1. September 2010
Understanding the
health of your supplier: Is your company fuelled
with working capital?
At a glance
With demand hard-hit by the Suppliers looking to increase Suppliers, OEMs, and investors
recent recession, many suppliers production in response to should consider benchmarking
restructured their operations and improving market conditions may analysis of working capital
adjusted trade working capital to have capacity challenges and requirements and developing
reduced demand levels. pressure on liquidity. strategies to better understand
future liquidity prospects.
pwc

2. Understanding the health of your supplier network: Is your
company fuelled with working capital?
Introduction: cash patterns. These variations
can have major impact on a risk
With demand hard-hit by the assessment since the evaluation
recent recession, many suppliers of currently available liquidity and
restructured their operations and future cash requirements may
adjusted trade working capital differ significantly depending
to reduced demand levels. As a on the business model of the
result, suppliers now looking to analysed supplier.
increase production in response to
improving market conditions may In this article, we look at the impact
have capacity challenges and will of the recent market developments
often need to finance in advance on working capital requirements
significant shares of their purchases, and highlight some of the different
putting pressure on liquidity. Thus, trends observed across segments.
OEMs and suppliers need to We also describe the advantages of
understand and respond to the using benchmarking analysis when
resulting risks for their supply chains considering liquidity patterns and
or investments. working capital requirements. Thus,
Those suppliers that survive the initial phase of an improved market with a solid
liquidity cushion could have the financial flexibility to benefit from the recovery
afterwards and the opportunity to gain a considerable competitive advantage.
While traditionally risk management identifying and including companies
has focused attention primarily on of the relevant segment within
major suppliers, small and mid- the benchmarking base is critical
sized suppliers can also represent to understanding and assessing
a key element in the supply chain. the overall risk levels of a specific
These small and mid-sized suppliers company. Finally, we provide some
may have more limited financing strategies for suppliers, OEMs,
resources and other levels of and investors looking to better
working capital provision than understand the future liquidity
larger players, and correspondingly prospects of their companies and
higher risk profiles. Our working competitors, supplier base, or
capital analysis shows that different potential investment targets.
segments of suppliers have different
2 PricewaterhouseCoopers

3. The economic crisis: Full speed to hard brake
The global recession had a massive The US market was the first to
impact on the automotive industry. be hit by the economic crisis
In Germany alone, more than in 2007, although the downturn
100 suppliers filed for insolvency. quickly spread to European and
Across the Atlantic, two of the Asian markets during the course
so-called Detroit 3 OEMs, General of 2008. Consequently, European
Motors and Chrysler, went through suppliers with a major share of their
bankruptcy that impacted many of business coming from the US
their suppliers. market generally experienced a
greater decline in EBIT in 2008 than
The impact of the crisis on the did those with a strong focus on
P&L was dramatic. Operational the European Market. Our analysis
profitability of European suppliers shows that small and medium sized
fell by more than 70% between companies experienced the smallest
2007 and 2009, from 5.3% to 1.4%, impact on margins, possibly as
representing the steepest decline they tend to have a smaller global
in the past five years (Figure 1). footprint.
Revenue growth came to a virtual
halt in 2008, with an increase of just
1.5%, and collapsed in 2009, as Figure 1:
revenues declined 21.9%. EBIT margin and revenue growth rate
Median, in %
While the downturn had a negative
impact on all segments of the
15%
industry, some suppliers were
less able to weather the crisis 8.5%
10%
7.5%
than were their industry peers. 5.8% 3.7%
Service providers in particular, 5% 1.4%
4.8% 4.4% 5.3%
such as engineering companies,
0%
experienced a decline in profitability
1.5%
of almost 6% from 3.7% to -1.9% -5%
in 2009 (Figure 2). When the
crisis began, OEMs and tier-1 -10%
suppliers limited their outsourcing
of development projects and -15%
contracting third parties. As a result,
-20%
order books of service providers -21.9%
dried up after the completion of -25%
ongoing projects in 2009. 2005 2006 2007 2008 2009*
EBIT margin
Revenue growth rate
Source: PwC SupplierFacts
*2009 based on set of 61 selected suppliers
PricewaterhouseCoopers 3

4. Sidebar heading 1 out of fuel?
Scarce liquidity: Running
In order to preserve liquidity, While the need to free up cash may
many companies looked to have been paramount for some,
reduce investments and began cutting R&D can be a risky strategy.
reassessing projects in research and Demand trends are shifting and
development (R&D). This strategy technology is changing rapidly,
was only able to offer limited so suppliers that cut back too
potential savings, as projects in significantly on programs which
progress were usually finished to drive innovation risk losing their
minimise sunk costs. As a means competitiveness. Further, new
to increase liquidity, this strategy regulations are creating increased
is generally more effective over the technical demands on the industry.
mid rather the short-term. Given the Suppliers and car manufacturers
precipitous drop in demand and the may need to return to a higher
difficulties inherent in cutting on- level of investment in the medium
going projects, it is not surprising term to keep up with changing
to see an increase in the relation of demands impacted by regulation
CAPEX to revenues in 2008. In 2009, and competition.
as more programs drew to a close,
the level of investments bottomed
out, with CAPEX averaging a mere
4.1% of revenues.
Figure 2: Figure 3:
EBIT—Margin by sub segment EBIT—Margin by size
Median, in % of revenue Median, in % of revenue
8% 8%
6% 6.9%
6%
5.8%
5.7%
5.7%
5.4%
4% 5.6%
4.8%
4.5%
1.2%
0.6%
1.2%
1.8%
1.6%
0.8%
4.2%
3.8%
3.7%
4%
3.6%
4.5%
3.5%
3.4%
2% 4.0%
2.3%
2.2%
3.5% 3.4%
2% 2.8%
0%
-2.1%
1.3% 0.1%
-2% 0%
-4%
-2%
-6%
-8% -4%
Exterior Chassis/ Powertrain Interior Electrical/ Service Raw <1,000 1,000–5,000 >5,000
Underbody Electronic Provider Materials
2007 Revenue in Mio. €
2007
2008
2008
2009
2009
YoY Change 2008/09
YoY Change
Source: PwC SupplierFacts
Source: PwC SupplierFacts *2009 based on set of 60 suppliers
4 PricewaterhouseCoopers

5. Figure 4: Figure 5:
CAPEX Working capital to sales
Median, in % of revenue Median, in % of revenue
7% 18%
6% 16%
6.0%
5.5% 5.6%
5% 5.1% 14%
4% 4.1% 12%
3%
10%
2%
8%
1%
6%
0%
2004 2005 2006 2007 2008 2009*
2005 2006 2007 2008 2009*
Source: PwC SupplierFacts 500 >5,000
*2009 based on set of 60 selected suppliers 500–1,000 Median
1,000–5,000
Source: PwC SupplierFacts
*2009 based on set of 30 selected suppliers
Many companies viewed working Furthermore, the first signs of
capital as another feasible source recovery at the end of 2009 resulted
of liquidity. Facing zero or negative in a restocking. This is reflected
growth, working capital was quickly in the year end values of working
adjusted to the new levels of capital of the analysed suppliers.
demand, and unrealised reserves to
cover operational liquidity demand A characteristic of the economic
were released. crisis was the limited access to
external financing via established
As a result, net working capital sources such as banks and capital
was reduced to a level below the markets or equity investors due to
average in periods of economic the high degree of uncertainty and
growth and stability. Working capital disrupted global capital flows. Small
to sales was reduced from 13.4% suppliers in particular tend to have
in 2006 to 10.7% in 2008. This drop limited access to capital markets
is effectively a 20% decline and and often had to rely on internal
represents 2.7% of revenue. The sources of financing. Our analysis
impact cannot be overstated—the shows that the group of suppliers
liquidity achieved from working with less than m€ 500 revenue
capital reduction equals 45% of were able to reduce working capital
the capital expenditure in 2008 or between 2007 and 2008 more than
30% of the average EBITDA of the their larger competitors; however,
European supplier industry. In 2009 with a ratio of 12.7%, the working
suppliers continued to draw upon capital of this group of suppliers is
working capital as a key source still above the average. In 2009 the
of liquidity, however, due to the suppliers had to restock partially,
speed of the revenue decline the but nevertheless working capital
levels of working capital could remained below pre-crisis levels.
not be adjusted simultaneously.
PricewaterhouseCoopers 5

6. First signs of an upswing
Some signs of hope for an many industry observers expect
improving economic outlook and a decreasing sales volumes as such
recovery in automotive demand can initiatives come to an end in most
be seen: in the emerging markets of countries.
India and China, demand showed
a strong jump in August 2010;
demand in India was up +34%
Markets in Eastern Europe and Russia are still behind the registration levels seen
before the crisis.
in August and in China demand Recovery would certainly be
increased +37% YoY in August. preferable to further stagnation
In May 2010 Moody’s Investors or decline; however, increasing
Service upgraded the outlook for demand also implies certain near-
the global automotive industry to term risks. Following a period of
positive, and mature markets such low or negative earnings and limited
as the US posted more stable sales access to financing, due to the
than expected in the first quarter of restrictive lending policies of banks,
2010. However other major markets suppliers and car manufacturers
remain unpredictable. In Western may have tapped every remaining
Europe, demand for passenger source of liquidity. Many suppliers
vehicles was propped up by may need to reassess their working
scrappage schemes in 2009 and capital policies to ensure that these
are able to respond to market trends.
6 PricewaterhouseCoopers

7. Acceleration needs fuel
Optimisation of working capital is with suppliers were maxed out or
generally considered essential for renegotiated. Occasionally, car
a lean and efficient management manufacturers agreed to settle
of companies. Improving capital trade liabilities earlier to support
efficiency and thus capital charges their supply base. For example, a
remain one of the main issues for German OEM decided to pay its
operational management. But what suppliers earlier at the end of 2009,
does the observed reduction of eliminating a major share of trade
working capital mean? And what receivables—and thus working
are the implications for supplier and capital—of the OEM’s suppliers.
manufacturers as well as banks
and investors? Such measures only offer a
stop-gap solution. If demand for
In the wake of the recent economic passenger cars and commercial
crisis, even small companies are vehicles normalises, levels of
actively addressing these questions working capital is expected to revert
and working capital management in the direction of the levels seen
has become a focal point of before the crisis.
While in general the recent reduction in working capital levels is positive,
companies may want to ensure that they watch their liquidity closely and to remain
financially flexible to cover increased liquidity demands when growth returns.
interest for nearly every enterprise. This could have a double impact on
This renewed attention has led to the liquidity of suppliers. Suppliers
the uncovering of hidden reserves may experience an immediate
and the optimisation of processes cash outflow due to the additional
and stocks. In the long run this working capital requirements of their
could result in a leaner organisation, current level of revenues. Further,
less capital requirements and an increase in demand could result
additional value for shareholders. in the need to allocate additional
capital to working capital reserves
Indeed, the current levels of working in order to finance the additional
capital at suppliers are not likely revenue growth.
to be sustainable. In the search
for liquidity, terms of payment
PricewaterhouseCoopers 7

8. Assuming that automotive suppliers return to a
normalised level of working capital to revenue
from 11.7% at the end of 2009 to the average
of about 13.2% for the European supplier
industry, working capital could need to grow by
approximately 28.1% in 2010 compared to 2009.
Many of the key forecasting established than those of their larger
parameters remain difficult to counterparts. Thus, they may be
predict, so projections for 2010 still more sensitive to growing demand.
reflect some uncertainty. In this light,
the PwC Autofacts Group expects Despite growing revenues,
global assembly to be 68.7 million profitability may remain low. Pre-
vehicles in 2010. crisis production levels are not
expected to be realized for some
Smaller sized suppliers may time, while global assembly
experience even greater challenges. overcapacity could remain at a high
In general they have less negotiating level, particularly in Europe, putting
power and are less likely to be pressure on car manufacturers to
able to dictate conditions to other demand further price cuts from
suppliers and car manufacturers. their suppliers. While investors and
Smaller suppliers also showed banks are likely to remain reluctant
the highest net working capital to finance automotive suppliers, and
reduction in comparison to larger only medium to large sized suppliers
suppliers, and they may experience may have direct access to capital
a strong rebound effect. And while markets, the quest for liquidity will
we have seen impressive success remain on the agenda of automotive
in 2008 and 2009 regarding the suppliers. Indeed, for many it may
reduction of working capital, the gain in importance and in some
working capital management cases additional suppliers may
processes at small sized suppliers face illiquidity.
are still less robust and well
8 PricewaterhouseCoopers

9. Benchmarking as integral part of financial forecasting
Many companies are aware of be grouped and benchmarked to
the patterns of working capital reveal the liquidity pattern of the
requirements when demand specific sub segment. To assess
returns after a downturn, however, the risk of a specific supplier it is
they may not have implemented helpfull to map the relative position
sufficient tools to monitor and and performance of the company,
control the respective risks. Risks as well as its current and future
and countermeasures often vary liquidity requirements.
depending on a company’s position
within the value chain. The benchmark for such evaluation
of a supplier can be derived from a
Our analysis shows that working comparable peer group to provide
capital based liquidity patterns may realistic targets. For example,
vary significantly depending on the engineering service providers that
size of the company. But size is have a high share of revenues from
not the only determiner of liquidity products that are compensated on
requirements. Other factors that a per part base, when the specific
determine the supplier’s business part is used in production of a
model such as strategy, global supplier or OEM, generally have
footprint and product and service higher working capital requirements
portfolio are equally critical. It is than those engineering service
obvious that each supplier could providers that focus on pre-
react individually on growing production development such as
demand; however, certain suppliers prototyping. Thus, comparing the
with a similar business profile can current or future cash requirements
Figure 6:
Implementing benchmarking in a risk management system
Combine
Define and benchmarking
Gather resilient
Define peer group calculate data with
database
relevant KPIs forecasting
model
• Direct competitors • Standardised • Define KPI relevant • Historic liquidity
or companies with structure of for specific segment patterns of sub
a similar risk profile collected data • Configure threshold segment combined
• Experts judgment • Audited data values for KPIs and with market
of comparability preferred sub segments forecasts
of peers advisable • Corporate level, • Suppliers, OEMs
• Analyse historical where data is and investors/
development of collected, should banks need to set
peers to verify be comparable up process based
comparability on individual
requirements
PricewaterhouseCoopers 9

10. of an engineering service provider different products instead of direct available—individual accounts
focused on the development of competitors as part of the peer for companies with no major
production parts with the working group. subsidiaries.
capital targets of prototyping
focused service providers could To ensure a robust analysis, the Subsequently, meaningful key
result in an underestimation of future historic performance of identified performance indicators (KPI) have
liquidity needs. peer companies should also be to be defined. They may differ for
It is therefore essential to adjust the parameters and threshold values of a risk
monitoring tool to peer group specific levels to assure a high level of reliability of
the monitoring system.
The first step in implementing compared to the performance of the specific segments and should
a benchmarking analysis as the focus company. This allows a be chosen individually to measure
part of the risk management comprehensive peer group with a the relevant value drivers of the
and forecasting system is the representative business and risk business. Using the collected data,
appropriate definition of a profile to be identified. the historical values of the KPIs can
representative peer group. Direct be calculated and segment specific
Afterwards, resilient data of the peer patterns identified.
competitors would seem to be
group needs to be gathered in order
the perfect fit, since they bear a
to analyse performance. During this Finally, the identified patterns should
comparable risk implied in the
process particular attention should be combined with forecasting data
business model. However, “pure
be paid to the following factors: to assess the risk of predicted
play” suppliers of a single product or
product segment are the exception. market developments. While historic
• Data should be gathered in a results will not be a guarantee
If the targeted peer companies standardised structure to provide
offer a similar product, however, it for future trends, the identified
a comparable database; patterns qualify as a suitable early
represents only part of revenues
for some of these companies and • Audited financial statements indicator. Forecasts should focus
the risk profile will differ. The same should be used. Major differences on both the future development of
principle holds true for other factors in accounting standards should the automotive market in general
such as size or primary customers. be eliminated or considered when and the specific market of the focus
In some cases it might be more data is analysed; company. External automotive
appropriate to use companies industry production forecasts,
with similar business models but • Data should be collected on in combination with macro and
a consolidated level or—if not micro economic indicators, are a
10 PricewaterhouseCoopers

11. good foundation for a forecasting • Continuously optimise and reduce • Continuously benchmark data
system. Based on this data a working capital requirements; with respective peer group to
market model can be derived for monitor relative performance;
the relevant segment. Combining • Implement an integrated cash
the projected market developments flow forecasting methodology • Simulate liquidity risks based on
with the selected, identified cash based on market projections, forecasted market development
flow patterns (e.g., working capital including working capital and sub-segment industry
patterns) will render possible the requirements; patterns.
calculation of how KPIs of the focus
• Consider results of integrated Investors face the risk of mispricing
company are likely to be impacted
forecasting in the development a potential investment in the
by market developments.
of financing strategy and your pre-deal phase. Once they have
The process of implementation communication with external invested, they may end up losing
of an efficient and reliable risk creditors. the investment or needing to inject
management system using historical capital into a troubled investment
OEMs also face supply chain risk. due to a misinterpretation of
data as well as forecasting data
While most OEMs monitor the future capital requirements. These
needs to be tailored to the individual
bigger suppliers, small and medium concerns also apply to banks and
needs of the addressee. Installing
sized suppliers, as well as tier-2 other creditors. The following steps
a benchmarking functionality in
suppliers, can remain below the could help to reduce such risks:
your risk management system
radar. Nevertheless, a default by
may contribute significantly to the
a specialist supplier may cause • Compare historical capital
quality of the results. Suppliers,
major disruption in the supply or development with peer group
OEMs and investors should monitor
production process or even halt to assess performance of
the financial health of the supplier
production. The following steps can the company;
industry, but they face somewhat
help to reduce the risk for the OEM
different issues, and will need to • Reflect future business plan with
and increase transparency:
refine their models accordingly. historical benchmarking data to
• Get access to selected, validate plausibility;
Suppliers face the risk of limited
standardised financial data of
access to working capital financing • Simulate cash requirements
own suppliers as well as selected,
in times of growing demand. based on industry patterns
critical tier-2 suppliers (best in
Possible countermeasures include and assumptions regarding
class processes may require
the following: market development;
critical tier -2 suppliers and those
• Analyse and understand working who supply time-critical parts or
• Derive impact of cash
capital requirements through components to self-provide this
requirements on return on
industry cycles; information on a regular basis);
investment and debt service.
• Monitor working capital • Categorise suppliers to pre-
on a timely basis as one defined sub segment with
of the key KPIs for top individual industry pattern (e.g.,
management reporting; electronic supplier, engineering
service provider, etc.);
PricewaterhouseCoopers 11

12. Gentlemen, keep your engines running
While the worst of the economic understanding the numbers may
crisis may be behind us, major risks not be enough, though. Automotive
for all participants in the automotive players also should consider having
value chain lie ahead, even if access to sound forecasting that
demand recovers. For this reason, helps anticipate changes in demand.
suppliers, OEMs, investors and Combining financial benchmarking
creditors should consider further with an integrated forecasting
focus on liquidity issues. They methodology can provide a sound
could benefit from understanding analytical basis for decision making.
the industry patterns for each
relevant sub segment, including Those players that survive the crisis
capital requirements driven both and the initial phase of an upswing
by working capital and by future with a solid liquidity cushion may
CAPEX needs, which may have to have the financial flexibility to
increase to pre-crisis levels in order benefit from the recovery afterwards
to keep up with the technological and the opportunity to gain a
progress of the industry. Simply considerable competitive advantage.
12 PricewaterhouseCoopers

13. More about the SupplierFacts Benchmarking Tool
We analysed the influence of the crisis with our SupplierFacts Benchmarking
Tool to understand the implications on the financial performance of suppliers
and to identify major risks for suppliers, car manufacturers and investors, as
well as external creditors. We drew upon the annual reports of almost 200
European automotive suppliers for the period 2004-2008 to create a historical
dataset. For 2009 we analysed a set of 60 automotive suppliers with a global
footprint.
To have a deeper conversation about any of the issues in
this paper, please contact:
Authors
Jan Ebert
jan.ebert@de.pwc.com
Phone: +49 511 5357-5858
Dr. Michael Borgmann
michael.borgmann@de.pwc.com
Phone: +49 511 5357-5851

14. pwc.com/auto
Regional Automotive Practice Lead Partners
Global Automotive Leader North America Automotive Leader
Rick Hanna Dave Breen
richard.hanna@us.pwc.com david.j.breen@us.pwc.com
Phone: +1 (313) 394 3450 Phone: +1 (313) 394 6559
European Leader Asia-Pacific Leader
Felix Kuhnert Graeme Billings
felix.kuhnert@de.pwc.com graeme.billings@au.pwc.com
Phone: +49 711 25034 3309 Phone: +61 (3) 8603 3007
Global Automotive Tax Leader South America Automotive Leader
Horst Rättig Marcelo Cioffi
horst.raettig@de.pwc.com marcelo.cioffi@br.pwc.com
Phone: +49 30 2636 5301 Phone: +55 (11) 3674-2000
Automotive Marketing
Monika Schwarzer
monika.schwarzer@de.pwc.com
Phone: +49 711 25034-1262
© 2010 PricewaterhouseCoopers LLP. All rights reserved. “PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP,
a Delaware limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member
firms of the network, each of which is a separate and independent legal entity. This document is for general information purposes
only, and should not be used as a substitute for consultation with professional advisors. DT-11-0020