PRODUCTION SYSTEMS 2009 - Roland Berger

PRODUCTION SYSTEMS 2009
A rescue kit for turbulent times
March 2009
RB_ProductionSystems2009 (2).pptx

Executive summary
> The production systems industry is facing the biggest crisis ever – Incoming orders have
dropped 25% to 60% depending on the segment and compared to 12 months ago, but so far
the crisis has been underestimated
> The mid term business outlook is highly uncertain – different scenarios are possible, but
mid-term-scenarios suggest a significant duration of the crisis
> Key client industries (automotive, plastics, metal, etc.) are showing distress and will heavily
reduce production and spending in 2009
> Export business will be severely affected by negative growth scenarios in all major
industrialized countries
> CEOs of production system companies have to manage uncertainty in 2009, be prepared for
the "unthinkable" and capitalize on new strategic options that are arising for stable and wellperforming
companies
> ensure short term liquidity
> restructure operations
> use the crisis is a catalyst for consolidation.
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Contents
Page
A. Crisis 2009 – A shockwave for the production systems industry 4
B. Rescue kit – How to navigate through the crisis 16
© 2009 Roland Berger Strategy Consultants GmbH RB_ProductionSystems2009 (2).pptx 3

A.
Crisis 2009 – A shockwave for the production systems industry
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The global economy under stress – Current crisis has a significant
impact on 2009 growth and expected market development
"Economic recovery not expected
before late 2009 – Situation remains
uncertain"; IMF projections for GDP
growth rates: Germany: -0.8%, Euro
area: -0.5%, US: -0.7%, world: 2.2%
"Suppliers in automotive industry: The
worse is yet to come. – biggest crisis
ever." (Handelsblatt, Mar. 3, 2009)
"US rescue packages raised from
initial 0.7 to 2.0 USD trillion. 1 USD
trillion for capturing bad credits, the rest
for new credit for companies and
consumers" (FTD Feb. 11, 2009)
"Order income collabsed by 42% on
machinery regarding one year period"
(FTD Mar. 5, 2009)
"EZB decreases prime rate to 1.5%
- a historical trough"
(Handelsblatt , Mar. 5, 2009)
"Financial crisis jars even DAX
companies – insolvency of DAX
companies might be possible since
the state has to rescue banks.
(FAZ, Jan. 30. 2009)
"German companies plan massive
stuff cuts." (FTD, Feb. 20, 2009)
"German metal working industry
expect reduction of production at
least by 15%." (Handelsblatt Feb. 27,
2009)
Source: Press
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The financial crisis and global economic downturn have already
severely affected business and consumer expectations
OECD Business Confidence Indicator 2008
> Dramatic drop in business
confidence, reflecting
100
expected impact of
financial crisis
90
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
1) Includes 29 countries; excl. Brazil, India, China, Russia
Jan
JAN/JAN
Total
1)
USA
Germany
Euro area
-9%
-7%
-13%
-14%
> Consumer confidence in
some countries at the
lowest levels in decades
> Further decline in
business investments and
consumption expected for
2009
Source: OECD; Roland Berger analysis
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The crisis has long been underestimated – The drastic downturn has
come as a surprise for the production systems industry
Assessment of situation – April 2008 and today
Assessment acc. RB study 1) April 2008
Assessment today
> Only 9% of respondents were expecting severe
> Order income of German production systems
effects of the financial crisis on their own company industry were down 40% - capacity utilization
> 90% of respondents were of the opinion that the crisis
dropped to an average of 78% in February, compared
will be a primarily and limited problem of the finance to 89% in October last year. FAZ, March 2009
industry
> Orders of textile machinery were dropping by 52%
> Only 45% of the respondents were expecting negative from August to October. Orders of printing and paper
effects on the industry of the production systems
machinery were dropping some 35% within the same
period. " VDMA, December 2008
> Most respondents were expecting a regional focus
resp. concentration of the crisis in the USA
> The severe drop in order income within the German
industry shows direct effects: Big market players as
Thyssen-Krupp and BASF have communicated
drastic restructuring programs. Handelsblatt,
December 2008
1) Survey among 800 Managers about expected effects of financial crisis
Source: Roland Berger Studie "Effects of the subprime crisis on companies' restructuring needs"; Presse
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In reality the crisis is likely to continue for several quarters – three
critical indicators for production system industry
Indicators for crisis impact
High portion of production is exported –
big percentage of EXPORTS into
countries significantly effected by
economic crisis
1 200
Worldwide
ORDER INCOME of production systems [Index]
Germany
Non-Germany
2
All relevant CUSTOMER SEGMENTS
of production systems show significant
drop in production and utilization
150
VALUE CHAIN DYNAMICS within
3 most industries still expose production
systems manufacturers in an unfavorable
100
2000
"sandwich position"
0
2002 2003 2004 2005 2006 2007 12/2008
Source: Statistisches Bundesamt; Roland Berger
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1
Nearly all major export markets of the German production systems
industry show declining market developments
Expected economic developments in major export markets 1)
SHARE OF DEMAND [%]
Germany
Others
19%
39%
Asia
14%
EU
28%
Exports 61%
MAJOR EXPORT MARKETS
State Share of total Total production Total production
exports [%]
output 07-08 [%]
output 08-09 09 [%]
China 12.2%
+9,0%
+6,7%
USA 8.2%
+1,1%
-1,6%
Italy 5.8%
-0,6%
-2,1%
Russia 5.5%
+6,2%
-0.7%
Austria 5.3% +1,3% -1,8%
1) Production of tooling machinery as example
Source: VDMA; IMF; Roland Berger
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2
All major customer industries are showing distress and are
expected to reduce production in 2009
Development of main customer segments
SEGMENTATION 1) [%]
Others
Steel
and
metals
Plastics
10%
19%
18%
Automotive
32%
21%
Segment
Automotive
Automotive
suppliers
Recent development
> Sales of new cars dropping further in all relevant
markets
> Effects of stimulus packages not quantifiable yet
> Demand expected to drop even further than in
automotive
> Comprehensive restructuring programs started
Exp. production
output 09 vs. 08
-20% to -25%
-20% to -25%
Automotive
suppliers
Plastics > Demand highly affected by declining infrastructure and -10% to -15%
automotive industry
> Comprehensive restructuring programs in preparation
Steel and
metals
> Drastic decline in world crude steel output in December
> High grade steel output declining due to limited demand
from automotive industry
-5% to -20%
1) Production of tooling machinery
Source: VDMA; Annual Reports; Roland Berger
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3
Production systems industries are in an unfavorable "sandwich"
position – Only slight relief from raw material suppliers
Value chain dynamics – Automotive industry as example
Consumer
OEM
Automotive
supplier
PRODUCTION
SYSTEMS
MANUFACTURER
> Saturated markets in Western Europe, USA and Japan
> Declining brand loyalty
> High over-capacities
> European and American OEMs with out-of-date of models
> Ongoing price pressure towards suppliers
> Service and upgrades replace new investments
> Capacity expansions put on hold
> Flexible production systems reduce machinery demand
> Collapse of order income
Cancellation of ongoing orders
> Increasing price pressure
> Cancellation of ongoing orders "SANDWICH" POSITION
> Suppliers still enjoy negotiation power because of size
Suppliers > Critical suppliers with increased risks of bankruptcy/illiquidity
> Declining raw materials and energy prices generate only little relief
Source: Rothschild Automotive study; Roland Berger
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Despite differing business dynamics, all relevant segments of
production systems are affected
Crisis per segment
SEGMENT CUSTOMER INDUSTRIES CRISIS IMPACT
Tooling machinery > Automotive industry
> Automotive supplier
industry
> Order books still ok– esp. driven by recent replacements to
smaller engines at OEMs
> Order incomes expected to remain low until effects of stimulus
packages can be evaluated
ated
Plastic machinery > Plastics industry > Severe pressure on prices and volumes ongoing
> Duration of crisis heavily dependent on Chinese stimulus
package
Heavy machinery > Steel industry
> Infrastructure industry
> Planned investment projects expected to be cancelled
> Order pipelines expected to dry out shortly
Printing and paper
> Printing industry > Segment usually the first to be hit by downturn
machinery
> Several market players already in severe crisis
Textile machinery > Fashion and clothes
industry
> Product with very high investments; therefore significant impact
from crisis
Components > All > Expected to be affected within next months by "third wave"
Source: Roland Berger
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Extent and duration of the crisis still remain highly uncertain and
unpredictable – companies need to be prepared for the worst
Possible scenarios for production systems in Germany
Volume Europe
Growth
DEVELOPMENT WILL
[EUR bn]
2008-2012 DEPEND ON
400
> Credit and capital policy from
Pre-crisis +11%
banks
350
> Stimulus from investment
programs triggered by politics
Rapid recovery +2%
> Wave of optimism i from United
Recession -1%
States
300
Depression -10% > Effect of governmental aids in
China
250
2005
2008
2012
Source: IMS Research, VDMA, Roland Berger
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Furthermore companies need to cope with changing fundamentals
of business
Business
fundamentals 2008
> Stable revenues with significant growth
> Sustaining and continuous order
pipeline over the last years
> Long lasting relationships with
customers with well shaped rules of the
games and communication
> Reliable cash flows and payments from
the clients
> Stable and well established supplier
networks
Business
fundamentals 2009
> Postponement/cancellation of orders
and postponement of machinery
acceptance
> Unstable forecast of developments of
order incomes for the next months
Business
fundamentals 2010
> Communication with customers is
getting more and more difficult ?
> Payments are held back, renegotiation
of payment terms commitments are
increasing
> Risks from suppliers increasing –
financial burdens at suppliers are
becoming evident
> Secured financing with local banks > Raising capital and securing credit
lines is getting more and more difficult
?
?
?
?
Source: Roland Berger
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In sum: Those who proactively manage uncertainty and switch to
"rescue mode" will overcome the crisis
Current situation and need for action
CURRENT SITUATION
> The effects of the financial crisis have now
reached the industry of production systems
> The crisis has come as a surprise for
many manufacturers of productions systems
> Magnitude and duration of the crisis
i
cannot be predicted yet but fundamentals
of the business are changing
NEED FOR ACTION
> Achieve awareness for the current crisis
within the management
> Think in scenarios and be prepared for the
unexpected
> Define an action plan to remain fit
> Use the situation as an opportunity
wherever possible
Major challenges ahead
"Rescue mode" management
required
Source: Roland Berger
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B.
Rescue kit – How to navigate through the crisis
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Rescue mode 2009 – Three main priorities for CEOs
1
> 2 > 3
We
ENSURE
SHORT-TERMTERM
LIQUIDITY
RESTRUCTURE
OPERATIONS
BENEFIT FROM
CONSOLIDATION
> Perform diligent liquidity analysis
Work on all levers to improve cash position: i Working capital,
investments, financial restructuring
> If potential constraints arise, involve banks and credit insurance
companies very early in the process
> Revisit and challenge revenue planning (by product line) from 2009-
2011 – calculate base case as well as a worst case
Elaborate development scenarios comprehensively. Think the
unthinkable
> Define counter measures for all scenarios and across all cost
categories. Adjustment of structural ral cost is a must!
> Conduct intense discussions with customers and banks (message:
"We are a stable and reliable partner")
> Proactively screen for potential acquisition targets
Source: Roland Berger/Rothschild
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1 LIQUIDITY
Short-term liquidity has to be ensured via three main levers: Working
capital reduction, CAPEX reduction and financial restructuring
Example of levers to ensure liquidity
WORKING CAPITAL REDUCTION CAPEX REDUCTION FINANCIAL RESTRUCTURING
1 Budget control via centralized
cash desk
2 Inventory management
3 Renegotiation of payment
terms (suppliers, clients)
4 Receivables management
(e.g. factoring)
5 Overall stop of capital
spending
6 Disposal of non-core assets,
tools and operating
ressources
7 Sale and lease back of own
assets
8 Freeze of dividends
9 Equity cure
10 New money restructuring
11 Debt buyback
12 Covenant reset
13 Debt to equity swap
14 Debt to hybrid swap
Source: Roland Berger/Rothschild
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1 LIQUIDITY
Financial restructuring with large potential impact, but only mid-term
Available opportunities for short term liquidity management
TIMING
Shortterm
Longterm
Factoring
Stop of
Capital
expenditure
Debt
buyback
Cash desk
Inventory
mgmt.
Sale-lease
back
Covenant
reset
New money
restructuring
Payment
terms
Debt to
hybrid
swap
M&A
options
Debt to
equity
swap
Equity
cure
Freeze of
dividends
Disposal of
non-core
assets
> Most financial
restructuring measures
have pre-defined
timelines and are quite
predicable in their
financial impact (i.e.
covenant reset, etc.)
> Timing and financial
impact of other measures
(i.e. M&A, sale-lease
back) is firm specific and
varies significantly
Low
High
FINANCIAL IMPACT
Source: Roland Berger/Rothschild
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1 LIQUIDITY
Best-in-class benchmarks should be the target for liquidity
improvements
Selected benchmarks for liquidity management
Lever
KPI
BEST-IN-CLASS BENCHMARKS
1 Inventory
management
Inventory
range
Inventory
value
2 Payment terms Receivables
Payables
Ø Inventory [EUR] * 365
Material expenses [EUR]
Ø Inventory [EUR]
Revenues [EUR]
Receivables [EUR] * 365
Revenues [EUR]
Payables [EUR] * 365
Material expenses [EUR
Total working Working capi- Ø Working capital [EUR]
capital
tal intensity Revenues [EUR]
~45 days
~20%
~55 days
~35 days

2 OPERATIONAL RESTRUCTURING
Operational restructuring efforts have to focus on several levers
along revenues, variable costs, and structural costs
Example of levers to restructure operations
SALES AND REVENUES VARIABLE COSTS STRUCTURAL COSTS
1 Pricing optimization
(e.g. products/services
invoiced, selected price
increases, etc.)
2 Portfolio adjustments
3 Purchasing optimization
4 Insourcing
5 Direct labour adjustment
(loan workers, extra hours)
6 Personnel cost agreements
7 Accelerated purchasing cost
reduction
8 Shop floor productivity
improvement
9 R&D enhancements
10 Improvement of quality
department, maintenance,..
11 Production footprint
optimization
12 Overhead reduction and
savings in other operating
expenses
Source: Roland Berger/Rothschild
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2 OPERATIONAL RESTRUCTURING
Best-in-class performance is the benchmark for operational
restructuring targets
Selected benchmarks for operational restructuring
Lever
KPI
BEST-IN-CLASS BENCHMARKS
3 Personnel cost
agreements
Personnel
cost intensity
Personnel cost
Value add
~35%
4 Purchasing cost
reduction
6 Overhead cost
reduction
YOY material
cost reduction
SG&A ratio
SbA ratio
Material cost (t)
~5%
Material cost (t-1)
SG&A cost 1) 15-20%
Revenues
SbA cost 2)
Revenues
Indirect labor
Indirect FTEs at plant level
l
ratio
Total FTEs at plant levels
~ 5%
~25%
7 R&D cost
reduction
R&D ratio
Net R&D expenses
Revenues
3-5%
1) Includes all selling and administrative expenses
2) Includes all operating expenses other than production material, personnel and depreciation
Source: Roland Berger/Rothschild
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3 PREPARING THE FUTURE
The current crisis also offers new strategic options for stable and
trusted suppliers
Main levers to preparing the future
SHORT-TERM
GAIN MARKET SHARE
LONG-TERM
CONSOLIDATE VIA ACQUISITIONS
> Convince customers that you
are more stable than your
competitors
> Play an active role in the ongoing consolidation process
> Identify potential acquisition targets (which will be available
for attractive prices in 2009)
> Take over orders/projects from
struggling competitors > Revise product, technology and customer strategies to
ensure sustainability and technological leadership
Source: Roland Berger/Rothschild
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3 PREPARING THE FUTURE
Potential targets can be screened by specific characteristics –
several investment strategies are possible
Characteristics
of potential candidates
> Fragmented player landscape
( 5 players represent ~50% of total market)
> Process technology driven businesses
(causing lack of differentiation via product
innovation)
> Significant overcapacities already
before the crisis
> Low-margin segments
(Ø 2-3% EBIT)
Investment strategies
> Stand-alone – Acquisition of target
and improvement by applying own
best practice
> Active consolidation – Increase
market share and use bottom line
and synergies
> Target picking – Acquisition of
"hidden champions" in terms of
technology, application know how or
market entry
Source: Roland Berger/Rothschild
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