The global footprint of Spanish metal parts supplier Gestamp makes it very well placed to understand the effects the coronavirus pandemic is having on the auto industry. Gestamp’s first-quarter profit declined but it still maintained a 9.6 percent EBITDA margin. Despite disastrous second-quarter vehicle sales in Europe and the U.S. because of the pandemic, Gestamp Chairman Francisco Riberas says he will fight hard to remain profitable in 2020. He also told Automotive News Europe Correspondent Nick Gibbs how the crisis might even help Gestamp grow.
in Automotive News Europe, by Nick Gibbs, 16-06-2020
How many of your plants are running again?
A lot of them are open, including most of our operations in Europe and in the U.S. This month we started all our facilities in India. In late May Brazil came back online. The number of closed plants is very limited, but it’s also true that the level of activity in these plants varies greatly.
What capacity are you working at in Europe?
Our operations in Europe are running at 40 percent to 50 percent. It’s a bit more in Eastern Europe, including Poland and the Czech Republic, and a bit less in other areas, for instance, in the UK, where the comeback is a slightly delayed.
What about China?
All our plants in China are running quite well, especially our plants in the north. It’s still early, but the information from late May is that we have been able to outperform our initial budget in terms of sales from our China plants.
What does this mean for revenue projections?
It is difficult to predict because things are moving quite fast. The most important concern now is whether demand from car buyers will really come back. In China it seems that it has, but we still need to know what is going to happen elsewhere. In Europe, the month of April was a complete disaster in terms of sales. We are waiting to see how governments will support demand, which is going to be important. In the U.S. demand from end customers was also very low in April, but not as bad as in Europe. The most difficult thing to forecast is the reaction of the people, which is linked to the reaction of the global economy.
Will Gestamp make a profit in 2020?
There is going to be a huge fight to maintain a good EBITDA [earnings before interest, taxes, depreciation and amortization]. Last year our EBITDA was more than 1 billion euros. But this year will be first time in many years that we our sales have decreased. It will be very difficult to generate EBITDA that is sound enough to generate profits, but we are fighting to do this.
Gestamp had a good first quarter but, given your exposure to Europe, are you expecting a difficult Q2?
Yes, I think most of suppliers based in Europe or in U.S. are going to be much more impacted in Q2 than they were in the first quarter. April was difficult. May improved a little, but not that much. We will see what happens in June.
You quote IHS Markit predications in your Q1 report that the global total industry volume [TIV] will be down 23 percent this year. Do you still believe that?
Our assumption will change a lot from one quarter to the next. We still forecast a very severe global impact in the second quarter. We continue to expect that in the second half of the year we will see a decrease of 10 percent to 15 percent, so, not as much as expected.
Are automakers telling you they will delay or cancel new model programs?
This crisis is not the same as the one in 2008-09, when most of our customers adapted or froze a lot of their new model programs. Unlike the last crisis our customers don’t see a structural problem. In terms of new products and new vehicles, we haven’t had any big announcements by our customers saying they intend to stop a program. There are some delays, ranging from one month to six months, but they are not very radical. However, we are convinced that these kind of changes will happen.
Why are you convinced automakers will cancel programs?
The most important reason is demand. If they feel there will be a prolonged impact from the pandemic, they will probably need to address overcapacity. I would not be surprised if we start to see plans similar to the ones that have been recently announced by Renault, Nissan and Mitsubishi. So far, we haven’t seen too many plant closures, but that is something that could happen. I think there is overcapacity in this sector now because even in 2018-19 we saw sales decline when we were expecting growth. Therefore, even before COVID-19 there was some overcapacity in the market.
What does it mean for EV demand?
The COVID-19 crisis will convince even more automakers and governments to continue to push EVs [scrapping programs in France and Germany are providing up to 13,000 euros toward the purchase of an EV]. Most of our customers will not cancel their EV programs, instead they will probably delay programs linked to autonomous vehicles and connectivity because they will need to save some money. We are very well positioned to take advantage of the growth of the EVs because we have the ability to reduce vehicle weight by using hot-formed steel and similar technologies.
How are steel prices reacting?
Even before the crisis started there was a slight decrease in steel prices, at least for the auto industry. We started 2020 with prices that were lower than in 2019, and last year they were lower than in 2018. In 2021 demand will be linked the recovery of the economy. And while we don’t know what automotive demand will be like next year, I currently don’t see many reasons why steel prices will move a lot next year.
How is supply for you at the moment?
We are doing well in terms of supply. We need to produce quite close to where our customers are, and we don’t buy many parts from areas such as China. Overall, I see very limited impact. I think most of the problems are because of demand rather than supply.
You talked in your Q1 release about the need for a drastic cost-flexibility measures. What did you mean?
could see lower volumes not only this year but for years to come. Therefore, most of the companies working in this sector will need to address their fixed expenses. That’s absolutely clear. In some cases, this could include restructuring.
Automakers were already preserving cash ahead of the pandemic. What fundamental changes will they be forced to make that they weren’t already doing?
Cash is going to be important for them. They cannot stop investing in crucial vehicles, so they will probably reduce investments in non-crucial programs. They will also try to attack their fixed expenses, which means they may increase outsourcing to preserve cash.
Does this mean the crisis could present an opportunity for Gestamp if they outsource more metal stamping?
It’s too early to say. We currently only see the problems caused by the pandemic, but there will always be opportunities. As happened in previous crises, there will be some consolidation of the industry. There will be some suppliers that are more impacted. In the coming months, we will probably see suppliers facing a financial situation that is not very comfortable.
Gestamp was able to grow in the aftermath of the financial crisis of 2008-09, right?
Yes. In 2010 we bought the first company [the hinge and control systems unit of Edscha], and one year later we bought Thyssen Krupp’s metal forming division. We reacted quickly and as a result we incorporated different kind of activities into the group. We need to see what is going to happen after this crisis.
Are you in a financial position to do something similar now?
Our financial situation in terms of liquidity is OK. We have been able to really improve our position, but we need to determine whether this will allow us to undertake further consolidation. It’s very important to really understand whether we are going to have three, four or five years with volumes that are below what we had in 2017. Even in 2008-09 there were countries such as China and India that did very well. This time every country has been impacted; therefore, we don’t see these the same kinds of opportunities.
Do you do get an early warning on plant closures such as Nissan’s decision to shutter its factory in Barcelona?
Our customers tend to be quite quiet about this, but with some common sense you can figure out what could happen. Nissan had a very aggressive growth strategy for roughly a decade, but in the last two years they realized that just growing would not be good. The Nissan plant in Barcelona was not as competitive [as alliance partner Renault’s factories in the country] because volumes were very low for the last three years. In addition, some Renault factories in France are not the most competitive. Therefore, most decisions to scale down a footprint are common sense.
Will the politics that come with shutting a plant in Europe impact these common-sense decisions?
The managers of these big companies need to make the decisions they think are best for their companies in the long run. That being said, the social and political environment in Europe will make things very difficult. We will see governments try to save companies that they might have been attacking three or four years ago due to environmental reasons. It’s going to be nice to see some equilibrium develop between keeping industry going, preserving jobs and pushing for the greener vehicles.
North American was the only region where Gestamp increased revenue in Q1. Why?
We have made some investments in the last two years and focused on some specific programs, for example, with Daimler in Tuscaloosa [Alabama], in South Carolina for BMW and also Fiat Chrysler Automobiles around our hot-stamping technology. The programs were running well until the COVID-19 crisis started. We are absolutely convinced that the activity will come back, which would mean that our sales in North America could be more than 20 percent of our global sales in the next few years. It’s a very good diversification for us that reduces our exposure to Europe.
MEET THE BOSS
- NAME: Francisco Riberas
- TITLE: Gestamp Chairman
- AGE: 56
- MAIN CHALLENGE: Minimizing losses while managing the expected drop in global vehicle demand.
“In terms of new products and new vehicles, we haven’t had any big announcements by our customers saying they intend to stop a program,” Gestamp Chairman Francisco Riberas said.
picture: Rober Solsona