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Risk Management in Automobile Industry

By Chris Pentago posted 07-15-2013 04:38 AM

  

Being employed in car industry for some time I had insight in various cases of troublesome experiences which led me to write this article ad shed some light on inside of risk management process in my industry.

Hope to discuss this afterwards in comments bellow.

Read on.

image source: re-energy-systems.com

Overview

Does it not surprise you that when you see the economy sliding down the dumps, the number of litigations rises? The difficult times may fan tempers to file claims on product failures, and may cost bundles of money flowing out for defense.

These would involve expenses to get the alleged claims dismissed, amicably settled, and worst – is to go on trial and pay on judgment day. If you are an automobile dealer, you need to do the math to ascertain that you have adequate coverage to take care of any eventuality.

You then ask yourself, how much?

Some may say that you need to have as much as you can shell out. Others would advise you that you need to factor in your revenue to get the right percentage. It may eventually depend on your total loan exposure in running your business. This would be the amount that can leave you hanging if things do not go as planned due to probable litigation cost.

Automotive companies are not spared of this predicament. Any firm that makes importation of parts, does manufacturing assembly, and acts as a distribution company for materials and parts can't avoid the basic business truism, that “product liability is a civic responsibility”.

This was discussed in detail by Alliance Insurance Services Inc., Vice President Franco Ganino on an insider's information relayed to In The Pits Interview, of the After Marketer Club, a blog series that features interviews with automotive and aftermarket companies.

Ganino stated the need to get an insurance coverage that would form part of the automotive company's vision of a general liability service that encompass general, advertising-related, and medical payments should the need arises.

Research on the Automotive Industry's Risk Index

Most of the risk in the business is attributable to the current fluctuation in exchange rates. An example of these would be the hedging rates between the US dollars against the British pound of around 60%, and hedging rates with the Japanese Yen which is even higher.

Another risk indicator in the industry trend would be the state of the economy. If the economy recovers faster than expected, industry levels that reached a high level in 2007 and 2008, is seen to be coming back again. In the medium term, growth is seen to rise with expansion opportunities in Asia and Eastern Europe as stated in Daimler's Report on Automotive Opportunities and Risk.

Production of spare parts and car assembly are now going full blast in China and Russia, with cooperation from local partners. Further change is also seen in the development of automotive technology that affects corporate sales and earnings. At this juncture, if can be perceived that there is an apparent real risk and hazard of the trade.

A manufacturer of brake components may have a greater risk than a company that manufactures hood components. The volume of production would also indicate the amount of risk involved. A manufacturer that ships out US $50.000.000 worth of parts would be experiencing real risk hazard than a company that only ships out US $50.000.

Additional:
http://www.ebs.edu/iscm/1762.html?&L=1

Product Testing Risk

In a study of probable liabilities, you as a business auto dealer should be prepared to defend yourself against product failure claims. There is a need to prove that proper care and attention are thrown into the engineering design and specifications.

There should be ample evidence to prove that the manufacturing process considered consumer's welfare on the company's agenda. This is what they say in the market arena as corporate responsibility. Therefore, as a responsible auto dealer/manufacturer, you need to document and track down all Research and Development processes.

You need to indicate the checkpoints that were put in place to assure that there was a follow through with quality control, as well. These controls must be documented to include indicators that differentiate your products from competitors; and that regular product testings were done to maintain quality standards.

The documentation of all the processes would be factors that would help you face litigation that may crop up later on.

Risk Management and the Automotive Industry

From automobile factories to dealers, the industry has experienced unprecedented upheavals and pressures in all sectors in recent years. For automakers, the stress points have practically remained the same: competitive pricing, product quality, and new models to perk up the competition. The manufacturers who have achieved these goals, showed impressive growth rates in the last couple of years.

However, the market scenario for car dealers is not the same. Sales had gone down by 18% – 20% in 2008 and 2009. As a result, car dealers were forced to do other offerings to help fill up the void of dwindling sales – used cars and after sales service to perk up their sales targets to stay out of the red. Interesting to see would be how companies like Klosters and their Newcastle based smash repairs business dealth with tough economic crysis couple of years ago.

image source: smartdriving.co.uk

The severe economic downturn experienced from 2007 to 2009 practically reduced the industry to a halt: credit crisis, spiraling down of new car sales, rising unemployment, and customer anxiety. This crisis had a ripple effect that brought down two of the giants in the automotive industry – General Motors and Chrysler.

Today's upheaval in the market arena represented a unique opportunity for other Non-U. S. Automakers to enter the market – Honda, Hyundai, and Kia among others. But companies gearing towards high volume sales should pay heed to Toyota's experience in 2002 in its desire to become the world's number one automaker. Their goals to garner 15% market share meant a corporate growth rate of 50%. These resulted to quality control issues that brought a wave of recalls in 2010.

These recalls, coupled with allegations of lax practices in quality control, saw Toyota stumbling from a high of 17% market share in 2007 to 15.9% by 2010 (Casey Thormahlen and George Van Horn, Moving Metal – Managing Risk In the New Automotive Marketplace).

Conclusion

The recovery of the automotive sector would be dependent on auto lending. Risk management can be better understood by lenders in knowing better the auto industry's landscape. On the retail level, dealers who are not tied down with troubled brands like Chryslers and GM and hitching into the new rising brands, like Ford, Hyundai or Volkswagen are seen to perform better than the others.

It is a known fact that brand performance varies every year, dealers then that offer vehicles from a number of rising brands are better equipped to survive any future crisis.

Lenders and insurance agents who see an automotive company's strategy of more avenues for alternative earnings – used car sales and after service maintenance, would most likely consider it to be less risky than dealers who solely concentrate on brand new vehicles.

It was also observed that dealers who have gone through cyberspace in their marketing efforts, are more likely to have dramatic increases in volume sales as compared to their traditional counterparts.

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