Issue: Jan 2010


The game has changed for auto industry, says PricewaterhouseCoopers



by Steve Barclay

The after effects of the worldwide economic and financial downturn have altered the business landscape and have challenged long-standing assumptions about successful operating structures. There is a need to establish a new ‘normal’ for the automotive industry and the reality is that the game has changed, according to the report ‘Global Automotive Perspectives’ by PricewaterhouseCoopers.

New approaches to everything automotive companies do from reporting to their stakeholders and the investment community to making decisions on tax and legal structures in a changed global market are essential.

Richard Hanna, global auto leader, PricewaterhouseCoopers LLP said:

“During the last decade, the underlying competitive landscape has changed dramatically because of the emergence of new markets and new industry players as well as fundamental changes in the economic environments of the mature markets. The global recession has challenged the core operating models responsible for delivering the business strategy of many companies.

In addition to the traditional disclosures on results of operations, cash flows and financial position, users of financial statements want insight into management strategy for dealing with changing industry, extended liquidity information and transparent discussion of risks and the company's outlook. Establishing a regular information flow between companies and the investment community develops a climate of confidence, creating a virtuous circle of transparency and credibility.”

The report highlights three key themes:

- Robust and transparent reporting on financial results and outlook
- The golden rule of transfer pricing and how companies can help themselves
- Simplifying the business model

Financial reporting

Since the beginning of the economic crisis, reporting has focused more on cash flow, and many companies have released enhanced information on debt maturity and covenants, cost-optimised liquidity and capital resources, their level of equity and refinancing measures, and their level of working capital and cash requirements.

However, based on PwC’s discussions with analysts at the latest ‘Meet the Experts’ Conference in London, there are gaps between the provided information and the information that the capital markets need to understand a company’s performance. Specifically, capital markets want details on the impact of foreign exchange translation on debt on the one hand, and acquired (or divested) debt on the other hand. Numbers alone however, are not enough – the analyst community need to understand the management’s vision and strategy.

Transfer pricing

Most companies have set rules to determine the prices for intercompany transactions. These rules work under stable economic conditions but might not be adequate during a downturn. For example, typical transfer pricing arrangements may generate situations in which a large number of entities within the group are paying cash taxes while the group as a whole is loss-making.

The golden rule of transfer pricing (TP) is to set prices for transactions between related parties as independent parties would - the so-called arm's-length principle.

Simplifying the business model
The automotive industry is over 100 years old, and layers of complexity have been introduced at each turn of its evolution. It has one of the most complicated upstream and downstream value chains for a volume produced product.

Car manufacturers and suppliers need to have different strategies for mature markets versus emerging markets. In emerging markets, companies must have the very efficient market access platform to position themselves to benefit from growth opportunities. However, without the right strategy and execution in mature markets, it is clear that companies cannot profit from emerging markets – the persistence of structural cost and complexity in mature market operations will eventually rob all but the most resilient competitors of the opportunity to compete in emerging markets.

Richard Hanna, global auto leader, PricewaterhouseCoopers LLP said:

“A complex corporate operating model can be costly to manage and to maintain. It can create specific challenges as well, not the least of which is impaired operational efficiency. Change is never easy however, provided the change effort is recognised and managed appropriately, the size of the prize at the end of a successful implementation can be significant -- a cost effective, risk-compliant, tax efficient, and flexible organisation which is truly fit for the future, whatever it might hold.”

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