Change Management. Analysis of the causes of crisis and recommendations for restructuring based on a case study in the automotive industry

TABLE OF CONTENTS

1 Introduction of XYZ Automotive Systems GmbH ... 1
2 Analysis of the problem of XYZ Automotive Systems ... 1
3 Causes of the Crisis ... 1
4 Crisis Cause Sales Structure and Cost of Business units in Europe: A brief overview ... 2
5 Recommended Measures of Restructuring ... 3
APPENDIX A ...III
A1) Financial indices of XYZ Automotive Systems ...III
A2) Hourly rates / full cost basis of the European production facilities ... IV
A3) Productivity per Employee ... IV
A4) Headcount ... V
A5) Recommended Measurements: Strategic, Fiscal and Cost effective in terms of short-term, mid-term and long-term liquidity ... V
REFERENCES ... VII

1 INTRODUCTION OF XYZ AUTOMOTIVE SYSTEMS GMBH

XYZ Automotive Systems GmbH (XYZ) was founded in 1983 in Germany. The company’s focus is on manufacturing test systems which are applied in the automotive industry. The core business consists of the Wiring Harness Test Systems, whereas XYZ is market leader in this segment, and the Function Test Systems. XYZ operates internationally with its subsidiaries in various countries such as Portugal, Turkey, Brazil, USA and China (Putz & Partner 2013a, p.1). In 2005, ABC Private Equity GmbH acquired 100 percent of the shares of XYZ (Putz & Partner 2013b, p.1). In the first half of 2007, 210 employees worked for XYZ worldwide (Putz & Partner 2013c, p.13).

2 ANALYSIS OF THE PROBLEM OF XYZ AUTOMOTIVE SYSTEMS

XYZ’s financial performance between 2001 and 2007 has significantly declined. Appendix A1 shows an operating performance with a slight down slope in 2007 of 18.526TEUR. The EBIT significantly declines with a negative EBIT in 2006 of -826TEUR and -3.712TEUR in 2007. Furthermore, the annual results in 2006 are negative with -827TEUR and in 2007 -5.012TEUR. The balance sheet total has increased to 18.540TEUR in 2006. This is caused by the increase of intangible assets from 2004 1.331TEUR to 8.604TEUR in 2005, the increase of liabilities to credit institutions in 2004 from 2.962TEUR to 10.557TEUR in 2005 and the decrease in owner’s equity to a minimum of 1.847TEUR in 2006. Also, liabilities to shareholders have been firstly accounted for in 2005: 1.640TEUR. These figures point out a rather critical financial situation for XYZ. The company is not liquid anymore and not able to pay suppliers, interest on shareholder loans or amortization payments to financial institutions. XYZ has been granted three loans from BPE Private Equity to assure solvency with a total amount of 900TEUR in 2007 (Putz & Partner 2013a, p.6).

3 CAUSES OF THE CRISIS

Nevertheless, XYZ’s current situation is caused by several problems which are drawn by internal and external causes. Table 2 below examines the strengths and the weaknesses of the company. On the one hand, XYZ thinks global, is the market leader in Wiring Harness Test Systems, has a strong branding “Made in Germany”, in-time delivery by 7 days and is open to business expansion, for instance, with the extension of the core business to Function Test Systems (Putz & Partner 2013a, p.1-6). On the other hand, the internal causes of the crisis can be split as such sales structure of XYZ needs to be applied to the market conditions, the employee management entails a lack of a detailed competence overview, a coherent organizational structure across the whole group is weak, the financial statements are not transparent, the IT-Systems such as SAP for accounting and controlling are not fully integrated across all subsidiaries which means financial accounting is not coherent across the group and XYZ’s management decision making such as expansion in Function Test Systems with its exploitation of potential to other industries has been weak (Putz & Partner 2013a, p.1-38; Putz & Partner 2013c, p.1- 25).

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External causes of the crisis can be determined such as change in market conditions, a change in the customer demands and the lifecycles of the product ranges (Putz & Partner 2013b, p.1).

4 CRISIS CAUSE SALES STRUCTURE AND COST OF BUSINESS UNITS IN EUROPE: A BRIEF OVERVIEW

The highest amount of sales is brought in by the Wiring Harness Test Systems unit, a total of 88 percent in 2006. On the contrary, the products of the Wiring harness Test Systems are sold internationally from all subsidiaries compared to the Function Test Systems which are only sold from Germany. Nevertheless, Germany makes most of the sales in Wiring Harness Test Systems with a total of 60 percent in 2006 (Putz & Partner 2013a, p.37). The production facilities in Europe, Turkey and Portugal, are delivering modules to be completed in the German production facility (Putz & Partner 2013c, p.15). However, on the cost side of production in Europe, Germany compared to Turkey and Portugal has rather high hourly rates including the direct material as well as the overhead costs. Portugal’s hourly costs are twice as high in terms of assembly, quality management and construction compare to Turkey (Appendix A2). Also, the design costs per module are 239.65 EUR in Germany, 391.92 EUR in Portugal and 141.02EUR in Turkey. Portugal’s design costs are besides the higher hourly production rates 64 percent higher than in Turkey (Putz & Partner 2013c, p.16). Furthermore, the productivity of manufacturing the modules per employee have declined by 22 percent from 2005 to 2006 (Appendix A3). At the same time, more employees have been hired at the foreign subsidiaries in Brazil, China, Portugal, Turkey and the USA (Appendix A4).

5 RECOMMENDED MEASURES OF RESTRUCTURING

The case study on XYZ includes recommended measure of restructuring divided into strategic measures, fiscal measures and cost effective measures (detailed overview: Appendix A5). Due to XYZ’s critical liquid situation, it is very important to nominate short-term, mid-term and long-term measurements. In terms of the above explained crisis cause Sales Structure and Cost of Business Units in Europe, there is the following short-term strategic measure to close the production facility in Portugal to gain access to liquid funds shortly. In accordance to other short-term measure of crisis causes and to stabilize the liquidity of XYZ, it should aim at putting interest payments to financial institutions on hold, gaining additional loans from shareholders as well as access to other capital funds such as from financial institutions. This must be supported by an overall appraisal and a communication strategy with the financial institutions. Furthermore to the above mentioned crisis cause Sales Structure and Cost of Business Units in Europe, XYZ should aim at a mid-term to long-term measurements of centralizing the management and the marketing. This is not only limited to the European production facilities but rather looking at an overall approach: an Integrated Management System.

APPENDIX A

A1) FINANCIAL INDICES OF XYZ AUTOMOTIVE SYSTEMS
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A1) Financial indices of XYZ Automotive Systems based on Putz & Partner 2013a, p. 2, 5; 2013c, p.12

A2) HOURLY RATES / FULL COST BASIS OF THE EUROPEAN PRODUCTION FACILITIES
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A2) Hourly rates / full cost basis of the European production facilities based on Putz & Partner 2013c, p.37

A3) PRODUCTIVITY PER EMPLOYEE
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A3) Productivity per Employee based on Putz & Partner 2013c, p.13

A4) HEADCOUNT
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A4) Headcount based on Putz & Partner 2013c, p.13

A5) RECOMMENDED MEASUREMENTS: STRATEGIC, FISCAL AND COST EFFECTIVE IN TERMS OF SHORT-TERM, MID-TERM AND LONG-TERM LIQUIDITY
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A5) Recommended Measurements: Strategic, Fiscal and Cost effective in terms of short-term, mid-term and long-term liquidity based on Putz & Partner 2013a p.1-38; Putz & Partner 2013c, p.1-25 and Group Work during the corporate choice lecture on 26/27.04.2013

REFERENCES

Putz & Partner. 2013a. “Information for the preparation of a Restructuring Appraisal for XYZ Automotive Systems GmbH.” Paper presented at the Corporate Choice class, HSBA, Hamburg.

Putz & Partner. 2013b. “Briefing Letter Case Study.” Briefing presented at the Corporate Choice class, HSBA, Hamburg.

Putz & Partner. 2013c. “Case Study XYZ Automotive System Handout Students for Day 2.” HSBA, Hamburg.