Jeff Henning Global Markets Leader +1 313 628 8270 [email protected]

For more information on Lessons from change and the 14 sector-specic white papers this study comprises, please visit:

ey.com/lessons-from-change 31

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Ernst & Young Assurance | Tax | Transactions | Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 144,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. For more information, please visit www.ey.com. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. © 2009 EYGM Limited. All Rights Reserved. EYG no. ED0030 In line with Ernst & Young’s commitment to minimize its impact on the environment, this document has been printed on paper with a high recycled content. This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.