Despite recent signs of economic recovery, the global heavy-equipment industry still has a big hole to dig itself out of, as 39 percent of companies in the sector face the risk of financial distress in the next two years absent aggressive restructuring action. That figure is up from 13 percent a year ago, and just 6 percent the year before that. That’s according to a study released by global business-advisory firm AlixPartners LLP.
The study, which looked at 35 OEMs from the agriculture, construction and heavy-truck industries in North America, Europe and Asia, also found that despite a double-digit revenue decline since 2008, selling, general and administrative (SG&A) costs have actually increased, by 4 percent. It further predicted that, going forward, construction equipment will remain the most depressed of the three sectors, but that the other two industries will continue to be challenged as well. In addition, the study pointed to aggressive working-capital management, as part of an overall cash-management program, as key to avoiding risk in the current environment.
“In today’s more sober, ‘new normal’ environment of less economic activity, less building construction, less shipment of goods and less of just about everything, heavy-equipment companies need to build flexibility around the fact that they don’t have less of one thing: a giant millstone around their necks in terms an average fixed-cost load of about 30 percent,” said Francesco Barosi, an AlixPartners managing director and head of the firm’s heavy equipment practice. “As a result, many companies, in all three segments, are far from out of the woods, despite things like recent run-ups in some stock prices. Given their fixed costs, for every dollar in lost revenue heavy equipment firms need to be able to shed at least 30 cents in structural costs just to stay even, but clearly that has not always been the case, starting with SG&A costs.
“The key for heavy-equipment companies going forward,” continued Barosi, “will be achieving even greater financial flexibility than they have to date, which in turn means undertaking a staged portfolio of actions, from improvements in working capital, direct material costs, manufacturing footprint and beyond. That is what the most successful companies in this sector have done already, and those that wish to avoid distress in the tough year ahead will do the same.”
Barosi went on to say that most heavy-equipment OEMs need to scale back their SG&A spending by at least 10 percent in order to realign their operating expenses with their current revenues.
The study, the AlixPartners 2010 Heavy Equipment Industry Study™, also found that cost-structure flexibility is equally important should the economy fully recover, as a lower cost base aids in the ability to quickly ramp-up volume.