With the Detroit Motor Show providing a feel good start to 2012, we are seeing a new excitement about product across the automotive sector. In this edition of Overture, Fidelio looks deep into the organisations which create the cars in the headlines and explores value generation in the automotive sector in terms of Human Capital.
Gillian Karran-Cumberlege
Clearly the automotive industry is heavily capital and labour intensive. It is estimated that the sector accounts for one in seven jobs in Germany; Volkswagen and Toyota have global employees of over 500,000 and 300,000 respectively. Unsurprisingly the contribution of human capital has traditionally been assessed in terms of labour costs in relation to revenue, as well as per hour and per car.
These metrics clearly have their limitations with the market being surprised by the spectacular uptick in performance by the German OEMs following the 2008 crash. An average personnel cost ratio of 15% for the German OEMs in 2010 indicates that labour is a much smaller portion of the cost base than expected. Equally the focus on the hourly cost of labour masked the very substantial increase in flexibility prior to 2007, which combined with a weakened euro, goes far to explain Germany’s current export competitiveness.
It is back to being all about product, which is the way it should be,
– Mark Fields, Ford President of the Americas, USA Today, 8th January 2012
Let us therefore re-adjust the lens through which we view human capital. Taking a top-down approach, Board composition typically comes into focus in the context of M&A or an activist agenda. We would also argue, however, that few sectors represent greater complexity than the automotive industry with its global supply chain, massive consumer base, substantial workforce and strong political interests. Against this backdrop we question limited investor focus on Board effectiveness. We concur with The Economist that Toyota’s recall challenges in the US in 2010 could have been contained more effectively if the Board itself had better grasped the stakeholder landscape in the USA.
Moving to the Executive, there is indeed recognition that, despite the scale of the automotive OEMs, individuals can change the course of history in this sector. It is indeed an industry of big names – Dr Ferdinand Piëch, Jacques Nasser, Carlos Ghosn and Wolfgang Bernhard. Dramatic share price movements in response to the arrival or departure of such executives underscore the market’s belief that individuals at the helm can make a difference.
Therefore it is not surprising that the market does indeed focus on C-suite succession planning. But looking further into the organisation, an OEM such as BMW, which is able to field a deep talent bench across key management positions is clearly at a competitive advantage. Investors arguably lack the interrogative tools to form an opinion regarding the quality of succession planning, despite the obvious link to performance.
Indeed, succession planning becomes all the more acute for organisations operating complex operations across multiple geographies. Thus, Volkswagen’s dramatic and successful expansion in recent years rests upon a global management capability. Effectively the management pipeline for a multinational acquires the complexity and significance of supply chain management. The market scrutinises the latter, seldom the former.
The management pipeline that represents effective succession planning typically comprises internal and external talent. In the technology sector much analysis is devoted to the competition for talent between Google, Apple and Microsoft. Arguably analysts would do well to monitor the employer of choice for Germany’s leading engineering graduates – an analysis which has also become increasingly relevant for Chinese and Indian engineers.
The ability to attract talent is also a key differentiator at the management level. Indeed our work with both line management and HR in the automotive sector indicates that talent bottlenecks can represent an impediment to growth in critical fast growing markets. OEMs, suppliers and distributors are challenged to attract talent, for example in such dynamic markets as China. The demand for engineers is much discussed but bottlenecks clearly also exist across a range of finance, marketing and sales roles. A specific challenge is attracting senior management who combine functional expertise with the cultural profile required for effective leadership both at a local and multinational level.
The recession and the failures of the financial system have generated renewed interest in the link between an organisation’s financial performance and the way its employees are rewarded and managed.
– View from the City, CIPD/Henderson Global Investors, November 2010
It is widely accepted that the quality of business leaders drives value. We argue in this edition of Overture that an organisation’s ability to attract, develop and allocate talent is a key differentiator. Board composition provides a useful insight into the calibre of risk management. And an investor who can judge the quality of succession planning and the gravity of talent bottlenecks is surely close to identifying a genuine competitive edge.
Coming Up…
Overture explores how talent drives valuation. Future editions of Overture will deal with
• What do SWFs look for in Management Teams?
• The Strategist and the Communicator
• The New Challenge of Reward
• The Art of Building Shareholder Buy-in
• Executive Pay and Risk
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