Oliver Wyman analysis of the automotive industry’s structural change 2.0: Fine line for medium-sized suppliers

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The automotive industry will be facing enormous challenges over the next few years. In the wake of the expected growth, OEMs and suppliers will have to deal with the next wave of structural change. While this will open up new opportunities, it will also require huge investments. Even today, the financial scope for manoeuvre of many suppliers is limited – not least due to low profitability and increasingly demanding investors. This means that the classic medium-sized automotive suppliers are walking a fine line. If they want to accept structural change 2.0 and the associated costs, they will have to work primarily on their strategic orientation and operational excellence, thereby ensuring their profitability and creditworthiness. These are the findings of the Oliver Wyman study on the impact of the structural change involving the supplier industry.

In the next few years, globalization and technological progress will bring dynamism and growth to the automotive industry across the world. The major emerging countries are still developing rapidly, and so further accelerating the regional market shift. In China alone, annual car production volume will almost double by 2020 (from 18 to 33 million vehicles). In India it is expected to nearly triple from four to 11 million. Traditional automotive regions such as Western and Southern Europe are stagnating due, in particular, to low sales. In June 2013, for instance, the Western European car market lost more than five percent compared to June 2012.

Furthermore, OEMs, owing to their increasing focus, will in the future assign an increasing number of tasks to suppliers. Especially in research and development and in production, suppliers will gain additional value components. According to Oliver Wyman, automotive value creation in 2025 will amount to 1.25 billion euros. Of this amount, 69 percent will go to suppliers – a clear increase as against the 61 percent from 840 billion euros in 2012. Ultimately, the complexity of the product range is taking on new dimensions. More than ever, the automotive industry will be shaped in the next few years by new vehicle concepts, new models and new technologies.

High capital requirements – cheap debt financing but only with an intact business model

The imminent growth will trigger the next wave of structural change. For all players in the automotive industry, this will open up major opportunities. But the fact is that only profitable and financially strong suppliers will be able to make the necessary investments in global structures and new technologies. “It is precisely the medium-sized supplier landscape that is under huge pressure from the creation of structures for the expected growth outside their home region,” emphasizes Lars Stolz, a partner at Oliver Wyman. “Many could see their profitability severely impaired for a long time”. In fact, over the next few years there will be high investment requirements. Even the structural adjustments of recent years required enormous expenditure and had significant consequences for profitability. Total depreciation on investments in value-creation structures and expenditure on research, product development and management increased from 2008 to 2011 on an annual average from 19.1 to 20.3 percent of sales, while operating income fell internationally on average from 7.5 to 5.5 percent.

However, much higher investment and additional expenses will be needed for the forthcoming structural change and the related, but repeated, transition to a new value system. This will put profitability once again, and much more severely, under pressure. According to calculations by Oliver Wyman these structurally related costs could amount in the transitional phase to up to 23.3 percent of sales and push down operating profit to only 2.5 percent on average. For a supplier with a turnover of 300 million euros, for example, such an increase would mean an additional cost of around 10 million euros and make the profits shrink accordingly. An operating margin of 2.5 percent will only in the rarest cases be sufficient to achieve a positive result after interest and tax.

In addition, the global automotive industry does not enjoy linear growth, but is subject to considerable fluctuations. If revenues fail to meet expectations in periods of high investment, the profit could slip even faster below the zero line. Without adequate profitability cushions, however, most suppliers are unlikely to be able to handle structural change 2.0 on their own. External financing is in turn experiencing certain difficulties. Due to the tightening of risk management requirements, banks are required to scrutinize the creditworthiness of companies more closely. This will also be felt by the automotive suppliers. Successful and profitable suppliers currently benefit from low interest rates and good availability of debt. Companies with an unclear business model or an unfavorable competitive position, however, are finding access to much-needed external funding more difficult.

Localized globalization required

Especially small suppliers maintaining strong customer relationships with manufacturers headquartered in their home region have only occasionally driven the structural change in recent years and participate in the international expansion mostly through exports. This was possible because the OEMs frequently still supplied new markets from their home region. In the future, however, the clocks of globalization will be ticking differently. The automakers will establish an increasing number of development centers and numerous production locations in te major emerging economies, especially China, but also in America, something they now also expect from their suppliers.

If small suppliers want to continue to benefit from the global volume growth, they need to swim in the waters of their customers and create the corresponding structures on site. But most of them have neither the financial resources nor the profitability to make the necessary investments. “For many medium-sized suppliers, it is five to twelve,” said Tom Sieber of Oliver Wyman. “Now they are paying for having, in the past, mostly stood by and watched the decline of their profitability. If they do not act rapidly, they will be putting the existence of their company at risk because they lack the resources for future growth.”

Rethinking needed

More rigorously than ever the medium-sized suppliers now have to work on their strategic positioning – and from a long-term perspective. This includes, among other things, clear footprint and portfolio strategies, but also the strategic definition of high-value activities and their own value-creation contribution. At the same time, it is important to be well prepared not only in purchasing, production or development. The challenge is to be better than the competition in all segments of the entire value chain in order to be able to set yourself apart. This includes the optimal selection and prioritization of projects, a professional purchasing organization, strict cost management, optimizing production efficiency and quality and the outsourcing of logistics processes.

Moreover, medium-sized suppliers should be open to all financing options – whether corporate bonds or subordinated loans, or capital inflow through private equity partnerships, or other strategic investors. “The line between getting through and crashing is extremely narrow,” admits Mr. Stolz. “Anyone who does not want to slip into the red and risk a liquidity bottleneck should now adopt the right strategic orientation and, in operational terms, concentrate massively on profitability”.

ABOUT OLIVER WYMAN

Oliver Wyman is a leading global management consulting firm with 3,000 employees worldwide in more than 50 offices in 25 countries. The company combines in-depth industry knowledge with specialized expertise in strategy development, process design, risk management and organizational consultancy. Together with its clients, Oliver Wyman designs and implements sustainable growth strategies. We help companies to improve their business models, processes, IT, risk structures and organizations, accelerate processing and to leverage market opportunities. Oliver Wyman is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE:MMC – News). For more information, seewww.oliverwyman.de. Follow Oliver Wyman on Twitter @OliverWyman.

It is precisely the classic medium-sized automotive suppliers who are having to walk a fine line. If they want to overcome structural change 2.0 and curb the associated costs, they will have to work above all on their strategic orientation and operational excellence, thereby ensuring their profitability and creditworthiness.

Get Indocement Profit Rp 2.42 trillion in the first semester

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Jakarta – Cement producer PT Indocement Tbk (INTP) profit for the period amounted to Rp 2.42 trillion in the first semester of 2013. Acquisition was up from last year’s first half profit which amounted to Rp 2.16 trillion.

Based on the company’s financial reports to the Indonesia Stock Exchange, the net profit was due to higher revenue of Rp 8.91 trillion in the period January to June 2013. “Up from the previous Rp 8.19 trillion in 2012,” said Director of Indocement, Daniele Lavalle, Wednesday, July 31, 2013.

The cement sales Indocement most in Java, which amounted to Rp 7.05 trillion and sales outside Java Rp 1.81 trillion. Cement exports recorded very minimal which is only Rp 49.6 billion.

Indocement recorded an increase in cost of revenue of Rp 4.69 trillion, up from Rp 4.4 trillion. While operating expenses include selling expenses and general administrative expenses also increased to Rp 1.26 trillion from Rp 1.16 trillion in the same period the previous year. Thus, the company’s operating profit in the January – June 2013 amounted to Rp 2.99 trillion.

Some time ago Indocement has signed the commencement of construction of the project P-14 plant in Coventry, Bogor, West Java, Indonesia with PT Sinoma Engineering. Aldo added, Coventry factory was among the company’s three main projects this year. The project is still in the form of semi-finished land (brown field).

The plan, built the factory with a capacity of 4.4 million tons per year. The investment value of Rp 5.5 trillion, while the construction will be completed and began operation in 2015.

Two other major projects, namely the addition of new cement grinding plant with a capacity of 1.9 million tons per year in Coventry, will be completed in the fourth quarter of this year. With the addition, the company is targeting production capacity at the end of 2013 amounted to 20.6 million tons, up from the current 18.6 million tons.

The next project on the land yet so plant (green field), namely the construction of two new plants with a production capacity of each of 2.5 million tons per year with locations in Central Java and outside Java.

Meanwhile, other competitors such as PT Semen Indonesia (Persero) Tbk posted a first half net profit of Rp 2.58 trillion or Rp 436 per share, an increase of 22.9% from the same period in 2012. The revenue stood at Rp 11.4 trillion, an increase of 31.9 percent over the same period last year, which stood at Rp 8.6 trillion.

The increase in revenues was supported by the total sales volume increased by 18.3 percent to 12.23 million tons in the first half of 2013. Domestic turnover amounted to 12.14 million tons (up 18.0 percent) and export sales of 0.09 million tonnes (up 170 percent). While the national cement sales volumes (industry) grew 7.5 percent to 27.83 million tons compared to the previous period, which stood at 25.89 million tonnes.

Modernland Record Profit of Rp 260 billion, Jumped 250%

Property company, PT Modernland Realty Tbk (MDLN) earned a net profit of Rp 260 billion during the year 2012, surging 250% from the previous year’s profit of Rp 74 billion. Earnings per share also increased from Rp 24.26 per share to Rp 41.57.

The increase in net income was driven by the increase in total revenue in 2012 amounted to Rp 1.06 trillion from the previous year sebesaar revenue of Rp 504 billion. This was conveyed by the company in its disclosure to the Indonesia Stock Exchange (BEI), in Jakarta, Tuesday (03.19.13).

The amount of revenue sustained by net sales in 2012 amounted to Rp 1.01 trillion, which was also up from the previous year of Rp 468 billion.

Also supported the acquisition of the company’s revenue from the golf course and restaurant business Club House in 2012 amounted to Rp 37.76 billion. That was up from the previous year of Rp 36, 44 billion.

Of a business acquisition also sustain revenue of Rp 7.48 billion in 2012. Meanwhile, the cost of sales also increased from Rp 238 billion in 2011 to Rp 556 billion in 2012.

Assess Semen Indonesia Rp 3 Trillion Bonds

Jakarta – President Director of PT. Semen Indonesia Tbk Soetjipto said the company examines global bonds worth U.S. $ 300 million or Rp 2.98 trillion. The plan that bonds will be issued next year. “It’s an investment for next year,” he said when met after the event Bisnis Indonesia, Tuesday evening, July 2, 2013.
The Company requires capital expenditure of U.S. $ 500 million – U.S. $ 600 million next year. Half of it comes from the need of external funding is through the issuance of bonds. “For this year we are still strong power of cash.”
Capital expenditure was used to build two new factories in Apex, Central Java, and Indarung, West Sumatra. Some will be used to finance business expansion plans into Myanmar and Vietnam.
Factory in Vietnam built with a production capacity of 2.3 million tons. The investment value of Rp 1.5 trillion in the form of investment of 70 percent ownership stake Thang Long Cement.
The Company is considering a rate cut option Thang Long Cement factory in Vietnam that is too high. “Hopefully in the near future could have taken a decision,” he said.
The plant began operations in Myanmar next year. The investment value of U.S. $ 200 million. The plant production capacity of 6.5 million tons per year. “This new subsidiary with local companies Myanmar, our ownership share of 51 percent minimum,” said Dwi.
This year the company is targeting sales volume in 2013 amounted to 28 million tons, and the company’s 44 percent market share.
Capex this year of Rp 4 trillion. Sources of funding capital expenditure is 40 per cent and 60 per cent internal funds from bank loans.

Malut manufacturing industrial production growth, up 2.54 percent

Central Statistics Agency (BPS) recorded North Maluku, manufacturing industrial production growth and are quarterly (quarter-to-quarter/qoq) in the second quarter of 2013 increased by 2.54 percent from the first quarter of 2013.

“The growth of large manufacturing and industrial production are quarterly in the first quarter of 2013 increased by 2.16 percent from the fourth quarter of 2012. Growth of large manufacturing and industrial production are quarterly in the fourth quarter of 2012 rose by 4.63 percent from the third quarter of 2012 , “BPS chief Malut, Adhi Wiriana, in Ternate, Saturday.

According to him, the growth of production of Micro and Small Manufacturing Industry Quarterly. Growth in industrial production of micro and small manufacturing quarterly in the second quarter of 2013 rose 13.39 percent from the second quarter of 2012.

So, in the first quarter of 2013 rose 11.84 percent from the first quarter of 2012, in the fourth quarter of 2012 dropped by 3.25 percent from the fourth quarter of 2011, and in the third quarter of 2012 increased by 1.26 percent from the third quarter in 2011.

Adhi said, the types of micro and small manufacturing industries that experienced an increase in second quarter production growth in manufacturing large and medium industries (y-on-y) in the second quarter of 2013 increased by 13.13 percent from the second quarter of 2012.

Manufacturing industrial production growth and are quarterly (q-to-q) in the second quarter of 2013 increased by 2.54 percent from the first quarter of 2013. Manufacturing industrial production growth and are quarterly (q-to-q) in the first quarter of 2013 increased by 2.16 percent from the fourth quarter of 2012.

“For the growth of large manufacturing and industrial production are quarterly (q-to-q) in the fourth quarter of 2012 rose by 4.63 percent from the third quarter of 2012,” he said.

That is, the growth of production of large and medium manufacturing industry in 2013 rose 7.60 percent from the first quarter of 2013, in the first quarter of 2013 rose 6.05 percent from the fourth quarter of 2012.

Similarly, in the fourth quarter of 2012 dropped by 1.86 percent from the third quarter of 2012 and the third quarter of 2012 increased by 1.26 percent from the second quarter of 2012.

Bicycle merchant turnover increased

Coming to commemorate the anniversary of independence of the Republic of Indonesia (Independence Day), turnover bike trader in the Market Development Pangkalpinang increased 30 percent, due to increased demand for bicycles.

It is the custom every year to commemorate the anniversary of Independence of the Republic of Indonesia held a parade cycling ornamental, “said A Kim, traders in the Market Development Pangkalpinang bike on Sunday.

He explained that the demand for bicycles of various sizes up to 5 to 8 units a day, when compared to previously only 2 to 3 units a day, even during the day there is nothing to sell at all.

“Currently bike trader turnover reached Rp1 million to R1, 5 million per day, compared to 300 thousand previously only Rp500 thousand per day,” he said.

He said the current demand is dominated by bikes bikes for children and young women, while for men a little less, “he said.

Meanwhile, the price varies depending on the size of the bike and the brand price offered is around Rp500 thousand per unit up to Rp1 million per unit.

According to him, the increasing demand for bicycles is only temporary because after Independence Day typically requests again deserted.

“People prefer to use motorcycles instead of using a bicycle dikayuh, with cycling when our bodies to be healthy and free of pollution,” he said.

Hardi, other bicycle traders said, ahead of the Independence Day bike trader harvest due to increased sales of bicycles so that merchant turnover increased.

“Sales of bicycles on Independence Day is almost every year there is an increase, but after that, sales declined again, because there is still low awareness for cycling,” he said.

“I just hope the bike demands a typical day could continue to rise, so the bike stable income traders,” he hoped.

Mayora Record Profit Growth 34.28%

PT Mayora Indah Tbk (MYOR) recorded a profit attributable to owners of the parent rose 34.28 percent to Rp451, 51 billion in the first half of 2013 from the same period the previous year Rp336, 23 billion.

As quoted from disclosure, on Wednesday (31/07/2013), the increase in profit was also followed by an increase in the first half of 2013 the company’s revenues were up 6.5 percent to Rp 5, 79 trillion, compared with the previous Rp 5, 44 trillion.

Cost of sales of the company’s first half of 2013 decreased slightly to Rp 4, 30, earlier than Rp 4 trillion, 32 trillion. Gross profit in the first half of 2013 increased to Rp1, 49 trillion compared to previous Rp1, 12 trillion. Burden of the company’s sales rose to Rp679, 45 billion from Rp512, 44 billion.

The Company earned interest first half of 2013 rose to Rp13, 80 billion as compared to the previous Rp 6, 96 billion. Rental income rose to R1, 36 billion in the first half of 2013 from the same period a year earlier R1, 12 billion.

Meanwhile, the company’s profit before tax rose to Rp587, 50 billion in the first half of 2013 from the same period the previous year Rp435, 59 billion.

Total liabilities of the company on June 30, 2013 decreased to Rp 5, 14 trillion compared to period ended 31 December 2012 amounting to Rp 5, 23 trillion. The company’s equity rose to Rp3, 52 trillion in the first half of 2013 from December 31, 2012 amounting to Rp3, 06 trillion.

BlackBerry Sales Sluggish, Profit Drops 39% Erajaya

Erajaya Swasembada Tbk PT (ERAA) recorded a 38.9% decline in net income to Rp 129.8 billion in the first half of 2013 compared to the same period last year of Rp 212.4 billion. Profit fell because of sluggish sales of the BlackBerry which started early this year.

BlackBerry sales that have accounted for the largest portion of revenue to the company must be reduced. Consequently, total turnover alias Erajaya participate eroded revenue.

The Company recorded net sales decreased by 6.7% to Rp 5.976 trillion in the first half of 2013 compared to net sales in the same period of the previous year of Rp 6.406 trillion.

The company’s operating profit also fell by 30% to Rp 214.6 billion compared with the same period of the previous year which reached Rp 306.7 billion.

Director of Marketing and Communications Erajaya Djatmiko Ward said the decline in sales due to the new rules of import of mobile phones causing the import process becomes longer. As a result, the supply for uninterrupted sales.

“Two weeks things could not get in, the automatic result of stock and sales hampered,” said Djatmiko exposure time performance, at the Capital Residence Sudirman, Jakarta, Wednesday (31/07/2013).

In addition, he said, the decline in sales was also due to the floods that hit Jakarta in January that led to the loss of sales for 10-14 days. Start fading prestige BlackBerry brand in the Indonesian market since the beginning of the year also led to the sales down.

“Because of this flood hampered our distribution channels,” he said.

He said the decline in sales was also followed by lower sales volume for mobile phones to 4.9 million in the first half of 2013 from 5.2 million in the same period the previous year. Mobile phones and tablets recorded the most substantial contribution accounted for 88.1% of net sales to Rp 5.267 trillion in the first semester of 2013 from Rp 5.996 trillion in the same period the previous year.

Meanwhile, the average selling price for all mobile phone brands also fell to 1,070,578 in the first half of 2013 from 1,144,218 in the same period the previous year.

Taxi Express Raup Rp 60 Billion Profit, Grow 54%

Is ground transportation services brand Express, Express Transindo Main Tbk PT (TAXI) earned a net profit of Rp 60.5 billion. The amount of net income increased 54% when compared to net income in the same period in 2012 amounting to Rp 39 billion. This achievement exceeded the company’s target of Rp 59 billion.

The rise in net profit driven by the acquisition of the company’s total revenue per June 30, 2013 which reached Rp 331.3 billion, an increase of 40% when compared to the same period of the previous year of Rp 237 billion.

“The Company’s financial performance this semester boast, revenue growth and significant earnings thanks to the success and efficiency of the Company’s expansion strategy, in addition to our success was due to maintaining the quality of service,” said Chief Financial Officer Taxi Express David Santoso in a press release, in Jakarta, Friday (2 / 8/2013).

He said the biggest contribution is still dominated by regular taxi which reached 84%. The rest of the Business Value Added Business Transportation Limousine dominated by vehicles that are in Bali, Lombok, Bandung and Jakarta.

Express regular cab fleet itself which operates to this day more than 8,800 units, which is targeted to reach 10 035 units by year-end.

“This year we expect to be able to add to our regular fleet of 2,000 units,” added David.

For this year, he said, the company aims to add 5 new pool in the area Jadetabek.

According to him, from the target, the Company has been getting 3 new locations for the pool. The Company is currently looking for a location for a second pool. Indeed most current pool still in Jadetabek. In addition to the Jadetabek, Express Group also has a pool in the other areas, namely in Bali, Lombok, Medan, Surabaya and Semarang.

Meanwhile, with regard to the new tariff set Express Group, David explained that it does not affect the Company’s financial.

This is because the Express Group implemented a partnership scheme with the driver, so that the new tariff solely to adjust the driver’s income and maintain the welfare of each individual driver’s partner.

While the driver of the Company’s partners deposit value remained elevated and did not participate. “We will continue to focus on improving service to our customers. We are confident in the consistency of the Company’s future financial performance has continued to increase, especially taxi business in Indonesia is very potential, “he explained.

PLN: Net Profit Up 15 833 Percent

Company Limited reported a net profit of PLN in the first half of 2013 amounted to 15 833 percent compared to the same period of 2012.
Head of Commercial Division PLN Benny Marbun in Jakarta on Thursday, said the first half of 2013, net income reached Rp 4, 78 trillion, a significant increase of Rp 4, 75 trillion over the same period of 2012 which only 30 billion.
“The increase in net income was mainly due to tremendous rise in foreign exchange earnings which are noncash Rp 7, 6 trillion,” he said.
In the first half of 2012, the electricity SOEs suffered losses at Rp 6, 7 trillion, while the first half 2013 profit rate RP0, 9 trillion in order to obtain foreign exchange gain of Rp 7, 6 trillion.
Though, Benny continued, on the other hand an increase in interest expense and finance Rp2, 3 billion and increase the tax burden Rp1, 6 trillion.
According to him, the increase in foreign exchange gain of Rp 7, 6 trillion, mainly due to the appreciation of the rupiah against the yen by 10.4 percent even though at the same time the rupiah depreciated 2.7 percent against the U.S. dollar.
In the first half of 2012, the rupiah depreciated against both the yen and the U.S. dollar, respectively 2.4 percent and 4.5 percent.
“PLN pretty much liability in that decline yen yen positive impact on net income,” he said.
Benny also said that the first half of 2013 operating revenues rose 4.8 percent to Rp116, 7 billion when compared to the first half of 2012 amounted to Rp111, 4 trillion.
The increase in revenue, primarily from an increase in sales volume due to the addition of electric power customers and increase rates on a quarterly basis starting in January 2013 account.
Meanwhile, the operating expenses recorded Rp98, 3 trillion, up 3.6 percent compared to 2012 Rp94, 9 trillion.
“The increase in operating expenses among others, due to increased consumption of fuel and lubricants due to increased electricity sales and rising fuel prices,” he said.
Thus, he continued, first half 2013 operating income rose R1, 9 billion or 11.5 percent of Rp16, 5 trillion to Rp18, 4 trillion.
To EBITDA increased 10.1 percent to Rp30, 4 trillion from Rp27, 6 trillion.
The amount of non-current assets increased 2.6 percent to Rp484, 6 trillion on June 30, 2013 from Rp472, 1 trillion on December 31, 2012.
Current assets rose 0.9 percent to Rp69, 2 trillion on June 30, 2013 from Rp68, 6 trillion at December 31, 2012.
“The total number of the company’s assets at the end of Semester 1 in 2013 amounted to Rp553, 8 billion or increased by Rp13, 1 trillion from Rp540, 7 billion at December 31, 2012,” said Benny.