McKinsey Managing Slowdown - wmgwealthadvisory.com

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Presentation | 6th Sept 2019

Auto component industry

in India – Managing slowdown

ACMA ANNUAL CONFERENCE

2McKinsey & Company

Slowdown: What to do and what not?

Slowdown in the economy: Impact on the automotive sector

and key factors that are causing a downturn1

2

CONTENTS

Long term growth story of automotive

sector remains intact

3

3McKinsey & Company




2

CONTENTS



3

4McKinsey & Company

Slowdown in the Indian economy is impacting growth in multiple consumer focused sectors like Real

estate, FMCG and Automotive

1.2 1.31.5

1.0

0

0.5

Mar19Mar18

+7%Unsold

housing

units6.9

5.96.7

7.9 8.0 7.97.1 6.6

5.8

0

5

10

Q1-

2018

Q2-

2017

Q4-

2017

Q4-

2018

Q3-

2018

Q1-

2017

Q3-

2017

Q2-

2018

Q1-

2019

Real GDP Growth Rate, %

Y-o-Y growth; %

SOURCE: Economist Intelligence Unit; Department of Promotion of Trade and Internal Industry; Society of Indian Automobile Manufacturers; Press search

Q2 18 Q1 19

6%

11%

Q2 18 Q1 19

16%

6%

Economic indicators point towards a slowdown… …impacting growth in various consumer focused sectors

Slowdown

in FMCG

growth

Urban

Rural

Million units

Slowdown

in auto

sales1

FDI Inflow growth, %

5%growth in

Q2(FY19)

YoY

10%growth in

Q4(FY19)

6%growth in

Q3(FY19)

-12%growth in

Q1(FY20)

0

0

10 0.5

1.0

20

10

30

9

18FY 2015 16 17 FY 2019

-1

27 29

3

1 Average growth rate in a quarter

5McKinsey & Company

Automotive sector is going through a period of significant slowdown, led by liquidity crunch, higher

acquisition cost, and subdued consumer sentiments

Growth Rates (Y-o-Y), Percentage

All major vehicle segments have observed

slowdown...

SOURCE: Society of Indian Automobile Manufacturers; Reserve Bank of India; The Thomson Reuters & Ipsos the PCSI Employment Confidence Sub-Index; Expert interviews; Press search

2W

PV

CV 0

100

-50

50

April July

76%

October June

30% 25%43%

January

-6%

April

-12%

-20

30

-10

0

20

10

27%

8%

17% 17%

-16%-12%

0

-40

20

-20

40

-3%

-17%

7%2% 6%

-18%

…driven by cash crunch, price rise and weaker consumer

sentiments

▪ NBFC NPA increased from 5.3% to 6.6% between

FY18 and FY19

▪ Bond issuance down to US 120 mn in May19 from

US 230 mn in Nov18

▪ 3 year & 5 year upfront insurance premium for 4W

& 2W led to price rise of 1-2% & 4-8% respectively

▪ Increase in finance cost and raw material prices led

to 6-7% rise in price

▪ Transition from BS4 to BS6 could add another 5-

6% to price

▪ Outlook on increased spending down to 69% in

May19 from 83% year before

▪ Lending rates up from 8.4% in Apr 2018 to 8.7% in

Apr 2019

▪ Job confidence index down from 62% in Sept18 to

55% in Mar19

NBFC

liquidity

crunch1

Higher

acquisition

cost

2

Weaker

consumer

sentiments3

Slowdown

2018 2019

6McKinsey & Company

A combination of factors such as increase in NPAs and liabilities along with shrinking funds of

NBFC’s have adversely impacted sales in auto sector

SOURCE: Bloomberg; Reserve Bank of India Monetary Policy Report; Press search

1 NPA as % of Gross Advances

2 Commercial Papers are source of funds for financing companies with maximum maturity period of 1 year

5.3

6.6

0

2

4

8

6

FY19FY18

1

Most of the auto sales are financed by NBFCs…

60-65%

25-30%

55-60%

NBFC auto loans fell by 69% during Q4 FY19 v/s

Q4 FY18

Rising

NPA1 and

Asset-

Liability

mismatch

…which has seen stress over the last one year

Auto finance is a mature market with

~75% penetration rate. Of those…

…are financed by NBFCs

NBFC

Bond

issuance

declining

1,617

880

0

1,000

500

1,500

2,000

May19Nov18

NBFC have

~INR 1.3 lakh

crore of

maturing debt

in the near

future. This is

restricting

lending power

Net issuance

of CPs2

increased ~5X

in H1 FY19.

Some of these

were used to

fund long term

assets

%

INR Crore

7McKinsey & Company

Higher insurance premium, raw material cost variations and absorption of BS6 cost has led to an

increase in total price of the vehicle contributing to slowdown

SOURCE: Press search; McKinsey; CIR

100

59

58

48

Price

Brand Trust

After Sales

Mileage

1 It applies to segment A passenger vehicle customer

2 Primary research conducted through survey agency; McKinsey proprietary data analysis; sample size = 516

3 Price increase in steel during Q1, Q2 and Q3 of FY19 considered for the analysis

4 MCLR rate for 3 year and 1.45% of add-on; Loan tenure of 5 years; Analysis done on a sub-compact sedan in Delhi

Price is the top buying criteria1 ……multiple cost and financial factors have resulted in price rise by ~9% in PV;

expected to go up by another 6% with BS 6 implementation

2

Key Buying Factors for customers2

%

5

6

2

Raw material

rate increase

On-road

price (Apr18)

Finance

2

Insurance

rate hike

100

Before

BS6 price

109

BS6 cost

increase

(Apr20)

Post BS6 price

115

INDEXED

ILLUSTRATIVE

Increase in cost

due to addition of

parts to make the

vehicle BS6

compliant is

estimated to be

~6% in PV

Hike in the

insurance rates

over the last year

have increased

the overall price

of the car by 1-

2%

Increase in

finance cost due

to rise in auto loan

interest rate from

9.4% in Mar18 to

10.20 in Dec184

Steel contributes

to ~65% of a car

cost. CR steel and

HR steel prices

have increased by

6% & 4% in

between April’18

and November’183

ESTIMATES

8McKinsey & Company

Rising debt and cost of funds along with falling employment confidence in consumers is causing a

delay in purchase of vehicles

SOURCE: The Thomson Reuters & Ipsos the PCSI Employment Confidence Sub-Index; Press search

There has been decline in consumer

confidence…

…which is being driven by increased debt, decline in employment

confidence, and rising lending rates

3

Rising

household

debt1 (%)

Consumer perceptions towards increased

spending, %

8369

May 2019May 2018

2.8 2.44.0

0

2

4

FY 16 FY17 FY18

>1.4x

14% point fall in consumer sentiment

towards increased spending

Falling

employment

confidence2

(%)

62 61 55 61 6040

0

80

AugDecSept March June

1 As a % of disposable income

2 Primary Consumer Sentiment Index (PCSI) Employment Confidence Sub-Index in India

3 Median MCLR rate (1 year) for schedule commercial banks under Reserve Bank of India

8.4 8.6 8.7 8.8 8.7 8.6

6

8

10

AprilOctoberJuly JanuaryApril 18 July 19

Rising

lending

rates3 (%)

2018 2019

9McKinsey & Company




2

CONTENTS



3

10McKinsey & Company

Addressing the downturn requires a coordinated set of actions in the near short term along with

strategic moves in the long term (1/2)

SOURCE: Expert interviews, McKinsey

Optimize parts

complexity and

modularize products

▪ Leverage current slowdown and OEM consolidation trend to reassess

the design of key components to develop modular parts:

– Conduct product mapping exercise to identify major components

that can be modified

– Develop modular solutions for priority components. Take help from

stakeholders (e.g., OEMs)

Enhance quality, aim

for zero defects and

higher yields

▪ Build quality into operations, management and people systems:

– Operations: Quality based supplier selection; Standardization of

shop floor tools due rapid design changes; RFID based tracking

– Management: Measure both preventive and occurrence metrics

– People: Ensure quality standards are understood and rewarded

Optimize portfolio –

look at the tail end

▪ Rationalize portfolio to ensure maximum 10-15% revenue from a single

product

‘Enabling Digital and Analytics’ and ‘Transformation mindset’

across the organization are critical for success


Addressing the downturn requires a coordinated set of actions in the near short term along with

strategic moves in the long term (2/2)

SOURCE: Expert interviews, McKinsey

Re-look at

organization structure

to find efficiencies

▪ Build a cross functional task force to conduct value stream mapping

(e.g. Span of control for supervisory manpower):

– Identify critical roles with disproportionate impact and invest in them

– Assessment of roles and job description to eliminate overlaps

– In case of overlaps reallocation of talent to departments with talent

shortage, which will improve utilization during slowdown

▪ Conduct benchmarking to identify right balance for talent allocation (e.g.,

ratio of white and blue collar employees)

Develop optimal

inventory control &

build transparency

▪ Instead of depending on OEM forecasts, develop internal models

(leveraging analytics) to plan production and control inventory. Few

examples:

– Develop applications for tracking inventory movement between

OEMs, Vendors and Tier 2 suppliers

– Use analytics based demand forecasting and Sales & Ops planning

‘Enabling Digital and Analytics’ and ‘Transformation mindset’

across the organization are critical for success


To arrest amplification of the shock, auto component manufacturers should avoid certain actions

Avoid dishonoring commitments to peers, suppliers and

workforce

What not

to do?

2 Don’t focus only on downturn, keep growth phase in mind;

continue to invest in quality and safety

1

Avoid under cutting competition with unsustainable practices

(e.g., price), which will be tough reverse once growth returns

(avoid loss-loss situation)

Don’t reduce critical investment in business development and

R&D as a cost-cutting measure

3

4

SOURCE: Expert Interview; McKinsey





2

CONTENTS



3


Despite the current slowdown in the economy, the long term growth story for Indian auto sector

is intact

SOURCE: International Monetary Fund; Economist Intelligence Unit; IHS Markit; Press Search

Favorable outlook of macroeconomic indicators... ... likely to have positive impact on auto sales in long run

Nominal GDP (USD)

1.6 3.0

2019

~2x

2025

Private consumption (Trillion USD)

~5 trillion GDP growth by ~2x

between 2019 and 2025

Rapid urbanization (%)

~38% Urbanization by 2025 from

34% in 2018

92

130

28

46

2018 2025

Passenger Vehicle

Two wheeler

Vehicle penetration is expected to rise(Vehicles/1000 people)


Recent measures taken by the government could help in turning around the momentum and revive

growth

Industry measures: Stimulus to

tackle slowdown in auto sector

Financial measures: Revive PSBs and

improve liquidity of NBFCs

Economic measures: Boost economic

growth and revive jobs

SOURCE: Reserve Bank of India; Analyst reports; Press search

▪ Lift ban on purchase of new

vehicles to replace all old vehicles

for its departments to boost demand

▪ Additional depreciation of 15% on

all vehicles acquired till 31st Mar20

to reduce high inventory build up

▪ Evaluating investment in infra for

auto component industry (to

boost exports and accelerate

development of new components

like EV batteries)

▪ Infuse INR 70,000 Cr in PSU banks to

enable release of INR 5lakh Cr

liquidity

▪ One time 6 month partial guarantee of

INR 1lakh Cr to purchase high rated

assets of NBFC; this could reduce

potential NPAs

▪ Removed the requirement of

maintaining Debenture Redemption

Reserve to improve liquidity in NBFCs

▪ Invest INR 100lakh Cr in infrastructure

over the next 5 years to boost the

economy by ~2x and generate jobs

▪ Scrapping surcharge on foreign

portfolio investors (FPIs) and domestic

market players to revive sentiments

and boost investment

▪ Launch of electronic marketplace for

MSMEs – ‘Bharat Craft’ to expand

reach. This could generate INR

10lakh crore revenues and 5 Cr jobs

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McKinsey Managing Slowdown - wmgwealthadvisory.com