TRAVERSE CITY, MI – Low returns on invested capital are a big reason automaker stock values languish, while tech firms are the darlings of investors, says an auto-industry financial turnaround expert.
“Low ROIC, especially in low-growth capital intensive industries, typically generates laggard shareholder returns,” AlixPartners Managing Director Al Koch says here at the 2017 Center for Automotive Research’s Management Briefing Seminars.
He probably is best known for his role in General Motors’ dramatic turnaround during last decade’s worldwide financial meltdown. He served then as GM’s chief restructuring officer.
“Return on invested capital in the auto industry pales in comparison with high-tech companies,” he says.
For example, Apple and Google in 2016 had 19.9% and 14.2% ROIC, respectively. That compares with 2.7% for Ford and 5.2% for GM.
He says the auto industry should “always, always” keep ROIC in mind and work to improve it significantly.
A way to do that is through more partnerships, including with tech firms.
“That means being open to the idea of not controlling the entire process,” he says. It also means being OK with what he calls NIH, or “not invented here.”
NIH shouldn’t get in the way of business objectives, he says.
Currently, capital spending gobbles up half of available cash in the auto industry, Koch says. That could create code-red conditions during a potential sales downturn in a business known for its ups and downs.
“A downturn will strain balance sheets,” he says. “It all comes down to dollars and cents.”
