{"id":2247,"date":"2013-03-22T10:15:07","date_gmt":"2013-03-22T10:15:07","guid":{"rendered":"https:\/\/www.icebreakerexecutive.com\/?p=2247"},"modified":"2013-03-22T10:15:07","modified_gmt":"2013-03-22T10:15:07","slug":"nissan-uk-is-the-uks-new-north-seal-oil","status":"publish","type":"post","link":"https:\/\/winningthinking.co.uk\/?p=2247","title":{"rendered":"Nissan UK is the UK’s new North Sea Oil"},"content":{"rendered":"

European Car Manufacturing<\/span><\/strong><\/span><\/h3>\n

Almost all European car manufacturers are loss-making. Strong brands on the back of high sales to emerging markets have kept them afloat.Europe has many countries, all of which are desperate to protect their car industries. Since 2008 only two plants have been closed \u2013 an Opel factory in Belgium and a Fiat site in Italy. Europe churns out 22 million cars per year. Manufacturers need to be shifting 80 per cent of their units to make money, most are currently operating at 50 per cent.<\/span><\/p>\n

Daniel Akerson, chief executive of General Motors says there are at least ten plants too many in Europe. The company already wants to cut production by 400,000 units in Europe \u2013 the equivalent of two factories. This month, the board decides whether Vauxhall\u2019s Ellesmere Port factory will be closed. David Bailey, a professor at Coventry Business School, says that high-cost production sites in Germany might look more vulnerable on paper, but moving out would likely lead to a costly labour row. A clutch of German producers \u2013 Volkswagen, BMW and Daimler \u2013 have mounted strong resistance.<\/span><\/p>\n

Flexible labour laws and the lack of a serious national industrial policy make UK plants more likely candidates for the chop.<\/span><\/p>\n

Enterprising investors might see declining revenues and industry-wide restructuring as an opportunity to pick up cheap assets and strip out costs. Few firms, however, have the stomach to take the battle to trade unions and regional politicians, and these businesses are operationally lean. And then there\u2019s the strength of the euro, which pushes up costs. It seems likely that production will shift to Poland, Mexico and South Korea.<\/span><\/p>\n

UK Car Manufacturing<\/span><\/strong><\/span><\/h3>\n

Having being in automotive manufacturing from 1989 – 1997, which included the last recession, I was fascinated to attend the SMMT Conference yesterday to understand about the UKs Industrial Revolution with the UK Automotive Industry leading the charge. The event was very upbeat and there were 450 other SME delegates to give a very fresh view of what the reality is like on the ground. Overall I would conclude the same issues for tier 1 and 2 suppliers remain, although efforts to offshore to reduce cost have been exhausted’ leaving some commodity suppliers nowhere to go.\u00a0 The main change however is very positive is the increased success of the UK OEMs, particularly Nissan.Nissan is the new North Sea Oil at 11% of the UKs total exports yet unlike North Sea Oil \u00a36bn of their procurement spend is non UK.<\/span><\/p>\n

The Automotive Council<\/span><\/h3>\n

The Automotive Council are creating central hubs, such as the joint propulsion centre, to leverage technology spend in one place, create \u00a0closer alliances with the OEMs and prevent the valley of death; vendors technology not getting to market. The question will be how will this work without slowing down the decision making, and or creating the need to harmonise the procurement processes and vendor development across the OEMS. Furthermore how will this technology be protected vs competitors, how do you define competitors, and how will these centres protect the IP they create? The benefit will be a view of aggregated demand from the UK OEMs to support the SME business plan to invest in the technology and support UK Plc as a whole.<\/span><\/p>\n

Dave Allen from JLR indicated there will be a strong benefit in localising operations, and developing tier 1 processes locally in the UK. The paradox is that the only difference between technology and innovation now and it becoming a mature product is the passing of time. Product introduction life cycles at Nissan are for example about 4 years with a 2 month buying decision window during that period. The SMEs ability to create viable profitable business is therefore defined by recovering profits from mature products, and recovering the development costs during that period. So the focus on technology is misgiven. Dave Allen JLR buyer responded that mature product supply has to be competitive, which implies a rather less than strategic focus on the mature lower technology products.<\/span><\/p>\n

Its a demanding industry<\/span><\/h3>\n

The difficulty for automotive companies is that the industry is relatively high capital intensive, quality standards and maintaining the systems is costly. In return margins are tight, although business long term and OEM schedules levelled so pretty steady. Down the supply chain tier 2 and 3 volumes do fluctuate quite dramatically due to Forester supply chain Effect leaving swings in working capital requirements and peaks and troughs. With short lead times defining the industry leaves these suppliers with large peaks and troughs in working capital. Depending on the fixed cost structure, the periods of loss making in between due to these peaks will not be factored into the OEM buying decision.<\/span><\/p>\n

The issues facing SMEs owners are management capability, growth, functional strategy, technical, leadership, future strategy 2-5 years, with the incessant focus on cost reduction, supply chain flexibility and building functional capabilities as these SMEs pass the \u00a325m mark. The benefits for good suppliers is repeat business, with Nissan keeping 80% of the suppliers over the last 5 years<\/span><\/p>\n

Pilots are being run to create the business plan for these centralised schemes. Long term 1 job in an OEM relates to 3-8 in the UK supply chain. That said there is little visibility of the missing capabilities below the tier 1 OEM suppliers required to grow the UK OEMs. OEMs next stage of growth is driving them to take a closer look at the vertical capabilities and integration of these capabilities into the supply chain to meet the growth targets.<\/span><\/p>\n

The Challenge of working with OEMs<\/span><\/h3>\n

In the mean time Chris Gane from Caparo indicated the reality \u2013 OEMs are very difficult to connect or engage with without a clear path to who best to speak to get the new technology off the ground, leaving projects and opportunities stalled, and a \u00a33Bn trade gap or opportunity for UK SMEs to fill.<\/span><\/p>\n

Lending has reduced 10% year on year. Access to finance was raised, and many bank and other asset based lenders were there. Automotive margins tragically are far too low to maintain asset based lending long term so it becomes a first and last place to resort, in the main postponing the enviable. There is still a void in terms of understanding and realities of bank lending; they DONT take risk Many owners faced with a matched funding as an option might walk away as they might not have enough confidence in the OEM demand to warrant them being willing to take the risk. The issue we consistently experience in turnaround scenarios always is there is not an investable plan and the business owner needs support to pull this together. This requires changes to their business that might be beyond their experience which they don\u2019t see too. Delays in getting this solution right first time, often causes business failure… insolvency or turnaround is a very unfamiliar place for many SME owners.<\/span><\/p>\n

Funding tooling is a significant hurdle often amortised over many years, and the foundation of the business plan project \/ project. Shared risk at OEM level to support SMEs with funding or committing to tooling down the supply chain was pushed back as Andy Wareing said the OEM focus is to invest in promoting the products. The challenge is clearly to get the right degree of ownership on both sides, as the SME cannot supply product to anyone else off that tool.<\/span><\/p>\n

It has been considered that The SMMT might become a contracting aggregator to support these investment plans but this was deemed potentially too onerous and kicked into the long grass.<\/span><\/p>\n

OEM product design and brands are creating the winners<\/span><\/h3>\n

Nissan plough on producing 650k cars this year in the UK and growing 10% YOY, and 5.3m globally with 10% market share and they continue to grow. They contribute a positive \u00a35bn balance of payments to the UK economy. 99% of their suppliers supply more that 1 Nissan plan globally.<\/span><\/p>\n

The difficult at grass roots level is that whilst automotive is steady it is not an exciting investment prospect. Cash cycles are long, investment cycles far longer and growth only steady vs the fast growth opportunities that fall on a VCs desks. Turnaround investors worry about the stability of the top line to recover their investments of even get the businesses back to profit.<\/span><\/p>\n

In Automotive turnaround overheads incurred to \u201cstay ahead\u201d leave them uncompetitive as they cannot recover consultancy of the development costs on an ongoing basis. As time passes the SMEs complexity increases as they are often still expected to support a large variety of tail end products and the associated tooling without a great return. That said the aftermarket business is profitable!<\/span><\/p>\n

Yet suppliers can appear to be not ambitious from an OEMs perspective \u2013 its easy to see why, given the light degree of commitment relative to the investment the OEMs are prepared to share, and the relatively steady nature of the business.<\/span><\/p>\n

The skills gap<\/span><\/h3>\n

The skills gap was raised by Mick Aiers who came out with the old China get out to the schools. This was raised at a Cranfield conference. I argue this is ridiculous automotive companies need to take ownership of making OEMS and automotive SMEs great places to work. That surely is the starting point and becomes the main recruiter.<\/span><\/p>\n

In summary a there was externalisation of the issues; lack of funding, but in the main the OEMs need to increase the level of support down the supply chain tier 1 and 2, as its clear. Furthermore when the SMES need support they need to have somewhere to turn to – to professionalise their businesses and enable them to profitably grow. The OEMS should consider its an insular industry and there are better markets to chase for many suppliers<\/span><\/p>\n

The reality of the ground<\/span><\/h3>\n

Without this focus and support from OEMs like John Wingfield a former colleague sitting next to me, who is an SME MD plastic moulder good businesses will naturally diversify out of automotive into more attractive and profitable markets. John turned around Flambeau Plastics by diversifying out of automotive leaving on 5% of Flambeaus remaining turnover in the automotive sector, and the business now makes a good profit. He did also buy a machine from Birkby Plastics who icebreaker did the due diligence for with the VC.<\/span><\/p>\n

There was a good business at Birkby plastics but the difficulty was that it was difficult to get much ownership of the fragmented demand at OEM level, some growing some declining. This left the top line and therefore the business marginal and the management needed replacing, and overheads dramatically paired back which increased their direct costs reworking products, due to tool wear. The Birkby CEO at the time naively moaned about the banks and economic climate, yet there was tragically a viable plan for Birkby Plastics.<\/span><\/p>\n

Latest figures issued by the Society of Motor Manufacturers and Traders show car manufacturing declined 0.7% year-on-year in February. The main reason is the fall in the number of cars exported, which fell 9.8% last month compared to a year ago. The situation was made worse because of strong comparisons with February 2012 when production rose 26% compared with the same month in 2011. Nevertheless, production levels were still high with 137, 458 cars produced last month (2012: 138,483). For the year-to-date, production levels are up 0.2% on last year.<\/span><\/p>\n

The SMMT said part of the reason for the growth was high demand in the UK was partially offsetting the fall in the number of vehicles being exported. So far this year the domestic market has risen by a third. The situation was less robust in the commercial vehicle sector, where output levels fell 17.1% in February to 8,005 units. For the first two months of 2013 output was 18.8% down, at 15,827 units.<\/span><\/p>\n

Lets adopt some fresh thinking<\/span><\/h3>\n

A few years ago, VW chief executive Ferdinand Piech admitted he regretted missing the chance to buy Ducati \u201cfor peanuts\u201d. Piech already has ambitions to move into the motorbike market, a strategy that has been dubbed Project Eagle. <\/span>BMW, another potential buyer, already has a strong superbike business.<\/span><\/span><\/p>\n

There\u2019s another reason why a move to superbikes is attractive to Audi. Motorcycles have lower carbon emissions. Car-makers with motorcycle divisions such as BMW and Honda are therefore better placed to reach European carbon targets across their fleets. Oh, and Piech rides a Ducati himself.<\/span><\/p>\n

I attended this conference as my full time career in Automotive Manufacturing finished in 1997. The automotive sector needs some fresh external thinking to ensure the industry thrives, I am one of those engineers keen to fill the skills gap BUT by making these companies thrive by great places to work.<\/span><\/p>\n

A friend added “the thing that stuck in my mind is the seemingly lack of effort\/detail\/ability and research that some SME\u2019s put into their business plan\u2019s when approaching the OEM\u2019s.\u00a0 This a potential opportunity for Icebreaker executive to run some seminars on \u201cbest practice\u201d when pitching for business from an OEM, or perhaps you could put together an \u201cA\u201d team to aide SME\u2019s tender for business from OEM\u2019s. “<\/span><\/p>\n

Lets take a wider view beyond solely the view point of Automotive Industry and work together to maximise the opportunity…<\/span><\/p>\n

\u00a0T<\/span>he presentations from SMMT Open Forum \u2013 21 March 2013<\/span><\/h3>\n

Click on the links below to download the presentations delivered at SMMT Open Forum on 21 March at the Heart of England Conference Centre.<\/span><\/p>\n