Outsourcing companies may suffer from exposure to US automotive industry
Published:22-December-2008
By Stuart Ravens
The financial health of the US automotive industry threatens to hold significant consequences for the outsourcing industry. The failure of the Big Three - General Motors, Ford and Chrysler - to secure a $14 billion government bailout could cripple future revenue streams for outsourcing companies, with major firms suffering exposure.
The failure of the US senate to approve the $14 billion bailout of the ailing US automotive industry sent shock waves throughout world equity markets last week, and the specter of a major US automotive company going bankrupt now looms large. While it seems almost unconscionable that the US government would allow iconic brands like Ford, General Motors or Chrysler to go under, Lehman Brothers' collapse serves as a lesson that anything could happen in the current economic climate. While outsourcing contracts were considered to be 'safe', long-term revenue streams, the current malaise in the automotive industry will be of great concern to those that are exposed to it.
Using its IT Services Contracts Database of all publicized outsourcing contracts worth over $1m, Datamonitor estimates the value of contracts between automotive companies and IT outsourcers globally to be over $7.5 billion to 2015. Nearly $3 billion of these contracts are sourced from the US Big Three alone, with almost all of the exposure linked to General Motors. Worryingly, this figure is just for the deals that have been made public: if General Motors' approach to outsourcing has been replicated by its more opaque peers, the total value of US contracts still outstanding could reach nearer $8 billion.
Although current uncertainty renders it impossible to predict the future shape of the automotive sector, it will most certainly be bleak. The relatively healthy Fiat has been communicating a 10-20% drop in demand to analysts as its worst case scenario for 2009: if similar reductions are applied to outsourcing spend, then global revenues from automotive can be expected to shrink by over $1 billion, based on the assumption that all of the companies that are around today survive until this time next year.
At best, there is likely to be a great deal of consolidation among the major automotive players, greatly reducing the number of manufacturers. At worst, 2009 will see the collapse of one, if not several, household names and, without government help, it is almost certain that at least one of Chrysler and General Motors will fall by the wayside. With the prospect of potential huge mergers and bankruptcies, there will be a natural shrinkage in the value of outsourcing contracts in the future.
IBM has by far the greatest exposure to the automotive industry, with future contracts totaling $4.3 billion. Its exposure to automotive companies spans the globe, with General Motors and Ford supplier Visteon in the US; Fiat in Europe; and Mazda, Mitsubishi and Nissan in Japan. IBM is heavily reliant on Fiat and Visteon for its future revenues from the automotive sector, and Datamonitor values future outsourcing revenues from these companies at $2.7 billion and $983m, respectively. If the 20% fall in demand envisaged in Fiat's worst-case scenario for 2009 is mirrored in the money that the auto player pays out to its IT services contractor, IBM may be looking at a $500m black hole in the future revenues from its biggest automotive client. Given that both Ford and Fiat are, relatively speaking, healthy companies at present, IBM's problems may be nowhere near as bad as those of the next biggest contractor in automotive, EDS.
To 2011, ex-General Motors subsidiary EDS's sole substantial source of revenue from the automotive industry will be the $1.6 billion from its old parent company, which is more than 10% of the price that HP paid for EDS. With such a large amount riding on a company that possibly has the weakest balance sheet of all the global automotive majors, new parent HP may well be wishing that its recent acquisition was back with its previous owner.
Stuart Ravens
