1 Introduction
The objective of this project is to analysis the performance of two listed Australia-based companies in the automotive parts manufacturing industry, namely Pacifica and Orbital, through various analysis techniques learnt in IND3315. Pacifica is the primary company we are looking into and Orbital Prediction on future performance of both companies will be made in this report base on thorough study of different aspects of them such as their history, financial statements in the past four years and other major operational and external changes. The four main areas that we are looking into are the liquidity, gearing, profitbility and management performance of both campanies. Comparision between both companies will also be conducted to disclose the prospect in the automotive part sector in Australia and around the globe. Some advices on how to improve the performance of the companies will be provided at the end of the report. This report is divided in two parts in which Ken is working on the Pacifica and Jay on the Orbital.
2-Part A-Pacifica Group Limited
2-1 Profile
Pacifica Group Limited is engaged in the manufacture and supply of brake systems and technologies to automotive manufacturers in Australia, North America, Europe and Asia. Pacifica listed on the Australian Stock Exchange as Pacific BBA in 1989 as a manufacturer of brake and clutch systems and components, industrial plastics and textiles. In 2001, in order to concentrate on those areas in which the company had strategic and sustainable competitive advantage, Pacifica announced its intention to transform from a diversified industrial into an automotive technology company. As a result, almost all activities other than those based on superior automotive technology have now been divested. On May 1, 2006, Pacifica Group Limited sold its interests in Melwire Pty Ltd and Mounts Wire Industries Ltd, thereby completing the divestment of its Construction Products division. In late November 2006, a Germany Company, Robert Bosch, take over Pacifica. The Company also manufactures and sells friction materials for automotive applications. It operates in four geographical segments: Australia and New Zealand, United States of America and Asia.
2-2 Operation
PRB
Pacifica’s automotive subsidiary, PBR, is a leading supplier of brake systems and technologies to several of the world’s automotive manufacturers and is best known for lightweight callipers, park brakes, drum brakes and disc rotors. It also supplies replacement product to some 45 countries and has developed performance brake upgrade products for the growing sports/performance market. Furthermore, PBR is acknowledged as a world-class designer and manufacturer of brake systems and products for world markets.
In North America
PBR is well established as a supplier to the North American automotive sector through its plants in Knoxville, Tennessee and Columbia, South Carolina. Knoxville is the lead plant for PBR’s Global Manufacturing system, the introduction of which has enabled significant quality and productivity
In Australia
PBR supplies aluminium callipers, park brakes, disc rotors, knuckles and brake corner to all of the Australian vehicle manufacturers in 2003.It also exports brake systems to General Motors in North America, China and Korea. Recently, it introduced a new range of sports callipers aimed at the high-performance market and a web-based catalogue to support its trade customers. In addition, Pacifica is refocusing the Australian operations to concentrate on high value work that will largely service its Australian customer base. The business will continue to supply callipers to existing customers
In Asia
There are few plants locate in China and Malaysia supplying callipers, park brakes, drum brake, calliper bodies and calliper brackets.
FMP
FMP is the friction materials business in Australia and Asia which Pacifica owns in a joint venture arrangement with Honeywell. It is a leading manufacturer of friction materials, disc brake pads, backing plates, clutch facings, truck blocks and drum brake linings which contribute 49% interest in FMP (Australia) and a 50% interest in FMP (Thailand) and FMP (Malaysia).
Group Structure
Fig.1-A
2-3 Overview
Performance of Pacifica has been declining over the past four years due to some major operational and external changes. The profit margin has fell dramatically between 2003 to 2006 and a net loss of $A14.05 million ($US11.96 million) for the first half of 2007 is reported, down from a net profit of $A15.07 million ($US12.83 million) in the prior corresponding period. The outlook is gloomy as competition continues to grow, stronger Australian dollar growth, raw material price rising and other unfavourable external changes prevail, reflected by the announcement made by Pacifica that prediction on the fall on sales in the future. These external factors, beyond the control of Pacifica, limit the performance of Pacifica
Major External Changes
- Pacifica has a large proportion of their operations in North America has suffered, and continue to suffer, the negative effects of the significant strengthening of Australian dollar and moving of US/Australian dollar exchange rate when the profit made in overseas markets translated back to Australia. Unfavourable exchange rates also exposed Pacifica to additional import competition in Australia and reduced export competitiveness
- Demand of steel in the gobal market continues to soar, forcing Pacifica to face with sharply increased raw material costs, most notably reflected in the steel surcharge imposed upon Pacifica by its suppliers.
- Pacifica struggled to compete against cheaper imports in Australia market accompanied with reduction in import tariffs
- The global automotive industry is being transformed by geography and technology. Vehicle manufacturers are focusing on Asian centres for future growth. China in particular is becoming a key manufacturing centre for the industry. It currently manufactures four million vehicles per annum. By 2007, China should supplant Japan as the world’s second largest manufacturer. Thailand has also become an important manufacturing hub in recent years and it too is growing. China has also emerged as the manufacturing cost benchmark for the industry.
- Pacifica’s key US customer and joint venture partner Delphi Corporation filed for bankruptcy in 2005 resulting in $US11 million ($14.5 million) debt unpaid by Delphi.
- In 2007, Pacifica started legal action against US company Interment Corporation after Interment increased the price of iron castings by up to 85 per cent, threatens to reduce Pacifica’s post-tax earnings by about $1.5 million per month. If Pacifica loses the case, it may be forced to pay the higher cost for the brake parts.
- Demand for PBR products in both the North American and Australian markets drops when large passenger car and medium-sized light truck volumes have continued to fall. Profitability was impaired by a continued softening of local large passenger car volume.
- The company has previously indicated that substantial one-off costs associated with the Bosch takeover will be accounted for as significant items in Pacifica’s 2007 accounts. These costs will amount to about $13 million after tax.
Major Operational Changes
External changes are uncontrollable, in order to remain competitive, Pacifica made every endevour to make major opterational changes which can improve its profit margin and sales
- Pacifica has displayed ceaseless effort to continue to invest strongly in Research and Development. Its R&D activities are concentrated on new products and new processes. New product development has focused on By-Wire brake systems, an electronic actuation brake system. We continuously strive to improve these critical performance factors to satisfy its customers and end consumers. Work on improving process technologies was dedicated to improving productivity and quality, the two critical success factors in manufacturing.
- To maintain its cost competitiveness and to participate in the local industry growth, Pacifica has committed to establishing a world-class manufacturing footprint in Asia with new operations in China and a doubling of its capacities in Thailand. In china, the machining, plating and sub-assembly operation is due to commence supply of park brake and calliper components in mid-2005. Construction of a cast iron foundry is due for completion in 2006. Additional expenses were incurred owing to the start-up costs associated with the significant new projects that Pacifica commenced in the region. Whilst resulting in short term expense to the Company, these changes are essential
- In 2003, Pacifica bought AP Italia, a manufacturer of drum and park brakes for passenger and commercial vehicles, as a stepping stone to enter European market and diversify its geographic spread, product offering and customer base in order to reduce its dependency on the North American market.. The decision had proven to be good as its strong growth fuelled Pacifica profit margin in the next three years. Eventually, Pacifica sold AP Italia to Continental AG, one of the world's largest automotive industry suppliers, and concentrate on the North American and Asia-Pacific markets. Pacifica made earnings of $66 million after tax from the sale.
- Robert Bosch GmbH, the world's leading maker of car parts took over Pacifica in March this year and said it intends to concentrate on the North American and Asia Pacific markets, minimising duplication of common activities undertaken by Bosch and Pacifica in North America, Australia and Asia, and on implementation of common systems to improve capital management.
