Characterised by severe structural overcapacity and increasingly aggressive competitors, today’s global automotive sector is in the grips of a devastating global price war. North American consumer givebacks (in the form of consumer incentives) totaled an estimated $45 billion last year, and the European price war is equally brutal. Even high growth China has been hit by new car price deflation as competition has intensified. Automotive component suppliers around the world decry the continual “price downs” from their automaker customers, while rising commodity prices are squeezing some suppliers to the point of strangulation
The reason for this dire situation? Simple: the automotive industry has too much of everything — too much capacity, too many competitors and too much redundancy and overlap. For all the talk of better returns as a result of globalisation, meaningful consolidation and rationalisation have yet to truly take hold. For example, according to AUTOFACTS, light vehicle excess capacity today stands at 20 million units — the equivalent of over 80 assembly plants — corresponding to a 76 percent utilisation rate. Even with growth expectations of 10 million units over the next eight years, it is unlikely that industry-wide capacity utilisation will improve to the 85 percent profitability threshold. And with market complexity and interdependence increasing, so are sources for volatility and risk. The future direction of this hyper-competitive industry can most optimistically be characterised as “uncertain”.
PwC has been an active participant in automotive strategy development and planning for nearly 20 years. We understand how to design and implement enterprise risk management programmes across all operational areas including strategy development and planning. In our view, risk management isn’t about making a company more risk-averse or more conservative than its competitors. Rather, good risk management is about creating an organisation that understands the risks to which it is exposed — and the risks it must accept in order to capitalise on the opportunities available to it. Because, in this industry with too much of almost everything, the one thing in short supply is margin for error.
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