There is a need to establish a new ‘normal’ for the automotive industry and the reality is the game has changed, according to the ‘Global Automotive Perspectives’ report by PricewaterhouseCoopers LLP (PwC).
The after effects of the worldwide economic and financial downturn have altered the business landscape and have challenged long-standing assumptions about successful operating structures.
New approaches to everything automotive companies do from reporting to their stakeholders and the investment community to making decisions on tax and legal structures are essential in the changed global market.
“During the past decade, the competitive landscape has changed dramatically due to the emergence of new markets and industry players, government involvement and fundamental economic changes,” says Damian Peluso, partner and national leader of the automotive practice for PwC. “The global recession challenged the core operating models of auto companies and the Canadian auto industry is now facing the direct outcomes of the downturn, particularly in Southwestern Ontario.”
According to the report, in addition to the traditional disclosures on results of operations, cash flows and financial position, users of financial statements want greater insight into management strategy for dealing with the changing industry, extended liquidity information, and transparent discussion of risks and the company’s outlook.
“Today’s investors are looking for regular and consistent information flow between companies and the investment community, which will help to develop a climate of confidence, increased transparency and credibility,” says Peluso.
There are a number of key findings of the report.
Since the beginning of the economic crisis, reporting has focused more on cash flow and many companies have released enhanced information on debt maturity and covenants, cost-optimized liquidity and capital resources, their level of equity and refinancing measures, and their level of working capital and cash requirements.
Analysts agree there are gaps between the information provided and the information that the capital markets need to understand a company’s performance. Specifically, capital markets want details on the impact of foreign exchange translation on debt on the one hand, and acquired (or divested) debt on the other hand. Numbers alone however, are not enough – the analyst community needs to understand the management’s vision, strategy and operations.
“Determining whether an automotive company is healthy is not based solely on its income statement or balance sheet. Platforms, customers, warranty issues, management teams and R&D spend should also be considered as part of the mix,” says Peluso.
Most companies have set rules to determine the prices for intercompany transactions. These rules work under stable economic conditions, but might not be adequate during a downturn. For example, typical transfer pricing arrangements may generate situations in which a large number of entities within the group are paying cash taxes while the group as a whole is loss-making.
The golden rule of transfer pricing is to set prices for transactions between related parties as independent parties would – the so-called arm’s-length principle.
The automotive industry is more than 100 years old, and layers of complexity have been introduced at each turn of its evolution. It has one of the most complicated upstream and downstream value chains for a volume produced product.
Car manufacturers and suppliers need to have different strategies for mature markets versus emerging markets. In emerging markets, companies must have a very efficient market access platform to position themselves to benefit from growth opportunities. However, without the right strategy and execution in mature markets, it is clear that companies cannot profit from emerging markets – the persistence of structural cost and complexity in mature market operations will eventually rob all but the most resilient competitors of the opportunity to compete in emerging markets.
“The key to a company benefitting from emerging market opportunities is the right strategy and cost structures,” says Peluso.