In the final session of MuMAC 2019, we provided the audience with a snapshot of the typical issues facing automotive suppliers when undergoing restructuring as well as approaches for dealing with them. We worked through the classic starting points in the automotive supply industry and the main factors for a successful outcome.
Typical Starting Points
With automotive suppliers undergoing restructuring situations in the German market, a consistent pattern of complex interactions is common. First, smaller and mid-sized suppliers, at least, are focused on the automotive industry only. Consequently, the customer base is mainly comprised of automobile manufacturers and other automotive suppliers—only in rare cases you can also find other business areas which may allow for a wider approach to restructuring. In addition, the automotive suppliers typically have a global footprint, with production facilities in Germany, other European countries, the USA, Mexico, China and others. Given this, there are often rather complex group structures with individual subsidiaries in every country.
Management structures and capacities that have not been adapted to increased business size, and group complexity, are notable consequences tied to the significant growth of the industry over the last 10 years.
The last decade has also established a trend of increasingly complex financing structures, which today frequently include syndicated loans, bilateral and local financing, bonds (Anleihen) and promissory notes (Schuldscheine).
Successful Automotive Restructuring
If a supplier does not provide the ordered parts in time, customers face significant losses due to the just-in-time supply strategy. Consequently, a predominant goal of every restructuring process in the automotive industry is to ensure the continuous capability of supplying respective parts to the customers. “Losing even a single car” must be avoided.
Customers play a dominant role and are crucial for success in restructuring in this industry. Very often, they only have a single source for respective parts, and it may take several weeks or even months to transfer the production of respective parts to another supplier. This places customers under intense pressure to avoid a stop in production by supporting the restructuring process. Such support is usually provided by way of shortening payment terms, advance payments, price increases or—in rare cases—direct financial assistance and loss coverage of the business operation (depending on the specifics of the respective case). A good relationship between the supplier alongside its advisors and the customers is an important factor for the negotiations.
The customer base and the complex financing structures together with the other complexities of the business of an automotive supplier lead to very complex stakeholder structures. The various stakeholders have all their own interests, which need to be aligned in the course of the negotiations. This requires excellent stakeholder management and transparent information policy for all stakeholders. An information disparity between different relevant stakeholders can easily jeopardize the restructuring. Thus, stakeholder management is another key factor for successful restructuring. Though this may be true for all larger restructuring cases, it becomes an even more significant element in the automotive industry. Here, excellent project management is essential to allow a timely finalisation of the various processes irrespective of the vast volume of the documentation which is usually associated with restructuring specifically in the automotive industry.
In summary, the key factors for successful restructuring effort in the automotive industry are (1) an early starting point, (2) excellent and efficient project management, (3) transparency vis-á-vis the relevant stakeholders as well as (4) the maintenance of good customer relationships.
Case Study by
Dr. Matthias Kampshoff,
McDermott Will & Emery