Auto Sector

Auto Sector is among one of the most vital sectors for the economy as it is the key economic growth factor. Its direct dependence on oil use affects the national security, economy, and the environment of the economy. When the global oil prices are high, an increase in operating cost is seen for the vehicles thus it trickles down to the sales and revenue growth for the organization and also shows an impact on the economic growth. In the year 2008 when the world experienced a recession, the decrease in consumer spending made a severe impact on the sales of the automobiles. Auto sector which incurs a huge cost for the R&D department had to struggle to balance the costs of doing business while maintaining competitiveness.

Read on GWI List of Top Car Companies and state of Auto Industry in India.

Costs, R&D and Innovation

Auto Sector has to incur many different costs such as product innovation/R&D, flexible manufacturing, globalization, marketing, pensions and legacy, and incentives thus decrease in sales was seen as a big hindrance in profit making. Apart from the costs incurred, numerous regulatory and legislative requirements is again a concern for the auto sector during gloomy years.

Now looking at the consumer trends we see that with an array of requirements to meet, it becomes difficult for the manufacturing companies to find a single technological solution thus resulting in investment in multiple new technologies. This investment has again become a burden for the companies.

Problems of the Auto Sector in the times of Recession

i) Tightening of regulations by government in relation to the environmental impact and others has just added to the sectors woes.

ii) The global slowdown in the economy led to the decrease in demand for automobiles and the sales of the automobiles saw a decreasing trend.

iii) A decrease in disposable income was seen which negatively impacted the sales.

iv) Due to the tightening credit policy the recovery of the already closed sale on credit became a tough task and companies witnessed a rise in bad debt.

v) Intense competition from peers, cost reduction and fluctuation in price of raw materials are some of the major problems faced in the industry.

In recent times with the rebound seen in the global economy, the crisis plague in the industry is seen to be diminishing gradually and the sings of recovery and growth are seen in the industry which again helped in changing the market sentiments to a great extent. Activities including mergers and acquisitions was seen rising in the recent times and in times to come, if the condition prevails. In no time the automotive industry will regain its footing and could turn to growth model. Policies like mergers and acquisition, Capex and of course shareholders rewards could be seen rising

Year 2009 shall be a memorable year not for any positives but as one of the most turbulent and dynamic years especially in the global auto industry. The worldwide financial crisis by then did the damage and a collapse of vehicle sales in North America was observed.

i) Soaring fuel prices in 2009, a drop in vehicle sales was experienced, leaving major automakers and suppliers at the brink of bankruptcy.

ii) This decrease in demand called for some major operational, financial and structural restructuring in the sector.

iii) Multiple change in financial polices was carried over and owing to lack of credit availability in market in 2008, the number of mergers and acquisitions (M&A) remained depressed throughout 2009.

iv) Strategic buyers were least interested to spend their limited cash reserves or take on additional debt for any buyout despite being offered mouthwatering price for the deal.

Currently we are at a point in the cyclical recovery where companies having strong profitability, liquidity position, creditability and strong operating models will likely leverage M&A which would help them to develop sustainable competitive advantage over peers. Early 2010 showed positive signs in the operating environment after the global financial crisis left the world’s economies with weak credit markets and disrupted consumer confidence leading to negative market sentiments. Owing to the crisis which plagued the industry at a global level, a cut in capital expenditure was seen owing to the three main reasons:

• Decision to reduce manufacturing capacity expansion
• Current capital expenditures are to a higher degree focused in emerging markets where construction costs and cost for machinery are generally lower as compared to high cost countries where it was mainly focused previously
• Use of less automation reduces capital expenditures for manufacturing lines in low cost countries.

Conclusion

Thus to conclude it goes on without saying that the Auto Sector experienced a decline during the year 2009 in particular, when the companies in the sector had to cut down on their capital expenditure and acquisition spending. This trend continued until 2010 when due to some support seen in the economy, auto sector gained momentum and companies started making acquisitions and expenditure while planning for future growth. Companies in the sector paid dividends and went for share repurchase to some extent during the year 2008, so as to offset the decrease in acquisition and capital spending. This move was intended towards improving the falling share price in the market and to generate positive sentiments among investors about the sector. The year 2010 brought in new hope for the sector when the companies increased largely on the share purchase and dividend payout so as to give back the maximum to the shareholders.