GKN feels the knock-on effect
[2008-12-23 17:04:40]
The problem with having beautiful, cuddly, long-term relationships with your customers is that you are expected to share their pain the moment they start feeling it. Thus it is that GKN, loyal component supplier to carmakers across the globe, has little to cushion it from the icy winds now blasting across deserted car showrooms.
But even Sir Kevin Smith, chief executive of GKN, has been taken aback by the slump in orders in recent weeks. Five per cent is regarded as a big swing between quarters. This quarter, orders are down by around three times as much - and not just in the US and Europe, but in Japan and China.
Like most manufacturers, GKN has built in some flexibility to allow it to adjust to volatile demand. A tenth of its workforce are agency workers or temps, making them relatively easy to lay off. About 1,400 people are, unfortunately, going in the wake of the profit warning issued yesterday. The ability to put factory workers on short-time working helps too. Most workers prefer a short week to the threat of no job at all.
The company has also been able to soften the impact of the raw material price increases that have plagued manufacturing recently. It surcharges customers when steel prices rocket. But no manufacturer can instantly adjust when faced with such an abrupt change in conditions. Profits are going to be down by a fifth this year. The laudable record of 28 years without a dividend reduction is now in jeopardy. Even Cazenove, the house broker, is predicting a cut.
GKN is also looking uncomfortably laden with debt. Total borrowings and facilities are 1.3 billion pounds, while actual debt at 693 million pounds is rather more than the company's entire value. Fortunately, the loans were negotiated in happier times, when GKN was looking to expand, not to contract. It is almost two years before any big chunks fall due.
Drive shafts and cylinder liners may seem a long way from the international credit crunch. But it is of course the withdrawal of credit deals, which finance most car and fleet purchases, as well as plunging consumer confidence, that has so depressed new car sales.
GKN won't be alone. Profit warnings are accumulating like flies on a windscreen. It is up-to-date anecdotal evidence of the slowing economy that the Bank of England needs to weigh every bit as minutely as historic economic data as it mulls more rate cuts.
