EARLY AGREEMENT ON PREMISES WITH POTENTIAL CUSTOMERS

For this purpose, expectations and required investments must be determined in advance with the potential client, i.e. the manufacturer. How and by whom will investments be made for the project? What one-time costs are incurred? Who will bear them? And what ongoing costs must be covered during ongoing series production? All these aspects need to be accounted for to achieve necessary profitability targets.

In fact, different divisions and companies within a corporation often compete for limited funds. Magna in Graz must therefore achieve appropriate profitability ratios and be able to present a balanced opportunity and risk matrix so that the corporation can approve the overall vehicle production project in question. In this context, the extent of pre-financing must also be considered.

CONSIDERING ONE-TIME AND ONGOING COSTS

In terms of financing, most one-time costs are charged at the start of the project. These include investments in production facilities, production tools and equipment, as well as the planning and start-up costs for the relevant production project. The level of required expenditure depends on the project in question – for example, how the new product can be integrated into the existing production infrastructure and how many existing facilities and tools can be used.

Ongoing costs are divided into variable and fixed costs. Fixed costs, which are incurred mainly regardless of the number of units produced, include the cost of the necessary premises, factory rent and, of course, personnel costs. 

PERSONNEL COSTS ARE MOST DIFFICULT TO PLAN ACCURATELY

Personnel costs represent a very large proportion of running costs. They are fundamentally dependent on the number of units produced, as more personnel are generally necessary for more output. However, unlike material and energy costs, they do not automatically decrease proportionally when the number of units produced declines. Adjustments can only be made within limits and, at best, with a certain time delay. In addition, personnel costs can change constantly, for example as a result of collective wage agreements or changes in social security contributions. 

COST BALANCE DEPENDS ON THE RESPECTIVE PRODUCTION PROJECT

The ratio of ongoing to one-time costs depend on the duration of the project and the number of units to be produced. These two key points must be established in advance with the manufacturer and are then contractually fixed. Generally, the one-time costs incurred at the start of the project become less relevant with a longer project runtime or increasing production volume.

This is because the onetime costs per vehicle decrease if more vehicles are manufactured with the initial investment. On the other hand, in the case of very long project runtimes, the one-time costs are not just incurred once but are required again and again as investments for the production facilities. For example, if the number of units must be increased significantly or if tools become unusable after a long runtime. 

ADAPTATION TO ALTERED QUANTITY REQUIREMENTS

If the product proves to be more successful on the market than expected at the start of the project, the required increase in production units can be achieved to a certain extent without further investment – by using different work shift models, for example. At Magna in Graz, there is also the possibility (if the vehicle in question is assembled with another type on the same line) of achieving a certain degree of adjustment by shifting the quantities between the vehicle types manufactured on one line.

However, the situation becomes more difficult in the opposite case, where the product is less well received by the end customer than anticipated. Or if, due to factors outside of production or product quality, the planned quantities agreed with the manufacturer cannot be sold. In extreme cases, if the project must be canceled while production is already underway, the costs already paid for can no longer be recovered and have to be amortized. 

RISK MANAGEMENT AS A CENTRAL COMPONENT OF FINANCING

To minimize such risks, it is particularly important to thoroughly examine and assess the opportunities and risks of a project, especially for manufacturing projects on behalf of new entrants, i.e. first-time participants in the automotive market. In addition to evaluating the financial solidity of the potential customer, this also includes factors that are not actually part of a contract manufacturer's core business, such as estimating the market opportunities of the vehicle concept and analyzing sales channels and sales strategy.

In projects for established manufacturers, serious miscalculations rarely occur. As a rule, such production orders are processed with the agreed quantities over the agreed term and are therefore far less exposed to risk.

POTENTIAL COUNTERMEASURES IN THE EVENT OF EXTERNALLY INDUCED UNIT VOLUME SHORTFALLS

However, even big and established manufacturers are exposed to some risk of not achieving their sales targets. For example, if external factors affect the business, like global or regional crises, pandemics or regional conflicts; or legislative measures that result in a reluctance to buy on the part of the end customer. This can also affect the contract manufacturer if they are unable to achieve the planned quantities.

There are no patent solutions for how to proceed in such cases because the manufacturing company has limited targeted influence. It is therefore extremely important for the contract manufacturer to constantly improve its own cost structure and continuously analyze and optimize it to keep the project financially robust. This applies not only to the actual costs of production itself, but also to the administrative areas, purchasing, logistics and plant structure costs.

Being part of a corporation has advantages here. Communication and a frequent exchange of information with colleagues from other companies in the group may lead to the discovery of savings potentials that have been tried and tested elsewhere and can be implemented in the company's own operations.

TRENDS AND FUTURE DEVELOPMENTS IN FINANCIAL MANAGEMENT IN AUTOMOTIVE SERIAL PRODUCTION

The automotive industry is no longer as robust as it once seemed just a few years ago. Even established manufacturers are not immune to market downturns and are not always able to fully achieve their sales targets. The prospects of success for new market entrants are also not always guaranteed. This generally increases the risks when a new series production is to be launched – even if it is not produced in the manufacturer's own plants but is instead outsourced.

For financial planning at a contract manufacturer, this means that the risk analysis, particularly at the start of the project, must be even more careful and complex. A high level of expertise is required to assess the market opportunities of the new product and its marketing strategy, especially for production orders from new entrants. However, an increased level of caution cannot lead to excluding every entrepreneurial risk from the outset.