Restructuring and Bankruptcy Challenges in the Automotive Sector
This article first appeared in Financier Worldwide.
Fred Hubacker was interviewed for Financier Worldwide’s magazine in an article titled “Restructuring and bankruptcy challenges in the automotive sector.”
Question: Reflecting on the last 12-18 months, how would you describe the general state of the automotive sector? What pressures are being exerted on the industry, and how are companies faring?
Fred Hubacker: In general, the automotive sector remains relatively strong in the US, because overall volumes have remained near the 17 million light vehicle sales level for an extended period. Many large supplier balance sheets are reasonably strong but there are numerous uncertainties, including trade policies, commodity prices, interest rates, the capital expenditure (capex) required for new technologies, and the sales success of many new vehicles launched in the past 12 months.
Question: In your opinion, have any developments in recent years laid the groundwork for troubles ahead?
Fred Hubacker: Trade policies and tariffs have had an unsettling and costly impact on the industry, and government regulations with respect to emissions and fuel economy continue to drive costs up. Record amounts of capex are being spent to support internal combustion engine and drivetrain fuel efficiency improvements and for development of affordable hybrid and fully electric vehicles.
Question: What are some of the operational and financial restructuring strategies that automotive companies need to utilize to address current and future challenges?
Fred Hubacker: Capacity rationalisation and capacity usage are extremely critical, control of new product launch processes and costs are very important. Tight controls on capex spending are needed to ensure facilitation is aligned with demand. Aggressive procurement strategies are required to secure and keep best total system costs suppliers for raw materials, components and tooling. In addition, selling, general and administrative (SG&A) costs must be constantly monitored for elimination of waste and for substantial reductions. Creative combinations and joint venture (JV) partnerships will continue to proliferate as OEMs and major Tier 1s attempt to share the burden of investments in new technology, which may or may not result in positive returns. The sharing of risk for these investments is as important as the sharing of cost.
Question: How would you characterise the current level of financing available to automotive companies? What funding sources are supporting the sector?
Fred Hubacker: In general, financing has and continues to mostly be available from a variety of traditional banking, mezzanine lenders, venture capitalists and private equity (PE) sources. Clearly, the enthusiasm of various lenders is nowhere near what it was several years ago for several reasons, most notably the expectation that volumes near term will turn downward as the economy softens and the autocycle ends. Opportunistic lenders are still participating, however, with many on the sidelines expecting multiples and valuations to come down. Commodity suppliers in the space have gotten significantly less expensive while high tech companies, electronics, electric, autonomous and connectivity are maintaining their values and attractiveness for financing.
Question: Have any recent, notable bankruptcy cases in the sector caught your eye? What lessons can we draw from their outcome?
Fred Hubacker: While there have not been many notable US filings since the great recession, turmoil in Europe has resulted in an uptick in European proceedings. As US companies assess restructuring strategies, those with European subsidiaries and operations overseas should be focusing on pragmatic approaches to constituent alignment with their European counterparts.
Question: What do you believe are the essential elements of a viable restructuring effort to create long-term value in the automotive industry? What advice can you offer to companies that are considering this process?
Fred Hubacker: The essential elements of a restructuring include the following. First, credibility. A company’s ability to articulate and demonstrate its capability to deliver on its commitments to its constituents. Second, customer support. Products or services that are both valued by customers and can be delivered profitably. Third, product portfolio. A balanced product mix, including meeting the demands of today’s customers and the customers of the future throughout the launch and balance out cycle. Fourth, constituent alignment. Ensuring that the restructuring plan properly aligns all constituent objectives within the framework of the long-term plan. Finally, flexibility. A successful restructuring must always require compromise and the ability to quickly adapt to changing circumstances. Those considering a restructuring should begin the process as soon as possible to preserve optionality. There is an inverse correlation in the time it takes for a company to recognise and address its challenges to the paths available to effectuate a turnaround. Those looking to develop a strategy should look to subject matter experts and develop a thorough and robust roadmap to long-term viability.
Question: What is the outlook for the automotive sector? Do you expect to see an increase in restructuring and bankruptcy cases over the coming months and years?
Fred Hubacker: The outlook for the sector is definitely mixed. The strength of the economy and the availability of credit in the future months are significant uncertain factors that underline the health of the industry. We definitely foresee an increase in restructurings and financial difficulties in the upcoming months, particularly in the Tier 2 and 3 levels of the automotive sector.