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Financial Assessment of the Global Automotive OEM Industry

  • March 2013
  • -
  • Frost & Sullivan
  • -
  • 88 pages

Financial and Risk Management of Public Companies in Automotive OEM Industry

This financial assessment study analyses the financial ratios of public companies across the globe in the Passenger Cars, Commercial Vehicles and 2&3 Wheeler segments. To assess the financial performance, ratios are divided into four categories: profitability, liquidity, activity, and solvency. Weights are assigned to different ratios based on the industry, and an overall rank is determined. Top performers in each sector are highlighted as well. The study also presents a portfolio analysis, wherein key indicators such as Sharpe's ratio and portfolio risk of top companies in each sector have been computed.

Executive Summary

• In the current economic scenario, maintaining healthy financials plays a key role in determining a company’s future prospects.
• This study analyzes the financial health of public companies in the global automotive original equipment manufacturer (OEM) industry, which is divided into commercial vehicles, passenger car manufacturers and two- and three-wheeler manufacturers segments.
• Companies are ranked based on four broad categories of ratios: Profitability, activity (reflecting financial management), liquidity, and solvency (reflecting risk management).
• Top companies are plotted based on their risk management rank and financial management rank.
• Top performers are identified and their key financials are presented.
• The study also discusses key challenges and issues faced by industry participants.

Research Objective

• To analyze the financials of public companies in the global automotive OEM industry (including passenger cars, commercial vehicles, and two- and three-wheelers).
• To rank companies based on their financial and risk management and compare their position with respect to the industry.
• To identify key trends/events that might affect the performance of industry participants over the next 12 months.

Geographic Scope


Broad Industry Classifications

• Commercial vehicles
• Passenger cars
• Two- and three-wheelers

Ratios Analyzed

• Activity (turnover)
• Liquidity
• Profitability
• Solvency

Study Period

FY 2010-2011

Companies Analyzed

180 publicly listed companies

Who Will Benefit?

• Automotive companies
• Fund managers
• Hedge funds
• Insurance funds
• Other members of investing community
• Private equity
• Retail investors
• Sovereign wealth funds
• Venture capital investors


• Frost & Sullivan’s in-house research expertise
• Established business and financial databases such as Capital IQ
• Company annual reports
• Published news
• Press releases

Key Risk Factors Affecting Industry—Business Risks

The ongoing debt crisis in the Eurozone is affecting all major global economies.
Companies are increasingly cautious and risk averse.
This, coupled with high inflation in developing economies/BRICs, is forcing the central banks to increase borrowing costs.
BRICs contribute considerably towards the revenue of the automotive original equipment manufacturers (OEMs).
Around X%-X% of financing for buying vehicles is done through borrowing from financial institutions.
So a X %-X% increase in financing costs can significantly affect the consumers’ choice when buying a vehicle.

Signs of Slowing of Emerging Economies Eurozone’s impact on emerging countries’ growth
After % growth in April to June 2011, India’s GDP decreased to % in January-March 2012. With China’s growth also decreasing, companies are finding it difficult to manage operations in these emerging economies. While inflation versus growth is a key factor in the slowdown in these economies, a part of this slowing can be attributed to the Eurozone crisis. The European Union is one of the biggest foreign markets for emerging countries: around 19% of China’s exports and % of South Africa’s exports go to the European Union. Expansion into emerging economies is now a greater challenge for established western companies. Also, EU interest rates are at low levels (around X%) to encourage capital expenditures and investments. If any major economy in the EU (e.g., Italy, Portugal, Greece, or Spain) defaults, then foreign institutional investors are likely to withdraw.

Government Regulations
Government regulations for exhaust emissions, noise, safety, and pollution for plants are extremely high within the industry. Companies need an in-house components division. These companies also need to be pro-active in anticipating future regulations and to have a product development strategy in place to help them adapt faster to new regulations.

Cyclical Nature of the Industry
The automotive industry is extremely cyclical, undergoing significant changes in demand with the economic environment. The financial results of companies depend on the global economy. The companies’ ability to adapt to changes in the economic environment with respect to plants and production is a key factor for success.

Cut-throat Competition
The industry in facing stiff competition due to globalization. The global top 10 OEMs haveX% of the global market share. Asian OEMs taking shares away from American OEMs and the rest of the world. They are increasingly involved in cross-border M&A deals. The American OEMs are coming out of the subprime crisis of 2008 backed by government bailouts. The European OEMs’ business may be affected by the Eurozone crisis.

High Customs Barriers
With rapid global expansion, companies depend mainly on imports of raw materials and finished goods. High customs barriers and other minimum local content requirements for domestic production limit the OEMs’ production.

Fluctuation in Prices
The prices of vehicles are quite volatile due to various factors such as variations in demand, shortage of components, changes in import regulations, excess inventory and increased competition. Lack of demand can result in a over capacity situation which would further cause price variations. Also, raw material prices are very volatile and the stiff competition within the industry does not does allow OEM’s to completely pass on the price rise to consumers. This would result in consumers choosing competitor’s products and eventually market share would be lost.

Natural Disaster Management
The twin disasters in Japan on March 11, 2011 have alerted the industry to adopt alternative business continuity plans. If a company’s production is disrupted, then its competitors gain market share in the short term. The recent incident at the Maruti Suzuki plant at Manesar, Gurgaon (India), involved violence between workers and management that resulted in a plant lock-out. Maruti’s production for 2012 as well as its market share fell in India.

Relationship with Suppliers
Prices of most raw materials are fixed internationally and are dynamic and hence more uncertain. Over-reliance on a single supplier is risky, as some components may take time to develop.

Key Risk Factors Affecting Industry—Financial Risks

Interest Rate Risks
Companies take loans from different countries and this exposes them to various interest rates set by central banks. Any increase in interest rates increases their interest burden, but this can be managed by the companies’ finance department.

Currency-related Risks
Changes in currency exchange rates have a direct impact on cash flow and operating income, especially for companies with revenue mainly from exports. Especially, when the company is operating many countries, the earnings are vulnerable to that much exchange rate risks.

Market Risks
Automotive companies have a huge portfolio of assets and take many positions in the commodities derivatives market. These companies deal with many raw materials and in order to hedge their position, they enter into the commodities derivatives market to minimize their probability of losses.

Credit Risks
Changes in currency exchange rates have a direct impact on cash flow and operating income, especially for companies whose main revenue is from exports.

Liquidity Risks
The automotive industry is sensitive to liquidity. Approximately X% of the current assets of a company in this industry are raw materials. On-time procurement is a challenge, especially for companies that use just-in-time inventory.

Table Of Contents

Financial Assessment of the Global Automotive OEM Industry
Table of Contents

1. Executive Summary
2. Definitions of Key Terms
3. Research Objective and Scope
4. Research Methodology
5. Key Issues/Challenges Faced by Industry Participants
6. Passenger Car Manufacturers
7. Commercial Vehicle Manufacturers
8. Two- and Three-wheeler Manufacturers
9. Markowitz Portfolio Allocation—Determination of Industry Sharpe Ratios
10. The Frost and Sullivan Story

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