Corona Crisis - Germany CIP as EBITDA - Leverage in the Foundry
Experts agree that the world will look different after corona. With regard to the sales figures of the automotive industry, expectations for 2020 as well as for the following years fluctuate strongly. This also applies, as a result of the high level of dependency, to the production figures of German foundries.
The particular problem with all forecasts is to first estimate the end of the corona crisis. But also for the time after expectations vary widely as the corona crisis comes to an end. The number and weighting of the different influencing factors present the experts with special challenges. However, at one point they all agree that economic influence and the temporal effects will be much greater than we would expect from crises in the past know.
Even if we currently have the feeling that we do not even know the present, from now on we must intensively occupy and shape the future. Despite the many unknowns in this process, we know that the technological but above all the economic challenges will take on a new dimension. There will be no production volume as before the crisis in the near future. The main EBITDA leverage of the past, the permanent increase in production volumes, will therefore be missing from most foundries for the foreseeable future.
While securing liquidity has been the sole management priority in recent weeks, the continuous improvement process, as the most important EBITDA lever, is now at the same level. Special times require special consequences. Only foundries that have consistently implemented the necessary changes will retain their market authorization for the time after the crisis.
Past, Present, Future
After corona, the foundry industry will not be the same as before. We know the past, we must accept the present and shape the future. Triggered by the substitution of many vehicle parts (main focus: drive train) by aluminum casting applications, the foundry industry has only known permanent growth since the 1980s. The influence of this growth of 5% and more per year has now become a permanent feature of the foundries' profit planning. Many foundries have only been able to maintain the quality of their results over the years through this growth in sales, even if often at a low level (Ø EBITDA of German light metal foundries 2017; 8.3%).
However, the management focus in recent weeks has not been on earnings forecasts, but on the issue of liquidity. A detailed and rollingly updated liquidity forecast (basis: worst case scenario) is currently the most important company report of top management. Derivative KPI's are of utmost importance as early warning systems and have at least temporarily displaced other key figures.
In addition to the necessary and correct focus on the present, foundries have to deal with and shape the future immediately and with the same intensity. Only if new opportunities and known approaches can be implemented in CIP projects with EBITDA effect and if these can be sustainably transferred to the company results, the companies will be successful.
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The necessary CIP projects must:
- be clearly described (objectives). The profit contribution of the projects must be visible in the P&L.
- have figures as a basis for all actions.
- be analyzed on the basis of figures, data and facts
- have the highest priority in implementation (management commitment)
- generate short-term EBITDA effects (monthly results) and be sustainable in the long term
The required CIP EBITDA leverage will be twice as high in the short term as in the past. New opportunities but also already known approaches must be used. Costs and benefits must be evaluated individually and projects must be prioritized accordingly.
Even if we don't know when the end of the corona crisis will come, the remaining time will in any case become less every day. The companies must now intensively deal with the time "afterwards". In most cases, a continuation like before will not be sufficient.
With the continued focus on liquidity, the issue of change must be given the highest priority. New opportunities but also already known approaches must be assessed individually. The implementation priority must be strongly geared to the EBITDA effect.