DAS AUTO – A TERM OF THE PAST?

It is getting chill. Not only outside, but also certain industry sectors are cooling off.

In the 1980’s, the steel industry was the 'sick man' of the global economy.  Overcapacities, lack of innovation and new advanced materials marked the end of a century old industry. In the year 2019, countless media reports make us to believe that the automotive sector–as we know him until recently–is the new 'sick man' of the global economy.  "Das Auto" a term of the past, with no room for innovation, really?

A few days ago, Continental CFO Wolfgang Schäfer’s official statement erupted many industry peers: "We do not anticipate that global production of passenger cars […] will experience any material improvement in the next five years.". With other words: There will be absolutely no growth in this sector for a very long time. The Hannover, Germany-based company said also it will fully spin off its powertrain business, formally rebranded as Vitesco Technologies.

For investors this means: Sell, before it is too late?

For the industry itself, it means: Optimize the whole business, focus on innovation, reshuffle financial resources (part of our business) and yes, restructure where necessary!

By the way, Continental’s dramatic shift also affects their North American operations: Its hydraulic brake systems plant in Henderson, NC (650 employees) and an engine hydraulic components plant in Newport News, VA (740 employees) are facing a shutdown soon. The bitter-sweet message for the affected workers: Your skill-set and experience is still in high demand–nationwide. For example, at Autoneum. We devoted a case study to this (see below).

This issue is devoted to the Automotive Sector. And to be absolutely clear: We strongly believe in the future of individual passenger cars–whether they will be steered by us or co-piloted by a computer.  

"Das Auto", car makers and its thousands of suppliers will remain a very crucial element in the global economy.

Enjoy readying, Happy Holidays and don’t hesitate to say Hallo!

  

Martin Raab, CAIA       Stefan Götz
Founding Partner        Managing Partner

BEST BOOKS FOR THIS WINTER

A hot, controversal book describing the unimaginably lucrative and equally corrupting oil and gas industry, globally.

With her trademark black humor, Rachel Maddow covers Russia and the US, including Chevron, BP, and a host of other industry players get their star turn, most notably ExxonMobil and Rex Tillerson.

Blowout is a call to stop subsidizing the wealthiest businesses on earth, and to check the influence of the world’s most destructive industry and its enablers.

Don't read it if you are invested into oil and gas stocks–you will probably call us to sell them.

Fireside chats about ETFs and passive investing ahead? A great read for everybody who wants to benefit from the ETF wave.

Beyond Smart Beta is the milestone publication about how to make active portfolio management with ETFs and index-based strategies a real success story.

Deep analysis but easy-to-understand content and illustrative clarification from an author team recognized as thought-leaders and accomplished practitioners in the industry.

Also, a perfect gift for colleagues, family members or wisecracks from the Country Club.

CULINARY CORNER


Picture: Priscilla Du Preez

Thanksgiving Recipe Ideas from Germany

Hosting Thanksgiving this year? Surprise your guests with some unique food on their plates–German dishes are often a natural fit with the Thanksgiving meal. Find out here and enjoy!

 


CASE STUDY AUTONEUM:

How to prevent losing US$ 33 million in six months within your U.S. business unit

Successful high-tech manufacturing in the U.S. is not always child’s play. A Swiss Tier 1 automotive supplier learned it the hard way–from nightmare to  turnaround.

by Martin Raab, CAIA

Novi, a few miles north of Detroit, is the hidden Automobile epicenter for foreign direct investments in the Mid-West. A dozen of European car technology companies have local plants or headquartered its U.S. operations there. Prominent names are Eberspaecher, MTU America, Robert Bosch, Magna and Harman International. Also, Autoneum North America, Inc. chose Novi/Michigan as the location for its U.S. subsidiary–a 12 hours flight away from Autoneum’s global headquarter in Winterthur/Switzerland.

Autoneum is one of the leading manufacturers in vehicle acoustic and thermal management solutions. Some call them the best in class in this segment. Where ever a car has parts for noise reduction or heat isolation, the chances are high that Autoneum’s products are on-board. The parts are used in the interior, engine bay and the car’s underbody. The company’s major clients in the North America unit are Ford (responsible for 17% of Autoneum‘s total net turnover), Nissan, Volvo as well as BMW and Daimler.

"Delivering sloppy components or delivering not on time, could quickly become a nightmare and damage a long built reputation."

Erased Over Night

The Tier 1 supplier for the global automotive industry, the Zurich-listed company (Ticker AUTN SX Equity) appeared in early October 2019 suddenly in the news: "The misconduct and inability of Autoneum's American business unit, cost Group CEO Martin Hirzel his job" described Swiss newspaper Neue Zürcher Zeitung the debacle. Rumors said, major shareholders–including billionaire Michael Piper–lost its patience about massive losses in Autoneum’s North America unit and forced Hirzel to leave the driver seat with immediate effect. On October 28, also the CFO, Martin Zwyssig, left the company. By choice?

Delicate problems at two U.S. plants (the exact locations are kept secret as Autoneum's Investor Relations department refused to disclose) led to what the company described as "inefficiencies". These inefficiencies caused losses to increase month-after-month towards the end of 2018–any beyond. As a Tier 1 supplier to premium car manufacturers, delivering sloppy components or delivering not on time, could quickly become a nightmare and damage a long built reputation.

Big Clients, Little Mercy

Car manufacturers simply hate interruptions in their tightly timed supply chain process–no matter if they are called Ford, GM, BMW or Volvo. All of them show very little mercy for any quality or timing issues. Based on automotive industry reports, to deescalate the delicate situation, Autoneum had to grant massive price discounts. In some cases, certain parts had to be flown in from Europe with very short notice to match the client quality criteria and ultimately prevent Autoneum from multimillions of contract penalties. Eventually, the bill amounted to a loss of USD 60 million in just 18 months.

In the rear mirror, the situation was influenced by the following operational challenges–which are quite family to other Mittelstand companies doing business in the USA:

"KEEPING THE ENGINE RUNNING"
KEY POINTS TO CONSIDER FOR ADVANCED MANUFACTURING COMPANIES

  • Lack of Skilled Labor
    Due to a tight labor market and a very different variety of skill sets, especially in advanced manufacturing industries, it is challenging to find skilled employees with at least a basic engineering and automotive background. The situation in many States is different to the DACH Region (Germany, Switzerland or Austria), where apprenticeship programs are in place since many decades.Especially in the automotive industry, even the manufacturing of simple components has become a sometimes complex, highly precise process that demands high-skilled professionals. "Hiring from the street" and even staffing via external temp agencies isn't a good idea: A company can run into serious trouble if the skill sets of its workforce continuously mismatch the requirements and faces on-going quality issues.In certain regions and States, community colleagues and universities have partnered with KMU/Mittelstand companies to build a skill-rich workforce development. The number of DACH-region companies introducing apprenticeship programs at their U.S. branches is increasing every year.
     
  • Underestimated Training Requirements
    It is not uncommon, that D-A-CH companies frequently underestimate the training requirements for their machinery and high-tech production equipment. Even for fast learners it could take months until they could operate production equippment (CNC etc.) or execute auality assurance processes for production parts properly. A lack of training processes is a high risk! Therefore, a strict training schedule is very beneficial for new sites or start-ups–otherwise, chaos is close. Training sessions and testing should be a top prioritized goal of the local HR department in close collaboration with the product team leads and general manager. Also, in many cases, it turned out necessary that instructors and supervisiors (from the company’s European HQ) need to stay much longer than initially planned. A constant rotation of expats rotating in the U.S. subsidiary is not unusual and often helps building a transatlantic colleagueship.
     
  • Challenges in Financial and Operational Controlling
    Some Mittelstand companies tend to extend the "financial runway" for its newly founded, expanding or recently acquired U.S. operations too long and too laissez-faire. This is not healthy liberalism but simply risky.Also, due to the high volume of most U.S. production lines, the output figures and total revenue mislead sometimes about the sober net profit per production unit or per local plant. Also, a supply-chain which involves several other domestic plants could create additional complexity. Autoneum has six plants (Aiken, SC; Bloomsberg, PA; Jeffersonville, IN; Novi, MI; Oregon, OH; Sunnyvale, CA) in North America currently.Even smaller suppliers, for example Mittelstand subsidiaries with US$20 million annual gross revenues in the US, have potential to strengthen their operational and financial controlling.

Turnaround–Yet A Stony Way.

Meanwhile, Autoneum’s Board reinstalled Matthias Holzammer within hours as the new CEO. Holzammer left the company in January 2019 to pursue a new position outside the company–he couldn’t escape for long. Industry expert Holzammer was previously head of Autoneum’s business group Europe, which he successfully restructured and transformed into a profitable operation from 2012 onwards. The chances that Holzammer will be the leading force in creating a second miracle (again) are moderately high. However, it won't be an easy mission.

Now, his main focus is improving the performance at the company’s loss-making North American operations. His first business trip is probably already booked. Destination: Novi, Michigan.

THE BIG UNKNOWN

The expansion of the German-speaking Mittelstand into the US markets is a story of countless small and big successes. But the world is changing. Technological shifts and different consumer behavior will have consequences way beyond the outlook for the current year and many German companies will start feeling the impact. A small team of German originated US market experts has made it their mission to guide the Mittelstand through uncertain times.

by Stefan Götz

For more than a decade the German expansion into the US was driven by the automotive industry. After the recovery from the financial crisis 2008, German premium car manufacturers pushed products into the market that were spot on targeted towards US customers: midsize to large premium SUVs, leading in quality and features. Mercedes, as well as BMW shifted almost their whole production of SUVs to their US facilities, meeting customer demand in the US and worldwide. At the same time buyers’ interest for sedans and compact cars plunged. The focus on a wider products range meant more flexible production lines and just in time supply chains, possible by outsourcing more and more to their supplier bases – a win-win situation for everyone: the OEMs kept their traditional and proven supply chain intact, and German midsize suppliers could enter the US market with contracts for volume production in their pocket.

But with a new generation of consumers, behavior is changing rapidly. The so-called millennials don’t dream anymore of a big house in the suburbs, they prefer shared living models, car ownership is no longer the paramount sign of success and prosperity, but rather considered a burden, which needs expensive and time-consuming parking and maintenance. Instead, they can request an Uber a Lyft through their smartphones within minutes. Sure, the majority of Americans still lives outside of big cities, but this is not the consumer group that dominantly buys German premium brands. Driving out of US cities, attentive observers will learn quickly that the number of German cars declines steadily with every mile they leave the city and suburbia behind.

US and China – top growth markets for ride sharing services[1]

The big German OEMs are very well aware of behavior trends and responded. They started their own car sharing services in the US, invested in self-driving and electric vehicles and entered partnerships with Google and Apple to use their infotainment platforms.

Another challenge to the supplier base is the rising demand for battery electric vehicles. So far, the big break through of the battery electric vehicles has not happened yet, and some industry experts even question, if it will ever happen. The inconvenience in operating them due to a still underdeveloped infrastructure, as well as the currently high costs of ownership are strong limiting factors for the success. As almost every OEM is currently working on bringing new BEV to the market, they focus lies on lowering the total cost per vehicle. With the battery being the most expensive parts, cost savings will need to be necessary on other non-powertrain related parts, thus increasing additional cost pressure on the whole supply chain.

Powertrain composition – compact car[2]

Expected e-mobility development[3]

While suppliers of electric components may be the winners of this trend, metal part producers will strongly have to rethink their business model. A German metal products manufacturer, who produces parts for combustion engine can hardly transform its business model to become a software provider.

The US market may very well be the first market where their business model is shaken up. The US is without question a market of extraordinary opportunities, but for every success story, somewhere hidden you will find a story of rappid decline. The Mittelstand does not has access to comprehensive market studies or an army of business consultants. What the Mittelstand needs is a precise analysis of the own market position, a solution-oriented advice and real actions.

The wind might turn faster than expected. Key industries as the automotive industry are interconnected with consumer confidence. After hitting peak sales in 2018 with 17.3m vehicles sold in the US, 2019 is expected to close with 16.9m, but forecasts for the next two years predict a reduction to 15.1m vehicles in 2021[4] . This means suppliers will have to start preparing for lower demand now.

But restructuring or reorganizing day to day business operations is a tricky thing: Companies have to question processes and income sources that have worked in brighter times, while at the same time taking the risk that cash flow might be lower for the foreseeable future. It is therefore critical to have a close look at the financial situation, readjusting the business strategy.

Here at MitVest we believe in a holistic approach. We are a team of German originated US-market experts, who have been serving German clients for many years. We have seen business models succeed and fail. Our concepts are built on the core believe that market intelligence goes hand in hand with financial intelligence. We analyze your company’s current and future business model, involve industry experts and determine financial needs. Together with you, we develop a financial strategy for different growth scenarios, from scaling down to the preparation for the next expansion. Depending on the business objectives, we will advice you on the best financial structure and if a traditional bank lender, a strategic investor or your own equity is the right fit for you.

[1] https://www.statista.com/chart/9839/top-5-ride-sharing-markets/

[2] Parteto Research, Automobile & Parts, 6 December 2018

[3] Parteto Research, Automobile & Parts, 6 December 2018

[4] CNBC: Edmunds warns of a tough 2019 for us auto industry as sales slide, June 2019

 

Launched in early March 2019, MitVest is open for you: We love working with innovation-oriented executives and ambitious founders to help them achieving better financial results. Our banking team advises on cost-effective capital structures, helps to analyze cash-flows independently and ultimately makes your businesses a true success story.

FRUSTRATED MILLIONAIRE? HEAVEN FORBID!

In an environment where trillions of dollars’ worth of assets have negative yields, investors desire reliable sources of income. How to enhance your portfolio’s yield–while the global economy is cooling off.

by Martin Raab, CAIA

Investing in Fall 2019 is nothing more than a big challenge for investors. Rates in US-Dollars as well as in Euro are on ultra-low levels and likely stay low for some quarters ahead. Also, we are late in an economic cycle and fears of a recession have investors wondering about companies' overall fiscal health and if downgrades and defaults are in our future. Negative interest rates, like in Swiss Francs, are the icing on the cupcake, making it almost impossible to earn a single percent of return.

Shredding some of your “Class of 1996” economic textbooks, used in campus times, seems perfectly fine. The market rules have been changed–by some ruthless central bank folks. The European Central Bank’s Board consistently claimed “to help the real economy” by axing interest rates. Undoubtedly, lowing interest rates is a healthy element times of serious distressed in the financial markets and the economy itself. However, do we really have a “distressed situation” since over 10 years in a row? The architects of this believe are Mario Draghi and Ben Bernanke.

What happens in reality? The ECB, for example, is offering free money to banks, hoping that these billions of Euro may get lend-out to small and middle market enterprises. In reality, financial institutions borrow heavily Central Bank money and invests it into Government bonds. The turnover in selected “Govis” over the last years speaks a very clear language. As result: Each individual or institution with investable money is challenged to find attractive yields, while debtors applaud: Today, having debts in Euro or Swiss Francs is ironically a better position, than owning a million Euros in my bank account.

Sugarwood Financial discuss consistently strategies that seek to enhance yield and manage volatility, including:

■ High-Yield Dividend ETFs – These exchange-traded funds mitigate some of its stock-specific risks by diversifying across hundreds of names. The products are an interesting addition to a well-balanced, yield-seeking portfolio. Most of the HY ETFs are very competitive in the overall pricing ("bid/ask spreads") and its annual fees. Also, there are international high-yield dividend ETFs available. Examples are SCHD, SPHD, VIG, DOL and VIGI. However, not all High-Yield Dividend ETFs perform the same way, as the chart shows. Hence, ask an independent expert to help you with the final product selection.

■ High Yield Dividend Stocks – Depending on your personal risk-profile, selected high-dividend stocks are a good addition for income-seeking investors. Also, it is important to consider the specific company's ability to keep the dividend levels constant in the future. Titans like General Electric or Kraft Heinz, once known for very attractive dividend yields, slashed its payouts meanwhile to almost zero. Finally, keep an eye on cross-border taxation if you invest in German, UK or Swiss high-dividend stocks.

It is not too late to react–make most of your money. We are a trusted partner and independent asset manager for affluent individuals, high-net worth individuals and sophisticated corporate clients. Get in touch with us and see how we can enhance your financial situation, protect your wealth and optmize your investment returns.  

Please note that individual returns highly depend on your individual risk profile, tax situation and other factors. Past performance is no guarantee for future returns. Investors act on their own risk. No recommendation to buy or sell securities or other rights.

KEEP CALM AND RETHINK

After multiple years of economic growth in the U.S., CFOs are well advised to prepare financial strategies for more turbulent times.

by Stefan Götz

It is a fair guess that the global economy may be at a tipping point. One might say that this is primarily caused by political disruptions, such as the ongoing Brexit disaster, global trade disputes and obvious distrust between the main economies. But some industries, face even more disruptive changes from within, such as the shift away from the internal combustions engine or new sharing models for office spaces and hospitality services. But slowdown is not only a danger, it is also an opportunity to question the fundamentals of the own business model. This process starts with a through analysis of the status quo:

1. Does my company have sufficient liquidity for emergencies?

It sounds logical that every company should have a rainy-day fund, but in reality, it is often hard to distinguish how capital is tied in the balance sheet. What appears as free capital in the balance sheet, may be part of working capital or needed at year end to cover taxes and insurance expenses. Mittelstand’s companies, importing goods and services for resell in the US market, usually have a close overview of their accounts payable and receivable. Longer payment terms from the parent company may help liquidity in the short term, but can become a real liability, if customers don’t pay on time or return products. Too much inventory could also become a massive problem, if not addressed beforehand.

2. Where can my business cut back?

Going through monthly expense, it is important to separate between fixed and variable costs. Fixed costs are primarily costs, necessary to run the business, independent from the output. Examples are rent, electricity, etc. Variable costs, in contrast, are expenses necessary to produce an economic output. They tend to rise proportional with income. So, when income declines, fixed expense remain stable. Initiatives like introducing a new CRM or new branding, are nice to have in times of revenue upswing, but can become risky ventures, when sales declines.

3. What is my cost of debt?

Given the low interest environments, debt has become less of a concern during the last years, especially when the business was growing. However, loans and leases are fixed monthly expenses, which do not adjust to the income situation of the enterprise. Some future costs, like residual value of leased equipment, may also not gotten the attention they deserved, especially when they don’t show up in the balance sheet. Although most companies keep track in detail of expected sales, forecasting the Cash Flow statement is rarely done in detail. 

4. What are the core skills of my company?

Cost cutting is always a risky endeavor. When done too aggressively, the consequences can disturb the business model in its fundamentals. It is therefore imperative to understand, which knowledge and expertise is vital to the company. Such core skill can be IP rights, technology or key employees. Keeping these in the company is crucial to ramp up productivity, once the market picks up. One the other hand, an economic downturn is a good opportunity to questions each department’s budget and responsibilities. In the US it is possible to outsource almost each business activity, from HR to marketing, IT and even to R&D and production. For entrepreneurs a slowdown may be the right point to asks, what needs to be done house and what not.

5. What is the next business opportunity?

 Economic cycles move in waves. So far, every recession, was followed by a period of new growth. While a downturn may be used to consolidate the business and sometimes requires painful cuts, it is also important to plan ahead for the future. It is therefore central to identify the parts of the business, which can be scaled up quickly and benefit the bottom line. In this regard it may be worth to keep underutilized equipment in good shape and operators well trained, if they can quickly broad back to speed, when demand rises. It is part of entrepreneurship to decide which asset is worth the risk, but a detailed cost-benefit analysis for different growth scenarios can help with the decision-making process.

At MitVest, we love developing solutions for entrepreneurs for good and in bad times. We know that tightening the belt is never easy, but done in the right way, one may arise slimmer and in better shape. Let’s start working out.

Our Services

  • Detailed balance sheet analysis with a focus on hidden risks and opportunities.

  • Smart forecasts, which will help you determine cash flow needs

  • Adjustment of the debt situation according to required liquidity. If necessary, we help with the restructuring

  • Develop refinancing solution that fit the income situation, from traditional bank loans to leasing solutuions.

  • Our newest product: The Smart Growth Bonds for the next growth investment – a flexible product, customized for different growth stages

 

IMPORTANT INFORMATION AND DISCLOSURES:

Sugarwood Financial Partners, LLC is a Registered Investment Advisor. We are an independent and owner-managed wealth management company, operating under the rules and regulation of the United States of America. Certain offerings may not be available for Non-U.S.-residents. Also, restrictions may apply to certain product strategies and market access. The investment solutions and investment strategies discussed may not be suitable for all investors. The appropriateness of a particular investment or investment strategy will depend on an investor's individual circumstances and objectives. INVESTORS ACT ON THEIR OWN RISK.

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