In this edition of Overture Fidelio visits again a sector that is one of the largest employers globally and whose brands inspire governments and consumers alike – the automotive sector. While agreeing with the famous Warren Buffett dictum below, we also argue that particularly in the automotive sector experience has tremendous value.
Gillian Karran-Cumberlege
A recent Automotive Conference hosted by the leading independent stockbroker, Redburn, explored margin sustainability in the sector. The scope of the challenge is vast; Fidelio suggests that a focus on the calibre of leadership provides a convenient short-cut for the asset owners. For manufacturers to be successful in returning value to their shareholders it is imperative to demonstrate the ability to create demand, achieve gains in both domestic and international market share and attain a clear advantage in production cost. Premium branding will become a component of sustainable profit growth if it contributes to successive gains in market share.
As a sector the automotive industry is global, competitive and enormously complex. Automotive leadership is multi-dimensional: managing the detail of a manufacturing process and supply chain that span the globe; constantly innovating to stay ahead of regulation and to inspire customer delight; and nurturing some of the most powerful brands the world has known.
While in the Financial Services sector regulators vet leadership roles of significant influence (SIFs), hard commercial reality represents its own tough selection process in the automotive sector. Shareholders should be looking for leaders with deep experience and understanding of the processes that underpin the automotive industry and a proven track record in delivering value. Manfred Wennemer, former Chief Executive Officer of Continental AG and a multiple Non-Executive Director, provided a clear, intelligent and uncompromising analysis of value generation – or lack thereof – in the sector at the Redburn Automotive Conference. Shareholders would do well to insist that this calibre of experience is available to the automotive companies they invest in – be it in an executive or non-executive capacity.
We would not dispute that the ability to respond to change is critical to success in any industry, even one with huge barriers to entry such as the car industry. Indeed all seasoned automotive executives have been surprised by the phenomenal growth of the Chinese market. Here arguably one of the biggest challenges for the OEMs is the talent bottle neck for the senior finance and engineering capability which is necessary to keep pace with the explosive growth of the Chinese market.
The recent preoccupation of those investing in the automotive sector has been whether one of the German luxury car manufacturers has been discounting in China. The marketer’s dream – the sudden opening up of an affluent and large new market which is fascinated by traditional Western brands – may well require innovative solutions. But both Martin Leach, Chairman of Magma Group, and Adrian Hallmark, Global Brand Director of Jaguar, at the same Redburn Conference identified the importance of brand management skills in China. An enthusiastic marketing and distribution capability that has not experienced how to nurture a brand through a soft or weakening market may contribute to the volatility and decline that it is seeking to avoid.
We accept that confusion in the face of a challenging market is by no means a purely Asian phenomenon. Think of the implosion of traditional American automotive brands in 2007 to 2009 – little marketing discipline there! And European volume brands in particular have also fallen into bad habits. Despite this sorry history, we argue it is imperative that automotive OEMs and their distributors ensure their senior sales and marketing capability includes seasoned industry professionals with a track record of nurturing a brand through choppy and sometimes treacherous waters.
When a business team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.
– Warren Buffett
Previous Overtures have maintained that Boards in particular can be strengthened by looking beyond the industry and the narrow pool of executives currently in leadership roles. We remain convinced of the value of Board diversity and wary of the cult of charismatic CEOs. In complex industries we do however explicitly recognise the importance of an Executive and Non-Executive bench that includes hands on and relevant experience. Moreover, we argue that leadership is likely to be greatly enhanced if this experience is through tough and challenging times. Provided lessons are learnt, past failures can add substantially to the effectiveness of a leadership team and also the value of a business.
Coming Up…
Overture explores how talent drives valuation. Future editions of Overture will deal with
• De-risking the Hiring Process
• Learning and unlearning CEO Behaviours
• The Strategist and the Communicator
• The Art of Building Shareholder Buy-in
Please contact us with comments or for more information on Fidelio Partners on info@fideliopartners.com