Comprehensive Analysis: Magna International Inc - PowerPoint Presentation Example

Slide Magna, International Inc. Comprehensive Case Analysis Slide 2 Company Background (Bloomberg Businessweek, Magna International Inc. was founded in 1961, and operates today as an automotive supplier in North America, Europe, and internationally. The company designs, develops, and manufactures automotive systems, assemblies, and modules and components. It also engineers and assembles vehicles mainly for sale to OEMs . The company employs 107,000 employees, and its home office is in Aurora, Canada. The firm offers interior, exterior, seating, power train, closure, roof, body and chassis, vision, hybrid and electric, and electronic systems. Slide 3 Industry Analysis Macro-environment Analysis Political issues Commitment to comply with Kyoto protocol to cut emissions Taxes linked to amount of emissions Removal of government subsidies Economic issues Excess capacity due to foreign imports Economies of scale suffering Diversification, mergers and strategic alliances Slide 4 Industry Analysis Macro-environment Analysis Social issues Cars with green technology being marketed in the mature car market Greater environmental consciousness, greater use of mass transport and other alternatives Technological issues Emergence of green technology and light car construction (aluminum cars) Improvement in fuel economy in response to regulatory pressures Hybrid and electric vehicle systems business is a large and promising market for the company. Therefore, Magna continues to explore ways to leverage its technological and manufacturing capabilities to diversify into promising new industries. Slide 5 Industry Analysis Macro-environment Analysis Legal issues Regulation (EC) No. 443/2009 sets emission standards for passenger cars in the EU Environmental issues EC committed to attain a 30% reduction in greenhouse gas emission (based on 1990 levels ) by 2020 Slide 6 Industry Analysis Porter’s Five Forces Model Internal Rivalry High due to international competition High due to the large size of industry Threat from Substitutes Low due to the high cost of switching to substitutes Low due to the high quality standards top clients require Slide 7 Industry Analysis Threat from New Entrants Low: need for strong distribution network Low : high capital requirements Low : patents protect big brands Bargaining Power of Suppliers High: Reliance on outsourced supplies Low: Volume critical to suppliers Bargaining Power of Buyers Low: Customers need the product/s Low: Large number of customers Slide 8 Competitive Advantage Sources of competitive advantage The company’s diversified product line and specialization in automotive components allows it to maximize market exposure and build strong clientele Magna offers one of the broadest product portfolios among tier one automotive suppliers. The company manufactures a wide range of automotive components which include: interior systems, seating systems, closure systems, metal body and chassis systems, electronic systems, exterior systems, power train, drive train and roof systems. Its products and services include sidewall and trim systems, cockpit systems, overhead systems, cargo management systems, carpet and loadspace systems, building prototypes and concept vehicles. It also offers concept vehicle engineering and development, homologation and vehicle styling, powertrain and drivetrain systems, modules and components. Strategic mergers and acquisitions enable the company to enter different market segments while concentrating in one industry, creating economies of scale Through these acquisitions, the company is able to harness a larger market share, access a broader range of customers and extend its product portfolio. In addition, acquisitions signal an ongoing commitment to the companys growth strategy, managing its assets conservatively, and making appropriate use of strong cash flows. Research and development enables greater expertise to cope with changing technological demands Geographic diversification allows for greater ability to cope with economic recession in mature markets Slide 9 SWOT Analysis (Datamonitor, 2011) Strengths Strong inorganic growth Acquired Resil Minas, Erhard & Sohne, Pabsa Magna focuses on strategic acquisitions to expand its business and to increase its earnings. For instance, in November 2010, Magna Seating expanded its presence in South America with the acquisition of automotive seating supplier, Resil Minas. Resil Minas, of Sao Joaquim de Bicas, Brazil, is the largest supplier of seat frames and stampings in South America. Its customers include Fiat, Ford, General Motors, Volkswagen, IVECO and PSA. In December 2010, Magna acquired Erhard & Sohne, a Germany based manufacturer of fuel tanks. Erhard & Sohne’s customers include MAN, Daimler and Scania. Magna Seating further strengthened its presence in South America with the acquisition of automotive seat supplier, Pabsa, in January 2011. Pabsa, previously part of the L’Equipe Monteur Group, is based in Buenos Aires, Argentina, and is a vertically integrated supplier of complete seats, foam products, trim covers and seat structures. In addition, Cosma International acquired the Durbheim facility of Acument GmbH, Germany, in February 2011. Broad product portfolio Firm manufacturers a wide range of automotive parts A broad product portfolio allows Magna to offer nearly all components of a new vehicle model, which results in a high dollar content per vehicle. The company has increased its average dollar content per vehicle in North America, from $872 in FY2009 to $988 in FY2010. Similarly, the average dollar content per vehicle in Europe increased from $495 in FY2009 to $536 in FY2010. Broad product portfolio shields the company against demand fluctuations in certain product categories and also enables it to benefit from opportunities available in various segments. Strengthening of hybrid and electric vehicle systems business Formed Magna E-Car Systems to develop vehicle electrification projects Developed a vehicle-development partnership with Ford Motor, issued a zero-emission lithium-ion battery electric vehicle. Magna remains focused on significantly strengthening and deepening its expertise in electric vehicle development and electric vehicle systems. During the past year, the company continued to make major strides in pursuing its strategic objective of becoming one of the industrys leading hybrid and electric vehicle systems suppliers. These include, formation of Magna E-Car Systems; joint venture with Semikron; and partnership with Ford Motor. The company created Magna E-Car Systems in 2010 as a new global operating unit to merge its technological competence and market position in the field of hybrid and electric vehicle technologies. Magna E-Car Systems will work together with the companys existing product groups and will help manage complete vehicle electrification projects with its customers. In FY2009, Magna formed a vehicle-development partnership with Ford Motor to introduce a zero-emission lithium-ion battery electric vehicle to be delivered to market in 2011. This partnership leverages the technical expertise of two global companies to achieve a common goal, delivering a no-compromise, zero- emission, battery powered car for the retail market. Also in FY2009, Magna and Semikron, a technology leader for power semiconductor components and systems, formed a 50/50 joint venture to produce power electronics for future electric and hybrid vehicle applications. This joint venture with Semikron provides Magna with an experienced and strong partner in the field of power electronics. Slide 10 SWOT Analysis Weaknesses Dependent on the outsourcing for components Magna depends on original equipment manufacturers, or OEMs , to which it outsources its components, modules, and assemblies, and at times complete vehicles. Magna is dependent on the outsourcing of components, modules and assemblies, as well as complete vehicles, by OEMs. The extent of OEM outsourcing is influenced by a number of factors, including relative cost; quality and timeliness of production by suppliers as compared to OEMs; capacity utilization; labor relations among OEMs; their employees and unions; and other considerations. As a result of lower cost structures due to recent restructuring actions, some OEMs may produce the goods, which they have been outsourcing previously. Outsourcing of complete vehicle assembly is particularly dependent on the degree of unutilized capacity at the OEMs own assembly facilities, in addition to the foregoing factors. Overdependence on few customers Magna depends highly on a few key customers, among whom are General Motors, Ford Motor, Fiat/Chrysleer, BMW, VW and Daimler, who account for 81% of sales Magna is highly dependent on few customers including, General Motors, Ford Motor, Fiat / Chrysler, BMW, Volkswagen, and Daimler. These customers contribute 80.5% of total revenues generated in FY2010. High dependence upon a few customers reduces the bargaining power of the company. Large customers besides using their bargaining power to impose unfavorable terms, would try to influence the strategies of the company. For instance, in 2009, Volkswagen threatened to cancel all of its contracts if Magna bought General Motors German-based Opel unit.Therefore, overdependence on few customers could have a material adverse influence on Magnas operations thus impacting its profitability and financial condition Slide 11 SWOT Analysis Opportunities Increasing demand for hybrid electric vehicles Worldwide demand for light hybrid electric vehicles (HEV) and batter electric vehicles (BEV) to reach 5.2 million by 2010 The worldwide demand for light hybrid electric vehicles (HEV) and battery electric vehicles (BEV) is estimated to reach 5.2 million units by 2020. Rising energy costs and increased emissions regulations are likely to increase the demand for HEVs, as hybrid engines are more fuel efficient and less polluting than conventional gasoline and diesel engines. Cost disparities between HEVs and conventional light vehicles are expected to decline as production volumes increase.The primary markets for HEVs will be within Triad countries (the US, Western Europe and Japan), although the rapidly growing Chinese market is also expected to experience relatively strong demand for these fuel efficient and environmentally friendly vehicles. Growing Asian automobile industry China, India and ASEAN countries to drive demand The Asian automobile market is expected to drive global demand for light vehicles through much of this decade. China, India and ASEAN (Association of South-East Asian Nations) countries are the major driving markets for Asian automotive industry. For instance, according to the Society of Indian Automobile Manufacturers, annual car sales in India are projected to increase up to five million vehicles by 2015 and more than nine million by 2020. Similarly, it is estimated that the registered cars, buses, vans, and trucks on the road in China is expected to exceed 200 million by 2020. Poised to benefit from the acquisition of Pabsa Pabsa recorded $110 million sales in 2010 Magna focuses on strategic acquisitions to increase the opportunities for sales and growth in earnings. For instance, in January 2011, Magna Seating acquired Pabsa, an Argentina based supplier of complete seats, foam products, trim covers and seat structures. In FY2010, Pabsa, previously part of the L’Equipe Monteur Group, recorded sales of approximately $110 million.The transaction, which includes two production facilities in Buenos Aires and one in Cordoba, Argentina, increases Magna Seatings global footprint and further positions the company as a leading supplier of automotive seating solutions in South America. Slide 12 SWOT Analysis Threats Intense competition and pricing pressure Competitors include Aisin Seiki, Borg Warner, Dana holdings, GKN, Gentex, Genuine Parts, etc. Magna faces intense competition across its market segments. The company competes on the basis of pricing, product and service quality, development and introduction time, customer service and financing terms. Magna faces strong competitors, some of which are larger and may have greater resources in a given business area and some from emerging markets, which may have a better cost structure. Some of its competitors are Aisin Seiki, BorgWarner, Dana Holding, GKN, Gentex, Genuine Parts, Johnson Controls, Lear and Robert Bosch. Volatile raw material prices Magna buys $2B worth of steel & $1B of plastic resin. Steel prices expected to rise by 60%, resin by 20% Rising raw materials costs pose a considerable threat to the earnings of the auto parts and accessories manufacturers, including Magna. Magna purchases approximately $2,000 million of steel per year and about $1,000 million of plastic resin. The prices of plastic resins, rubber, oil and steel have increased considerably due to enhanced global demand, mainly led by the emerging countries like China and India. In 2011, steel prices are estimated to increase by 60% and plastic resin prices are estimated to increase by 20%. Higher steel prices and resin prices would negatively impact Magna by approximately $100 million and $150 million, respectively in 2011. Foreign currency fluctuations Magna generates 79% of its revenues from markets outside of Canada. Magna conducts operations in worldwide, which involves transactions denominated in a variety of currencies. A significant portion of the companys revenues and expenses is denominated in currencies other than the Canadian Dollar. Moreover, Magna generates 79% of its revenues from markets other than Canada. Therefore, the company is subject to foreign currency risks and foreign exchange exposure. The primary exposures are to the US Dollar, the Euro, and British Pound. The effect of changes in demand and refinancing conditions, and fluctuations in exchange rates can have a significant impact the companys profit on imported and exported goods. Slide 13 Corporate Strategy Alignment Strategic alignment explores the relationships among the following: Business Strategy - Geographical expansion coupled with product diversification and technological innovation, to capture growing and changing green car demands Magna has a significant presence in the Asian automobile industry. In addition, the company has been taking a number of initiatives to tap the growing automobile industry in Asian.Therefore, growing Asian automobile industry represents an opportunity for Magna to capitalize on this market and to expand its revenues and profits Organizational Infrastructure – Supports global locations as well as product specializations, allowing strong performance and capabilities in a comprehensive range of automobile systems Slide 14 Organizational Structure, Magna Slide 15 Corporate Strategy Alignment Firm resources - Reduction in debt financing, increase in equity Disposal of non-productive assets, improved liquidity Substantial tangible assets as well as goodwill Distinctive competencies – Capacity in wide product range Developed new specializations through mergers and acquisitions Strong position to capture growing hybrid market Slide 16 Liquidity & Solvency Ratios Slide 17 Asset Utilization Ratios Slide 18 Profitability Ratios Slide 19 Comparison with Competitors Slide 20 Z-score for predicting bankruptcy (Data for financials sourced from 10-K Report) Slide 21 5-Cs of Credit Character – Strong reputation, favorable regard for brand name Capacity – Sufficient reduction in debt levels allow for capacity to leverage up Capital – Increase in equity position and improvement in capital structure from debt to equity Collateral – Sufficient tangible assets Conditions – Susceptibility to weak performance in unfavorable economy Slide 22 Recommendation The result of the preliminary evaluation shows that Magna International Inc. has been adversely affected by the recent financial crisis, but appears to have resolved their problems and sustainable operations have been strengthened. Recommendation, however, is to wait for 2011 performance results before Magna could be included as a potential target company for conversion to Cap One Blue Chip Accounts. Read More