McKinsey Managing Slowdown - wmgwealthadvisory.com
Transcript of 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
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
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
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
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
11McKinsey & Company
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
12McKinsey & Company
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
13McKinsey & 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
14McKinsey & Company
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)
15McKinsey & Company
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