Lessons from change

A roadmap to sustainability for

the automotive industry
Contents
That was then … this is now
2 Opportunities in adversity gave us a glimpse into the challenges companies were
facing in the automotive industry as they confronted the implications of an economic
downturn. Lessons from change goes deeper, exploring what companies are learning
and how they are using their new knowledge to prepare for their recovery ahead.

4 Introduction: automotive’s rough road

Automotive companies may have been caught off guard, but the weaknesses and
exposures present in the industry were there all along. The nancial crisis merely
hastened an overarching risk. While the prospects for the automotive industry may
seem dubious, all is not lost.

Securing your present: survival is the rst imperative

8 Most companies in the value chain must rst ensure their survival before
undertaking discretionary operational improvements.

Protecting your assets: unidentied risks ahead

12 The automotive industry faces myriad risks. While the recession may have brought
most of these key risks forward, more counterparty risks are ahead.

Improving your performance: optimize, not minimize

16 Optimizing your company’s speed to respond to market forces is an essential step
toward future growth.

Reshaping your business: it's time to change

20 While companies across industries are faced with “doing more with less,” many
automotive companies are trying to meet the minimum requirements with what very
little they have left. In this dramatically changed environment, a little unconventional
thinking may be the best strategy to not only stay relevant, but gain a
competitive edge.

Sustaining your future: innovate or become irrelevant

24 It is time to be bold. Companies that take advantage of the turbulence will emerge
well positioned to capitalize on future growth opportunities.

Conclusion: who will survive?

28 Automakers and the entire value chain have been carrying too much capacity, with
too little regard for cost consciousness. The companies that learn the lessons from
change will become exible, dynamic, market-focused competitors that will
outmaneuver and outperform their rivals.

A new business agenda is emerging

30 Lessons from change comprises a series of 14 sector-specic white papers,
based on more than 40,000 client meetings, and has produced more than
500 cross-industry insights. Studying this material, we see a new agenda for
success emerging.
That was then ...
In January 2009, Ernst & Young published Opportunities in adversity,1 a study that
provided insights into the issues executives were facing as they grappled with the
implications of the economic downturn.
We suggested that every company falls somewhere on a stress pendulum between cash
burn and cash earn, and for every business there is an appropriate course of action.
By executing that course of action quickly and effectively, management teams can seize
a potential source of competitive advantage.
The automotive industry is in the most precarious state it has been in since the rst
mass-produced model rolled off the assembly line. It is facing unprecedented challenges
and turmoil in the wake of the prolonged global nancial crisis. The senior executives we
interviewed admitted a fundamental shift in mindset, from an industry-wide focus on
prots to one focused on liquidity and cash-ow management and forecasting. While they
were troubled by the impact the downturn has had on their businesses, there were positive
signs about the sector’s willingness and ability to implement swift and decisive actions.

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1. All survey data referenced within this report, unless otherwise noted, is from Ernst & Young’s Opportunities in
adversity survey.

2
... this is now
Opportunities in adversity gave us a glimpse into the challenges automotive companies
were facing, but we wanted to know more. We wanted an in-depth understanding of the
specic challenges executives were experiencing, as well as the lessons they were
learning and applying to prepare their companies for the recovery ahead. And so we
went back to our automotive leaders to gain their insights. In total, Ernst & Young’s
automotive partners from our member rms around the world conducted more than
1,300 client meetings. These conversations revealed a series of strategic actions the
industry is taking to position itself for success. Not all of their lessons from change may be
new, but they are taking on new importance as automotive companies strive not only to
survive but thrive in the new economic environment.

Questions and considerations

As you take charge of implementing change within your organization, we invite you
to reect on the following questions and considerations:
• No matter how dark things look, start to plan now for future growth. Where do
you see your company in ve years?
• Take immediate action to ensure the stability and durability of your organization.
Do you have a strategy for cash preservation?
• Reevaluate your business model and product mix. Are you focused on growth
or protability?
• Reassess your ability to manage risk. What steps is your company taking to
protect assets?
• Thoroughly assess your company’s business performance. How can your
organization’s performance be improved?
• Before making drastic workforce decisions, consider your management talent
needs. What talent will you need in the future?

3
 Introduction

4
Automotive’s
rough road
These are perilous times for the automotive industry. Protability is a
fading memory and the industry’s new reality includes widespread supplier
instability, plummeting sales, bankruptcy and severe nancial distress. The
global recession blew through the automotive supply chain like a tempest,
toppling the structurally weak and damaging even the strongest companies.
The crisis exposed the critical faults of an industry that were either well
hidden or long ignored.

A culmination of maladies vehicle sales. For example, relative to the

According to Jay Young, an
Ernst & Young LLP partner in the US
serving the automotive industry, “The scale
and depth of the downturn is affecting the
industry in ways many might never have
anticipated.” Indeed, the global nancial
crisis led to enormous declines in new
same period in 2008, unit sales in the rst
six months of 2009 for 8 of the world’s top
10 automakers declined anywhere from
10% to 31% (see Figure 1). The ripple
effects from these declines extend
upstream throughout the supply chain and
downstream into dealer networks.

Figure 1
Global sales — 6 months, 2009

6 months 2009 6 months 2008 % change

1 Toyota Motor Corp. 3,564,105 4,815,442 -26%
2 General Motors Co.* 3,552,722 4,541,125 -21.8%
3 Volkswagen AG** 3,100,300 3,265,200 -5.1
4 Hyundai-Kia 2,153,000 - -
5 Ford Motor Co.*** 2,145,000 3,093,000 -30.6%
6 PSA Peugeot-Citeroen 1,586,900 1,844,700 -14%
7 Honda Motor Co. 1,586,000 2,022,000 -21.6%
8 Nissan Motor Co. 1,545,976 2,013,611 -23.2%
9 Suzuki Motor Corp. 1,152,000 1,283,000 -10.2%
10 Renault SA 1,106,989 1,326,164 -16.5%

* Includes Wuling
** Excludes Scania
*** Wholesale only
Source: Automotive News Data Center, Reuters (Hyundai-Kia sales)

5
Too much went wrong for automotive at the worst possible time.
A brief spate of higher oil prices suppressed demand for larger and
more protable vehicles. On the heels of the energy price spike, the
credit market collapsed, leaving consumers without access to credit
for the nancing of new vehicles. Further declines in industrial and
other output affected sales for heavy equipment manufacturers.
Add to this the growing list of government mandates that the
industry produce smaller, greener cars — meaning heavy investment
in both R&D and retooling.
The industry’s nancial underpinning has also changed dramatically.
Some have received injections from sovereign wealth funds and
more such capital may be on the way. Others have received
government bailouts. Governments and unions are now principal
owner-investors. And with private capital still scarce, government-
offered incentives, grants, loan guarantees and other programs are
now more prominent in nancing decisions.
The sum total is an industry facing severe distress — with many
participants still in a relative tailspin.

6
7
 Securing
your present

8
Survival is the rst
imperative
With further government bailout and stimulus measures unlikely, automotive
companies up and down the value chain must adopt scal prudence as their
new ideology. Difcult, yet well thought-out decisions must be made so
businesses see a future.
The industry itself may be in need of
transformation. However, for those caught
in the thick of the economic downturn, a
number of more immediate actions must
take priority. The speed and the severity
with which the crisis landed caught most
of the industry unaware, resulting in
waves of severe nancial distress. Many
rms in the industry have already gone
out of business or into bankruptcy. And
though many have been bailed out by their
country’s taxpayers — or have benetted
indirectly from the bailouts of
others — many are ghting to survive.
Cash preservation is self
preservation
Cash preservation is the foremost priority.
Companies throughout the automotive
supply chain must take pains to optimize
their capital availability. Time is of the
essence. Reinventing processes is not a
luxury most companies in the sector can
afford. Instead, immediate actions should
target all aspects of working capital
management, such as minimizing both
productive and nonproductive inventories
and aggressively managing accounts
payable and receivable.
Attention to detail is essential. Regardless
of inows or outows, the level of
inefciency that distressed companies can
accommodate in their cash management
systems is exceedingly low. Collection
systems serve as a key example. Since
customers often pay according to xed
cycles, any delays or errors in invoicing
can easily slow receipts by a month or
more. In addition, companies need to take
a close look at their processes for major
disbursements to avoid early payment or
overpayment. They should also review
the method of making these payments.
Now more than ever, companies need to
take command of their cash ows. The
continuous need for improved working
capital management and for developing
a culture of cost consciousness cannot
be overstated.
Improving cash forecasting can help
companies get a much needed handle on
this precious resource. To improve
visibility and management of their cash
position, companies should develop rolling
forecasts of cash inows and outows.
Though nding the right intervals will be
dependent on individual circumstances,
conducting one-week, two-week, monthly
and quarterly forecasts continues to be a
leading practice. Cash forecasting should
also support the modeling of debt
covenants to help avoid noncompliance.
Cut carefully
While cost reduction “is nothing new to
the industry,” according to Automotive
Global Markets Leader, Jeff Henning, the
current situation “carries added risks.” In
particular, because the cost reductions had
to be implemented with little time for
9
redesign, they may give short shrift to key control or decision-
making processes. In addition, says Henning, “when protability
returns, there is a real risk that waste and inefciency will likely
return.”
Companies should tread carefully in their cost-cutting programs.
There is a ne line between running lean and underinvestment.
Any further cost-cutting measures should be undertaken with an
eye for the future. Reductions conducted overzealously may
actually do more harm in the long run. While downsizing the
workforce tends to be a common cost-cutting activity, at this stage,
it’s likely that headcount has already been reduced as much as
possible. Any further workforce reductions could translate to a
competitive disadvantage in a future recovery, as skeletal
operations are unable to adapt to increasing demand. Ultimately,
while survival is key, don’t forget the reason for these survival
activities is an ultimate return to protability.
R&D expenditures should be handled carefully. The future health of
the business depends on having a relevant and useful product line.
However, these R&D activities should consider both the present
market demand and future industry trends. R&D activities cannot
afford to be hobbled by cost-cutting measures. Our recent
Opportunities in adversity survey revealed that in many cases,
these expenditures are growing.
Figure 2
Respondents who have Respondents who have
indicated a decrease in indicated an increase in
investment investment
Negotiate for savings
Renegotiation could prove to be the most useful weapon left in the
arsenal for companies in the automotive value chain. Everything
from leases to state and local taxes should be examined for
possible savings. Companies should also be prepared to renegotiate
within — more and more companies are looking at salary givebacks,
deferrals, rolling salaried-employee furloughs and reduced hours for
their workers.
Where possible, debt covenants should also be reviewed. The weight
of existing loans can prove suffocating for businesses given their
reduced volumes and cash ows. Now is the time to be frank with
creditors. A degree of consideration today could help the business
get by until the automotive sector begins to recover.
Negotiating with local or national governments may also prove
valuable. Likely, there will be plant closings. However, to the extent the
business has options relating to which plants or facilities it might close,
this can be used as negotiating leverage. Be polite — you will have to
deal with these authorities well into the future. But don’t be shy about
asking what tax abatements, grants, infrastructure upgrades or other
benets might be made available should the facility remain open. And
while this can be useful in a domestic setting, it can also apply to an
international setting. As Ernst & Young’s Automotive Tax Leader
Dan Kelley explains, “To cut costs, a lot of automotive companies and
their suppliers are shifting their manufacturing overseas — to Eastern
Europe, Russia, China and elsewhere.” Along the way, says Kelley,
companies should take care “to explore the various — and often
competing — incentives available.”

Uncover hidden sources of cash

Human resources
Operations
Information technology
Sales and marketing
39%
11%
Balance sheets often have hidden assets waiting to be monetized.
Companies are learning they may have left cash on the table in areas
36% that can include aging VAT refunds, customer deposits, insurance
7% claims, state or federal incentive receivables or even warranty
reimbursements. Often this lack of focus is a symptom of a larger
36%
issue — lack of clear information into these balance sheet accounts
11% and lack of ownership of managing the balance sheets. Another
avenue is the divestiture of noncore assets. But exercise care: don’t
sell off the IP of an essential component.
32%
14%

Research and development 14%

29%

Source: Opportunities in adversity

10
Above all, be realistic
Sometimes there is simply no other course of action than to enter Key considerations
into bankruptcy discussions. Restructuring is proving essential for
• Improve your cash preservation and management.
many OEMs and suppliers alike. In many instances, out-of-court
Improved forecasting measures will help you gain a clear
settlements or prepackaged deals are proving the most effective
position of your present and future cash positions.
at realigning businesses for the future.
• Embark on cost-cutting measures judiciously. With an
But be mindful that in the current environment, there are no
eye to the future you will identify activities that won’t
guarantees. As Jeff Ficks, a senior manager in Ernst & Young’s
hinder your performance when demand increases.
Transaction Advisory Services explains, “Bankruptcy is
traditionally an avenue to reorganize.” But the reality today is • Be honest with your stakeholders. Renegotiation of
that with so much overcapacity in the industry, “not everybody contracts can achieve the cost-savings you need to survive.
is going to be afforded the opportunity to survive.” As such, • Be realistic. Sometimes reorganization really is the best,
a signicant number of executives will need to ask themselves and perhaps only, option.
the most difcult question of all: do their companies have a real
future in the industry? Or does it make more sense to simply
sell off their book of business and move on?

Automotive pursues liquidity Figure 3

Which of the following steps is your company currently taking to maintain
The industry is taking a number of steps to
liquidity in light of the current market conditions?
extract cash from operations. Key actions
include: Automotive All Industries

• Top-down reviews of working capital/cash

Top-down review of current cash 61%
management practices management and of cash flows 57%

• Reevaluation of debt covenants and

compliance Making an inventory of all debt covenants 61%
and monitoring covenant compliance 30%

• Closer communication with lenders,

Considering alternate sources of liquidity
analysts and ratings agencies (e.g. disposal of assets, shut down or sale of 43%
35%
segments/revenue streams)
• Tapping short-term nancing facilities
Obtaining access to short-term 43%
finance facilities/credit 35%

Considering options to renegotiate 43%

debt covenants 26%

Communicating with lenders, analysts 36%

and rating agencies proactively 34%

4%
None of the above, cash is not an issue 16%

Shown: percentage of asset management industry respondents

Source: Opportunities in adversity

11
 Protecting
your assets

12
Unidentied
risks ahead
The global recession has amplied the vulnerabilities of the automotive sector.
According to The future of risk, an Ernst & Young a survey conducted with the
Economist Intelligence Unit in June 2009,2 an overwhelming 91% of
automotive executives indicated that they need to improve the alignment of
their risk management approach with their broader strategic and business
objectives. Similarly, over a third of the companies surveyed rated themselves
as only moderately effective or ineffective in terms of managing operational
risk. In essence, business managers see great shortcomings in their risk
management programs. Companies experiencing nancial distress cannot
afford to further erode their position by failing to identify and respond to
critical near- and short-term risks. These companies need to move fast to
implement more effective risk identication and management capabilities.

Start with your supply chain

In an industry rife with disruption and bankruptcy, automakers and Tier 1 suppliers are
learning it is important to take a close look at their respective supply bases. According to
The future of risk survey, only 47% describe themselves as either effective or very
effective at managing supply chain risk. Jeff Ficks points out that “the onslaught of
supplier failures is teaching industry executives that they must commit more resources
to supplier stability.” This begins with early-warning systems, where companies should
implement routine monitoring of core metrics for key suppliers.

2. The future of risk, Ernst & Young, June 2009.

13
Figure 4
How was your organization’s approach to your suppliers
affected in the past six months?
Automotive All Industries
We have lost key suppliers
to bankruptcy
We have negotiated longer-
term contracts with suppliers
We have narrowed the supplier
base to obtain more favorable
prices or terms
We have broadened the supplier
base to reduce the impact of the
failure of an individual supplier
Shown: percentage of automotive respondents compared with all respondents
Source: Opportunities in adversity
14
Maintaining close relations with suppliers is essential. The current
state of affairs demands heightened visibility into the health of the
supplier base at a level that is granular enough to drive timely
remedial action. Companies should formulate contingency plans for
likely supplier instability scenarios and be prepared to work with
those suppliers should they nd themselves in distress. Ultimately,
an ideal supplier risk management system generates just enough
43%
14% information to identify and address potential supply chain exposures.
A lack of proactive risk management could lead to any number of
36% unfavorable outcomes. These include unexpected requests for
43%
nancial accommodations in pricing and payment terms, or delays,
disruptions and stoppages. There have also been cases where
companies have been placed in the awkward position of serving as a
29%
42%
lender to their suppliers, leaving them no choice but to weaken their
own cash positions.
25% Sometimes any of the above is unavoidable even with planning —
31%
but knowing how you would respond in advance provides the luxury
of leeway. Companies should also be prepared to consider novel
approaches to keep their businesses running, such as assuming
critical operations of the supplier. Lastly, companies need to
develop capabilities for managing relationships within bankruptcy
proceedings — a key means of avoiding or mitigating
supply disruptions.
Review counterparty risk and credit
Counterparty risk remains a clear and present danger throughout
the automotive value chain — and beyond. A common misstep is
limiting the focus on just the counterparty itself. Companies that
manage their counterparty risks well monitor the overall health of
those with whom they do business. They also thoroughly examine
the risks within the counterparty’s covenants and contracts for any
potentially negative effects. Counterparty risk is often described as
a contagion, with good reason. In precarious times, even a
relatively healthy company’s fortunes can reverse with one
negative outcome.
Maintaining a frequent and thorough awareness of the credit
position of customers is of the utmost importance. If the nancial
crisis has taught us anything, it’s that circumstances can change
rapidly. The concept of “recent information” has been redened.
In all cases, it is important to regularly monitor payment trends
and the overall exposure to individual customers.
Key considerations
• Develop more effective risk management. Being able to
identify the risks your company faces is the rst step in
managing them.
• Be vigilant about counterparty risks. Scrutiny of the
companies you do business with should include their own
counterparty exposures.
• Keep a careful watch of your customers’ credit
positions. Their credit health may be subject to change,
so frequent monitoring is essential.
• Divest carefully. By separating operations judiciously,
you will be able to monitor all risks throughout the
divestiture cycle.

Divest with care

Companies are divesting to raise cash or perhaps only reduce cash
drain. Still, several risks arise — particularly when disentangling
operations that are highly integrated. Care must be taken to
properly manage operational, nancial and compliance risks
throughout the divestiture cycle. To avoid mistakes, companies are
learning that transaction teams must include members from a
cross section of the business capable of evaluating and managing
this process from start to nish.

15
 Improving your
performance

16
Optimize,
not minimize
Finding the balance
Cutting costs is a sound reaction when hard
times hit. Unfortunately, many companies
take it too far. Any cost-reduction program
should be pursued with an eye toward
future growth. There is a point of
diminishing returns on cost-cutting
measures, and in all probability businesses
in distress are nearing this point. Past
excesses in head count or other spending
have likely been addressed long ago.
As Ernst & Young LLP Advisory Partner
Steve Patton explains, “reducing spend
overzealously — without a plan for
reengineering processes or considering the
implications on the enterprise as a
whole — isn’t sustainable.” In short, the
objective is to optimize, not absolutely
minimize, costs.
If not already the case, companies should
resize the tasks that were the subject of
the cost-cutting so that when business
volumes return, creeping inefciency won’t.
At the same time, this means balancing
costs with performance.
Patton continues, “Finally, the company
should begin maintaining a dynamic
portfolio of cost-reduction projects,
implementing the most protable
initiatives as resources and other
constraints allow.” The goal: create a
culture that relentlessly slices costs without
failing to meet the needs and expectations
of customers or other stakeholders.

Our June 2009 The future of risk survey

showed that signicant numbers of
automotive executives believe there are
signicant opportunities for cost reduction
in supply chain (45%), marketing (50%)
and operations (68%).

17
Improving the quality of information ows Tools such as risk mapping, robust scenario analysis and
contingency planning can help an organization identify and
Companies need to develop a better means of seeing further respond more quickly and condently to both risks and
down the pipeline. “The industry needs to do a much better job opportunities. For example, a major US company has been able
of collecting and analyzing the data it needs to drive success,” to minimize much of the pain of the current recession thanks to
says Peter Fuss, Ernst & Young’s Automotive Industry Leader its early-warning systems and ready-made contingency plans.
for Europe, Middle East, India and Africa. For example, any As Ernst & Young LLP Global Client Service Partner Randy Miller
shortcoming in the ability to predict demand “results in excess explains, “The company routinely monitors global business and
inventories or lost sales and higher production costs,” economic conditions. When the recession hit, they had a plan
elaborates Fuss. ready.” Consequently, the company was able to move much faster
Similarly, the inability to equate all associated product costs than less-prepared rivals. Robust contingency planning, explains
with precise revenues can result in poor decision-making overall. Miller, “can be a tremendous competitive advantage.”
“Automakers need to do a better job of gathering the inputs Not surprisingly, The future of risk survey found that 78% of
they need to make a better assessment of P&L on a automotive executives say that improvements in risk
product-by-product basis,” says Fuss. Companies should also management lead to reduced costs, while 100% indicate that
rethink their processes for gauging customer needs. Companies improved risk functionality would enhance business performance.
that can get these and related fundamentals right “stand the best
chance of rising in the industry ranks.”
Addressing information ows should be a key objective for
automotive IT executives. Today, according to The future of risk
survey, only 25% of the automotive respondents indicate that
they are effective or very effective at IT rationalization. Another
25% indicate that they are not at all effective in this area.
Automotive companies have historically underinvested in IT
infrastructure. Not surprisingly, these businesses face obstacles
in accessing data and producing timely information for
decision-making. Many of the information systems are older, so
frequently the underlying data structures do not support access
to data at a sufciently disaggregated level. This had led to
maintaining large staffs of nance, IT and business analysts to
access systems and manually compile reports and analyses.
As those ranks have been reduced, companies must nd new
ways to enhance IT effectiveness, especially given the growing
need for more timely and detailed business intelligence.

18
Key considerations
• Think long term. Take the time to carefully review what
would provide the most benet to your organization’s
future health rather than reacting solely to the cost.
• Balance cost cuts and containment. A company stripped
to the bone with too few employees and antiquated
systems is unlikely to survive, let alone grow.
• Address IT issues. Pursuant to balancing costs, wise
spends in your IT infrastructure will improve the quality of
your information ows. This will make your business
smarter and far more nimble in the future.

19
 Reshaping
your business

20
It’s time to change
Had it not been for the cocktail of federal bailouts, forced and/or expedited
restructuring and broader stimulus actions, a number of major automakers
would have failed — perhaps catastrophically. Though such bailouts were most
prominent in the US, European and Asian nations have also done their share of
supporting their weak or failing auto and heavy-equipment makers and their
suppliers. Had any of those at the top of this supply chain failed, the
consequences would have been far more dire.
More important than how companies got here, however, is what they do from
this point. For a noteworthy few, restructuring gives a new lease on life. Their
balance sheets are lighter, their workforces are streamlined and their costs,
footprint and general capacity are more in line with demand. All is not perfect,
but at least for now, these enterprises are on a healthier footing.

Realizing nancial exibility must nd ways to obtain greater cost

Financial exibility tends to be a critical
vulnerability in the automotive industry.
The sheer size of its xed asset and cost
base is difcult to manage effectively.
As such, the industry must continue to
downsize to meet the new volume realities
in each of its markets. While production
can be adjusted, its lower limit is now
higher than demand. The plethora of
excess capacity translates to a punishing
cost burden. Downsizing is not a suitable
long-term solution, however. The industry
efciency from its xed investments,
including its investments in infrastructure
and supporting corporate or
administrative functions.
Financial exibility cannot be realized
unless the organization itself is truly
exible. Automakers and related entities
need to pursue innovation that can create
greater operating exibility. The industry
must become more adept at identifying
and responding to real demand across
all geographies.

21
Collaborate with the value chain
In addition to R&D investment, another means of achieving
incremental — if not breakthrough — performance in technology is
through greater degrees of supply chain collaboration. If there is
anything that the recession has taught us, it’s that distress can
have a profound ripple effect in the sector. As one automotive
executive explains, “Survival and success for many will come only
through true collaboration — where ideas are shared, prots are
shared and the business model works for all parties.”3 Indeed,
by coordinating efforts, consortiums of suppliers and vehicle
manufacturers can reduce their investments as well as their risks.
Closer collaboration can also lead to greater visibility up and down
the supply chain and by natural extension, greater efciency and
exibility overall.
Of course, collaboration and partnership to this degree almost
invariably lead to “coopetition,” or working with competitors
toward common ends while still maintaining an appropriate
competitive distance. While this shared approach might be
relatively new for the automotive industry and well outside
companies’ collective comfort zones, plenty of guidance exists
in other industries. This is an area where industries like technology
and life sciences excel. The automotive industry will likely take a
greater and more in-depth look at such partnerships in the near
future. Though it took a crisis to create this awareness, continues
the auto executive, “at least now there is a strong business case
for action.”

Key considerations
• Retool your processes for enhanced exibility.
Businesses in the sector can no longer sustain
overcapacity and underleveraged xed costs.
• Collaborate. There are opportunities for collaboration,
not only up and down the value chain, but also with your
indirect and direct competitors as well.

3. Ernst & Young interviewed a number of industry executives for this paper on a
condential basis.

22
23
 Sustaining
your future

24
Innovate or
become irrelevant
It is time to be bold. Companies that use this turbulent environment as an
opportunity to strengthen and build a sustainable and responsive organization
will emerge stronger and better positioned to take advantage of future
growth opportunities.

The future is green Many governments are now shifting

The industry is clearly picking up the pace
on meeting the global demand for green
products. Greater fuel efciency and
cleaner exhaust emissions are being driven
by increasingly strenuous fuel economy
and emission standards across the globe.
Incremental improvements in every
component, from the smallest fastener to
the heaviest transmission, have the
potential to deliver on this objective.
The pursuit for environmental sustainability
is driving investments across a range of
promising technologies. From batteries and
fuel cells to power inverters and
transmissions, the cars and trucks of the
future will rely on countless thousands of
advances. In short, R&D will soon prove to
be a core differentiator of performance.
Companies can choose to pursue such R&D
investment on their own, but faster routes
include partnership and/or acquisition.
Opportunities to work with companies
from other industries, such as utilities
(state-run or otherwise) and energy
producers should not be overlooked. In
addition, governments all over the world
have a vested interest in sharing IP that
delivers greater energy efciency.
taxpayer dollars, euros, yen, won or
renminbi into loans, grants or tax breaks
for green investment, research and
development. Says Dan Kelley, “There
are many incentives available — and
companies need to do their homework to
make certain they nd the ones that are
most appropriate.”
Be ready to grow
The future will bring new technologies and
new demands. It’s essential to have a talent
pool that is up for the task. As an
organization becomes more dynamic, the
value of key talent will increase. Companies
should adopt leading practices to attract,
recruit and retain a skilled workforce. Talent
mapping, a means of assessing current and
future gaps in the worker pool, is one such
useful tool in this undertaking. Companies
should also pay close attention to
compensation trends and to new career
development initiatives.

25
Stay close to customers everywhere: Tomorrow’s automotive industry will need to stay close to
customers globally through more robust market knowledge, as well
invest for growth
as the technology required to support and analyze it. Generally
The industry needs to involve customers more intimately in design speaking (as other industries have learned), if you ask consumers
processes by developing products that meet both current and the right questions, they will tell you what they want.
future demand. Companies should pay more attention to evolving
Moreover, the time has come to become a part of trends rather
customer needs and interests, respond quickly to trends and nd
than committing time and resources toward redirecting them with
ways for more customization. The customer base is becoming
little success. The prole of the automotive customer has changed
more sophisticated in developed nations and emerging markets
dramatically since the rst “horseless carriage”: the industry
have changing needs of their own.
should expect to change with it.
The fact is, even as auto sales have been plummeting in most
But most of all, this is no time to get discouraged. When nobody is
developed nations, demand remains strong in many of the
doing particularly well, the good news is that all industry players
emerging market countries such as India and China. In fact, last
have, roughly, the same starting point. Right now the prevailing
year, in spite of the global recessions, the China division for one
competitive advantage is survival. The environment is too adverse
major automaker experienced growth of over 40%. So even if a
for new entrants and the road back to protability is still rather
company’s sales are down overall, its emerging markets presence
long. Companies have a golden opportunity to reinvent and
is or should be in high-growth mode.
indentify new business strategies. By doing so, they can gain
Growth rates in emerging markets will likely far exceed those in the ground in the competitive landscape of tomorrow.
developed nations well into the foreseeable future. In order to
pursue this growth, industry participants must manage existing
investments and relationships with an eye towards opportunistic
expansion. In particular, companies should move now to build
business platforms that will be capable of supporting high-growth
operations amid intense competition. And at the same time, the
industry should also be readying to capitalize on the next eleven
(N-11) — the countries viewed as most likely to become the next
high-growth emerging markets.

26
Key considerations
• Innovate and go green. If the market data seems at all
ambiguous on the topic of energy efciency and green
technology, global governments are not. Tax incentives are
likely to continue for companies and customers.
• Plan for new talent. As companies return to protability
and growth, a new workforce with new skills will be
needed. An evolving business model will require a different
talent pool in the future.
• Continue to invest in growth markets. China and India,
for example, show massive growth potential. The business
model that can successfully manage the intensely
competitive landscape in those markets will thrive.

27
 Conclusion

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Who will survive?
For now, the playing eld is relatively level — nearly all automotive companies
are in comparable distress. The global recession has shown that automakers
and the entire value chain were carrying too much capacity, with too little
regard for exibility and cost consciousness. The question becomes, which
companies will take the needed actions to create sustainable frameworks that
can rise above the rest? As one senior automotive executive explains, “the
industry has a habit of making meaningful change when times are tough but
as soon as improvement returns, so do bad habits.”
The companies that learn the lessons from change will become exible, dynamic,
market-focused competitors that will outmaneuver and outperform their rivals.
We are entering a new and changing world. Executives who show ingenuity, have the
courage to make tough decisions and demonstrate the foresight to apply lessons from
change will guide their companies to success in the automotive sector. And they will be
the leaders who establish the foundation upon which our new global economy will rise.

29
A new business agenda is emerging
Lessons from change comprises a series of 14 sector-specic
white papers based on more than 40,000 client meetings and has
produced more than 500 cross-industry insights. Studying this
material, we see a new agenda for success emerging.
The new normal
While the intensity of concerns about credit availability and liquidity
may be showing signs of diminishing, cash is still a critical issue for
many organizations. Some have addressed their immediate
nancial issues. Others are still in some stage of cash distress and
may be challenged to survive in the future.
The global economy may be back from the brink of disaster, but
companies do not expect a return to the “normal” conditions we
have experienced for much of the previous decade. Many
executives feel that we will continue to see:
• Depressed demand and increased price sensitivity
• Increased taxes and regulation
• Ongoing restrictions on accessing funding
• Continued downward cost pressure across the value chain
• Structural shifts to markets and sectors
• A more global market
• Renewed challenges to government models and calls for
increased transparency
30
Emerging cross-sector insights
We nd a striking similarity in the actions all companies across
Lessons from change are taking as they prepare for success
in the new economy. These actions, taken from the lessons
these companies have learned, culminate in eight key
performance objectives:
• Reevaluate your business model. Embed innovation and
constantly challenge your existing business models against the
new business environment.
• Optimize the exibility of your operations. Increase the
responsiveness of your organization by emphasizing exibility
and leveraging resources.
• Optimize capital availability and deployment. Reect the
continued importance of cash and constricted funding by
optimizing the availability and deployment of capital for a more
exible and robust balance sheet.
• Optimize your market reach. Optimize your global market
reach and product/service mix to exploit opportunities, achieve
optimum returns and mitigate risk.
• Accelerate your decision-making and execution. Make and
execute decisions more quickly to take advantage of shorter
windows of opportunity and respond more quickly to
adverse developments.
• Revitalize the way you manage risk. Identify the full risk
complexity of the market and develop and align a strong control
framework for your business.
• Strengthen your management talent. Gain, retain and deploy
a management team that is capable of addressing the complex
market and organizational environment.
• Strengthen your stakeholders’ condence. Regain and retain
stakeholder condence through transparency and better
communication on nancial and nonnancial performance.

Automotive sector insights
Looking at these cross-sector insights from an automotive
perspective, we nd that four are key:
• In the search for operational exibility, automotive
companies need to balance cost cuts and containment.
There must be a clear focus on redesigning business
activities to support a new environment of restructured
costs. A company stripped to the bone with too few
employees and antiquated systems is unlikely to survive,
let alone grow. And, while balancing costs, wise spends in
your IT infrastructure will make your business smarter and
far more nimble in the future.
• This is the time to reevaluate your business model.
A change of model for automotive companies could
include “coopetition,” or working with competitors
toward common ends while still maintaining an
appropriate competitive distance. Collaboration outside
of the traditional “automotive value chain” is becoming
increasingly important as the industry and its future
products require alternative sources of energy, more
advanced componentry and different fueling infrastructures.
• Cash preservation is the foremost priority. Companies
throughout the automotive supply chain must take pains
to optimize their capital availability. Time is of the
essence. Stronger discipline to forecast and manage cash
needs and adequate systems to support this effort are
critical for future success.
• Effectively competing in growth markets will help you
optimize your market reach. As many automotive
executives have learned, the entry into newer, emerging
markets come with the promise of growth. But it is
important for companies to have well-developed risk
assessment, monitoring and communication processes in
order to manage all aspects of the strategy to take
advantage of expanded market opportunities.
About Ernst & Young’s
Global Automotive Center
Ernst & Young’s Global Automotive Center
in Detroit, Stuttgart, Shanghai and Tokyo is
focused on the mega trends in the global
automotive industry. It brings together a
team of professionals to help you achieve
your potential — a team with deep technical
experience in providing assurance, tax,
transaction and advisory services. The
Center works to anticipate market trends,
identify the implications and develop points
of view on relevant industry issues.
Ultimately it enables us to help you meet
your goals and compete more effectively.
It’s how Ernst & Young makes a difference.
Contacts
Mike Hanley
Global Automotive Leader
+1 313 628 8260
michael.hanley02@ey.com
Jeff Henning
Global Markets Leader
+1 313 628 8270
jeff.henning@ey.com
For more information on Lessons from
change and the 14 sector-specic white
papers this study comprises, please visit:
ey.com/lessons-from-change
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