The motor vehicle parts manufacturers sustain operations based on a healthy demand, driven by sales of new automobiles and demand from the replacement market. An efficient operator in this industry will need to be extremely focussed on its cost structure to sustain the multiple volatilities that are driven by automotive demands and changes in prices of key costs. The industry consumes a substantial amount of steel and energy and is, therefore, subject to volatility on these two fronts.
The direct manufacturing costs, within the industry, generally account for c. 80% of all cash operating expenses, with raw materials accounting for c. 70% - 90% of direct manufacturing costs. Steel would make up roughly 50% of the raw material cost in this industry; for example, ZF steering India and Nexteer Automotive (for 2015) have a raw material expense of c. US$ 33 Mn (INR 2,102 Mn) and US$ 1,409 Mn respectively; of this US$ 16.52 Mn (INR 1,051 Mn) and US$ 704 Mn comprises of steel costs for ZF and Nexteer respectively. Considering that steel prices have been volatile over the quarters from 2012 to 2015, ZF Steering and Nexteer Automotive have managed to keep their direct manufacturing costs at roughly 58% to 64% of revenue, over the last four financial years. Companies have selectively adopted hedging of raw materials to contain raw material price volatility to broadly match their order book. Efficient operators have heavily focussed on inventory levels to manage their working capital and the carrying costs as shown in the table below.
Source - Televisory Database, note: Inv. - Inventory, R.M - Raw Material, Nex - Nexteer Automotive and ZF - ZF Steering
On the Revenue front, existing and upcoming contracts with major automotive manufacturers would result in a constant stream of revenue. This is in part achieved by fixing supply contracts with major automobile or intermediate good manufacturers in the automobile sector. Considering that Nexteer Automotive had a healthy capacity utilisation of 100% in 2012 and 2013 as compared with 81.5% and 70% for ZF steering in the same period, it can be inferred that Nexteer has a larger proportion of contractual sales as against ZF Steering. Furthermore, ZF has an average capacity utilisation of 72% over the last four annuals. This would suggest a need to expand market coverage and develop a more robust aftermarket sales network. The ZF steering, despite being a smaller player as compared to Nexteer Automotive, has a higher EBITDA. Further, this is due to its lower costs that can be attributed to the lower wage rate in India.
While, both the firms have done well in their respective markets. Nexteer as the parts manufacturer from the developed economy has a potential to capture larger volume and reap the benefits of economies of scale. However, the firm may still suffer from lower margins as a result of higher manufacturing and distribution costs. On the other hand, companies like ZF would need to develop a more robust customer base with locked in sales obligations. This coupled with low manufacturing wages would help push margins up despite a lower market coverage. In the end, it can be stated that the two firms clearly seemed to have kept inventories at lower yet manageable levels.
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