Are pre-coronavirus turnaround plans a blessing for carmakers?

22 May 2020

22 May 2020

The coronavirus (COVID-19) pandemic is playing havoc with the financial performance of carmakers. But could those who are undergoing multi-faceted recovery programmes find themselves in a stronger position as the industry rebounds? Daily Brief editor Phil Curry muses over the situation.

For some manufacturers, the timing of the pandemic could not have been crueller. These carmakers are going through a period of change, with plans announced to return to profitability after months, or even years, where financial results have not lived up to their expectations.

However, could it be that the existence of these plans will benefit these manufacturers? Consider some of the key elements of a turnaround project – the need to save money by cutting employment, dropping models, and if possible, moving to shared platforms and engines. In this respect, these carmakers have experience of how difficult it can be to return to profitability. In contrast, their cost savings and, in the case of some carmakers, success will help them weather the storm better than if such turnaround plans had not been in place.

Steady pace

Opel, for example, suffered during its tenure under the ownership of General Motors (GM) and had not posted a profit for almost a decade prior to its sale to PSA Group. The carmaker initiated its PACE! plan, which saw it post a €508 million profit in the first half of 2018 that grew to an operating profit of €1.1 billion at the end of 2019. This undoubtedly puts the carmaker in a better position financially than it had been during the years of declining profits.

PACE! does not only apply to profits, however. The plan saw a number of job cuts and model restructuring, including the movement of some vehicles to PSA platforms. ‘Vehicles based on the shared Multi Energy Platforms are up to 50% more cost-efficient in development while at the same time improving quality,’ the carmaker said in 2018.

Therefore, Opel already has experience in pulling itself out of a difficult period and has plans to improve its profitability further, while its movement to share platforms with its new PSA Group sister brands means it is already on a better financial footing than it was when the French group bought the business.

Ford too, has initiated a turnaround plan for its European business, which saw success at the end of 2019. The company generated $21 million (€19 million) in EBIT in Q4 last year, versus a loss of $199 million the year before, and improved to nearly break-even for the full year. The business refocused its resources on three product segments: commercial vehicles, selected passenger vehicles and iconic nameplates, such as Mustang. At the same time, the business became more efficient, announcing plans to close or sell six manufacturing plants and eliminate 12,000 positions across the region.

‘Our strategy for Europe remains unchanged. The second quarter is difficult, but we expect to build on the promising start to the year before the crisis,’ Ford’s corporate communications spokesperson Rella Bernardes told Autovista Group.

Charge ahead

Then there is the case of Jaguar Land Rover (JLR) and its ‘Charge and Accelerate’ program. The carmaker follows the April to March financial year and was unable to comment on the current status of its plans due to the upcoming release of its full-year financial results.

However, in its Q3 (October to December) reporting during January 2020, it noted that the transformation programme had reduced operating costs by £154 million (€172 million), investment by £200 million, and inventories by £405m in the quarter. This brought the total cost and cash flow improvements to £2.9 billion, exceeding the £2.5 billion target three months ahead of its schedule. The company announced that it was embarking on ‘Project Charge +’, the next phase of Project Charge, which will primarily target cost savings and deliver a further £1.1 billion of cost and cash flow improvements for a total of £4 billion of improvements by March 2021.

While currently unknown, it is likely that this deadline will change in line with the coronavirus impact. Part of JLR’s plan was to improve its sales in China, a key market for the manufacturer. However, during February and March of this year, sales in the country were hit hard due to lockdown implementation.

Merging interests

Perhaps one of the biggest ‘turnaround’ plans, and one that has received much speculation in the media due to its size and complexity, is the merger of PSA Group and Fiat Chrysler Automobiles (FCA). The Italian business has been the slightly weaker of the two financially, with 2019 net revenues in Europe down 10%, while PSA Group’s net revenues in the region were up 1%. However, FCA has much to offer PSA Group, with a strong foothold in the US, something the French carmaker desires, as well as access to premium and luxury brands in Alfa Romeo and Maserati that will complement the Peugeot, Citroen and DS line-ups.

‘I’m pleased to report that all the workstreams for the 50:50 merger project we announced between FCA and PSA, to create one of the world’s leading automotive groups, are proceeding on time and as envisaged,’ said FCA chairman John Elkann while addressing the annual shareholder meeting of Exor, the Agnelli family holding company which controls FCA. ‘The strategic logic of this combination for the two companies and all their employees is stronger than ever.’

The two carmakers have agreed to scrap a dividend payment of €1.1 billion that was agreed as part of the initial deal, due to the COVID-19 pandemic, while a further dividend payment of €5.5 billion to shareholders may also be in question, following reports the carmaker has asked for a €6 billion state-backed loan from the Italian Government. However, none of this jeopardises the merger deal, which is still subject to antitrust approval. Should it go ahead and be cleared to happen, likely by the end of this year, the combined might, access to new markets and various new platforms and technologies, will indeed benefit the carmakers and help them in a post-coronavirus world.