That is the view of Ernst & Young, which in a new report reveals a total of 24 dealer insolvencies up to the end of August this year, compared to 12 for the same period in 2008.

‘UK Car Dealerships – Lessons from the Last Recession’ provides a perspective on the current and future trends in the UK automotive retail market and highlights the different effects on the sector between this economic slowdown and that of the 1990s.

Eric Wallbank, UK head of Ernst & Young’s automotive team, said the severity of the recession on the wider automotive sector was well documented but its effect on the dealer industry has been equally severe.

“Production shut downs, GM and Chrysler filing for Chapter 11 bankruptcy and a string of component suppliers going to the wall have dominated the headlines in recent months. But UK franchised dealerships, the last link in the global automotive chain, are suffering an equally severe effect,” he said.

“A cocktail of falling sales and diminishing profit margins has led to unprecedented levels of dealer closures. But the true extent of distress facing dealer groups is being masked by the closure of many loss making sites which would have not been reflected in the overall insolvency numbers.”

A significant contributing factor to lower dealer profit margins is that while new car sales typically represent 50 per cent of turnover, they only make up 25 per cent of gross profit.

Conversely, aftersales only make up around 15 per cent of dealer revenues but is the largest generator of profits with some dealers targeting and delivering over 50 per cent of gross profit from this source.

However, the overall slump in new car sales over the last 18 months will lead to weaker demand for servicing and parts from franchised dealers in the medium to long term, further adding to their profit woes.
“The strength of new car sales until mid 2008 should sustain dealer servicing volumes in the near term, but the impact of a drastic fall in sales from then on will be hard felt across franchised dealers over the next three year’s or so,” said Mr Wallbank.

“Add to this better build quality, longer service intervals and a consumer trend towards smaller vehicles and the future outlook for servicing volumes will be downwards for years to come.”

As a result, although the economic crisis appears to have stabilised, there are still real uncertainties for the dealership sector which will continue long after the UK emerges from the recession, says the report.
Vehicle manufacturer instability, the lack of available finance for consumers to fund new and used vehicles and falling demand for aftermarket services are all likely to adversely impact profitability for dealers.

Mr Wallbank says conditions will get worse for dealers before they get better and added:  “We expect the number of dealer failures and site closures to accelerate into 2010 as the full effects of the current drop in car sales are felt.

“The franchised dealers best placed to weather the storm will be those able to retain a significant proportion of customers’ aftermarket spend and those representing growth brands. This is particularly true of dealers offering a strong line of smaller vehicles which are proving to be increasingly more attractive to changing consumer tastes.”

Compared with the previous quarter (Q2, 2008), the value of funds raised has fallen by 66% and there have been 108 fewer deals. Emerging markets followed the global trend, with IPO activity in BRIC markets falling from 71 to 40 deals this quarter, with capital raised totaling US$3.4 billion compared with US$11.2 billion the prior quarter.

Aggregate data for the first three quarters of 2008 shows that the total number of IPOs and value of funds raised (676, US$92.5 billion) has halved compared with the same period over 2007 (1388, US$185.0 billion). In addition, data from Dealogic shows that 242 IPOs have been postponed or withdrawn in 2008 to date compared with 169 during the total of 2007.

Gil Forer, Global Director of IPO initiatives at Ernst & Young, says: “In the wake of turbulent economic times, we have understandably seen IPO activity slow. However, we know from previous experience that markets do eventually recover, for example while the reasons for the internet bubble were different – recovery took around three years. And importantly the IPO pipeline remains strong, geographically diverse and of high quality. Companies that have put in the groundwork to go public are well-positioned to take advantage of an IPO once market conditions improve.”

Beth Brooke, Global Vice Chair – Public Policy, Sustainability and Stakeholder Engagement, Ernst & Young adds: “Transparency and investor confidence is the foundation of strong markets, whether reflected in the number of IPOs on newer exchanges around the world, or in the current global markets turmoil. We hope that the US rescue package, which was approved on Friday, will start the process of restoring confidence.”

In terms of regional activity, Asia-Pacific led the way accounting for 60% of IPOs by number of deals and 50% of capital raised, up from 53% and 40% in the comparative period in 2007. Europe, Middle East and Africa (EMEA) accounted for 29% of IPOs and 42% of capital raised. North America accounted for the remaining 11% of volume and 8% of capital raised.

As per the prior quarter, the leading sectors were materials, industrials, and technology. Combined these three sectors (out of a total of 12) accounted for half of all IPOs and around two-thirds of capital raised. The top three IPOs by capital raised were Saudi Arabian Mining Company (materials) which raised US$2.5 billion; China South Locomotive & Rolling Stock Corp Ltd (industrials) which raised US$1.6 billion; and the Australian company BrisConnections (industrials) which raised US$1.1 billion. Of the top 20 IPOs, 14 are from emerging markets: including three from Africa and five from the Middle East. Interestingly, the deal threshold to make the top 20 has fallen significantly since 2007. In 2007, the minimum deal value required to make the group was US$1.9 billion, this quarter it was US$119 million.

The most active exchanges this quarter (by both number of deals and capital raised) were the Australian exchange (ASX), Hong Kong Stock Exchange (HKEx), and NASDAQ. By funds raised, the top three exchanges for the year to date are the New York Stock Exchange (US$24.8 billion), Hong Kong Stock Exchange (US$5.9 billion) and London Stock Exchange (US$5.5 billion).

In his new role, Philippe Peuch-Lestrade will focus on public finance management – advising on transparency, cost reduction and accountability on public policies. “Around the world, governments are faced with an increasingly complex array of challenges such as security and border controls, climate change, re-alignment in the global economy and pressure to deliver more and better public services,” says Mr. Peuch-Lestrade.

The opening of a Global Government and Public Sector Center reflects the high demand in government services advisory. Herman Hulst, Global Managing Partner for Client Service and Accounts, comments: “We are delighted to bring Philippe’s extensive public sector experience to this role. Together with the new center, this will enable us to serve our clients in this industry sector and respond more effectively to the increase in government and public sector activity.”

During his 20 years at Ernst & Young, Mr. Peuch-Lestrade has led the Financial Services Office in Ernst and Young et Associés as well as helped governments and the public industry sector on various projects.

“This was an important year for Ernst & Young for more than just our continued strong growth,” explained Ernst & Young Global Chairman and CEO James S. Turley. “We took two additional vital steps towards achieving our vision of global integration. We brought together 87 national practices across Europe, the Middle East, India and Africa, and 15 national practices across Asia, to create operationally integrated EMEIA and Far East Areas. These sit alongside our already integrated Americas Area. I believe these moves further confirm our status as the most globally integrated professional services organization. I am confident they will provide greater opportunities for our people to achieve their potential as well as provide seamless service for our clients.”

Ernst & Young experienced its strongest increase across the Asia-Pacific region, where revenues grew 34.3%, reaching US$3.3 billion. This comprised three Areas: Japan, which passed the US$1 billion mark, increasing by 42.6%; the Far East Area, which grew 32.3% to US$1.3 billion; and the Oceania Area, which grew 29.0%, reaching US$1 billion. Ernst & Young’s other two Areas also performed well, with EMEIA growing by 18.4% to US$11.4 billion and the Americas Area growing 8.9% to US$9.8 billion.

“We are mid-way through a four-year program that will see us invest US$1 billion, principally in the emerging markets,” said John Ferraro, Ernst & Young’s Global Chief Operating Officer. “These markets represent some of our best growth opportunities. In 2008 revenues increased 55.5% in India (42.8% lc), 43.3% in China (37.2% lc), and 38.7% across Russia and the Commonwealth of Independent States (31.4% lc).

“We also saw good performance in each of our service lines,” Ferraro continued.

In an environment where many businesses faced challenging economic conditions, Assurance & Advisory Business Services (AABS) increased 14.2%. Globalization is altering the tax landscape and is impacting companies’ compliance, reporting and planning needs, and this led to a 21.2% increase in Tax revenues and drove double-digit growth across all services and geographic Areas. Despite significant reductions in transaction values this year, Transaction Advisory Service’s (TAS) balanced portfolio of clients and the emerging markets led to a 19.6% increase in revenues.

“Today’s borderless business environment demands a truly global approach from our organization, and this is made even more important given the unprecedented turmoil we are seeing in financial markets around the world,” concluded Turley. “I am very proud of how our 135,000 people have embraced this global approach – coming together to create an inclusive culture and to focus on delivering high-quality service for our clients.”

The survey, which canvassed nearly 1,400 senior executives in more than 50 countries, shows that most believe that a security incident would have a greater impact on reputation and brand than on revenues, with 85% of respondents citing damage to reputation and brand as significant, compared with 72% for loss of revenues. Regulatory sanction is cited by only 68%.

Paul van Kessel, Global Leader of Ernst & Young’s Technology and Security Risk Services, comments: “A good brand and reputation can take years to build but can be severely damaged or even destroyed by a single security incident. The media coverage surrounding security breaches underscores just how devastating these failures can be to a firm’s reputation. For the past few years, most improvements in information security stemmed from regulatory compliance. Now, the desire to protect brand and reputation is motivating many organizations to do more than just tick regulatory and corporate compliance boxes.”

Despite tightening economies, the survey indicates that organizations are increasing investments in information security and more organizations are adopting international security standards. More than two thirds (67%) of respondents interviewed say they have now implemented controls to protect personal information.

Van Kessel continues: “Overall, the results of this year’s survey are encouraging; however, there are some key areas—such as insider threats, privacy and third-party relationships—that need more focus and investment.”

Spending set to increase
Despite an economic downturn faced by some of the world’s largest economies, 50% of respondents are set to increase their budgets for security; in fact, only 5% plan to decrease their current budgets.

Van Kessel comments, “We believe that organizations recognize that security cutbacks would have an adverse effect on stakeholder perceptions. Most also believe that security threats and attacks increase during an economic downturn.

“However, where the money is spent will be critical. It is not enough to simply fund further technical solutions, such as encryption. It is the people who are often the “weakest link”, with 50% of respondents citing awareness within their organization as the most significant challenge to information security. Businesses must work with information security to develop training and awareness programs and to adopt more sophisticated testing techniques.”

Third Parties in the Spotlight
The use of third parties and outsourcers is on the increase, and organizations are taking some important steps to safeguard information, but there is room for improvement. Only 45% include specific information security requirements in all of their contracts with third parties. Almost one third do not review or assess how contractors are protecting their information.

Van Kessel concludes: “There are an increasing number of reported incidents of data loss involving third parties and outsourcers that tells us that information security must be “portable”. Wherever data is in your supply chain it must be protected, and monitoring must encompass all those with whom you work.”

Jonathan Johns, head of renewable energy at Ernst & Young, says Brazil’s attractiveness has been boosted following the 1 July 2008 compulsory introduction of B-3 blending – the legal requirement to mix 3% biodiesel and 97% conventional fuel.

“As a result of B-3, annual biodiesel demand has increased in Brazil from 800 million to 1.2 billion litres. Brazil’s position has also been boosted by India’s increasing appetite for biofuels. This has significantly increased Brazilian export potential to this emerging economy.”

“It is also exporting increasing quantities of ethanol to the US and beyond, a strategy made possible by local investment in overseas distribution assets, which is expanding the international reach of Brazilian biofuels,” Johns says.

US feels pressure
After 12 months in the top spot, the US’ attractiveness for investment has suffered because of the tightening of the credit markets and the weakening performance of listed biofuels companies, which is resulting in investors losing confidence in the sector.

Johns says the growing scientific and political debate surrounding first generation biofuels and the impact on world food prices is compounding the problem.

“Recent research by the World Bank indicated that large increases in biofuel production in the US and Europe were directly behind the sharp increase in global food prices. This caused investors to carefully consider investing in these regions as these dynamics bring additional concerns into the investment picture,” he says.

An industry in transition
With criticism of first generation biofuel production increasing, Johns says the transition to second generation biofuel technologies – which involve the breakdown of nonedible crops and waste to create liquid motor fuels – needs to be accelerated as political and economic pressures on first generation technologies mount.

“Accelerating second generation biofuels will help the sector establish its long-term viability and attractiveness to investors. For this to happen, improved government incentives are required to attract the necessary capital into the market, to stimulate growth and accelerate the evolution of the industry. This will ultimately bolster investor confidence over the long-term,” he adds.

Johns continues by saying that in the interim, first generation technologies will continue to have an important role to play in meeting existing targets.

“There is likely to be a shift in focus of production to a few key markets where first generation fuels can be produced most economically and sustainably – most notably Brazil,” he says.

Country updates
Germany saw the biggest drop on the All biofuels index, falling from third to sixth. This was a direct result of the government’s decision to withdraw the E10 roadmap – the plan to blend 10% biodiesel with conventional fuel. The rise of France, Spain and Canada are predominantly due to Germany’s fall down the index.

The UK retained ninth position, but investor confidence has been harmed by criticism over first-generation biofuels by British non-governmental organizations and top environmental scientists.

As part of a series of research on climate change transformation, an Ernst & Young study of 150 global companies found that 90% of those surveyed were undertaking climate change initiatives, with disclosed financial commitments totaling US$276 billion over the next ten years. Another Ernst & Young study1 revealed that 35% of corporate venture capital programs will increase their investments in cleantech companies next year and 44% within the next five years, supporting the finding that corporations are accelerating their climate change response. A third Ernst & Young study2 showed that 51% of institutional investors globally always or sometimes consider a company’s climate change response when considering investment in a new issue.

This accelerated corporate response to climate change is reflected in global venture capital investment trends. Ernst & Young’s Venture Insights® reveal that as a proportion of global venture capital investment, cleantech has grown rapidly – up from just 1.6% of total investment in 2003 to 11% in 2008. And in terms of value, global venture capital investment in cleantech is set to significantly exceed the record US$3 billion invested last year, having already reached US$2.2 billion in the first six months of 2008.

Gil Forer, Global Director, Cleantech, IPO and Venture Capital Initiatives at Ernst & Young commented: “The climate change challenge is global and requires a transformation of infrastructure and practices that crosses industries and supply chains. We need not only to accelerate levels of investment in innovative clean technologies, but also to promote partnership and collaboration among multinational corporations, emerging cleantech growth companies, governments and other stakeholders.

According to Ernst & Young’s Venture Insights®, the US accounted for the majority of venture capital investment during 2007 and the first half of 2008, raising US$2.5 billion and US$1.6 billion respectively. Europe, the second largest market, raised US$443 million and US$353 million over the same period. China increased from US$30 million in 2007 to $84 million in the first half of 2008. And Israeli cleantech investment also accelerated rapidly, up from US$4 million in 2006 to US$134 million in the first half of 2008 (largely on the back of a US$115m solar energy company mega-deal).

As of 30 June 2008, there were 549 private venture capital backed cleantech companies globally with US$8.9 billion in venture capital. The US is the largest region with 301 venture-backed cleantech companies that have received cumulative investment of US$7.29 billion, weighted towards solar and biofuel companies. Similarly, Europe (203 companies), China (25) and Israel (16) are weighted towards solar manufacturing in terms of capital invested. China is emerging as a world leader in solar with four companies that have received cumulative investment of US$56 million.

Silicon Valley is by far the biggest global hotbed in terms of cleantech activity, comprising 74 private venture-backed cleantech companies with a total of US$2.2 billion invested to date. The UK is in number two position in terms of number of cleantech companies, with 48, but only fourth in terms of capital invested (US$426 million). Conversely, Southern California is in fourth place in terms of companies (on par with Germany at 34) but in second place in terms of capital invested (US$1.1 billion). This comparison of venture capital hotbeds reveals that US cleantech companies are more highly capitalized than their counterparts elsewhere.

Beyond venture capital
Cleantech indices have significantly outperformed the broader market in recent years and in 2007 institutional investors allocated US$23 billion in funds to cleantech equity investments. Cleantech private equity investments totaled US$50 billion in 2007. Global cleantech M&A activity surged by 46% in terms of number of transactions and 140% in terms of transaction value from 2006 to 2007. Likewise, during the same period, cleantech IPO transactions grew by 24% and capital raised by 98%. While there have been relatively fewer transactions in 2008 due to global capital market conditions, the value of M&A and IPO deals concluded in just the first six months of 2008 exceeded the levels of the full year 2005.

Gil Forer concludes: “Cleantech has passed an important investment tipping point. Demand for cleantech solutions is increasing due to higher energy and resource costs, regulatory requirements and the desire for corporations to pursue climate change related market opportunities. This, combined with the attraction of talent and investment to the sector and resulting accelerated technological change, has created a self-reinforcing dynamic of innovation and company creation, which is vital for any successful response to the climate change challenge. Cleantech is here to stay.”

With the rate of sales growth and pipeline productivity for the big pharma companies slowing and pricing pressures intensifying from generic competition, customer consolidation and government health authorities’ cost-containment policies, the big pharma business model and stock prices are under siege. In this environment, the pharmaceutical industry’s increasing attention on working capital has taken on new urgency. The analysis notes that the industry has made progress in reducing levels of working capital since 2000, but in the last two years 70% of the achievement gains in the previous five years have reversed.

Although a lot of focus has been on big pharma’s cost cutting measures, increasing the return on investment on existing assets is the value that keeps on giving. “In the past, pharmaceutical companies have not focused as rigorously on working capital management as other industries,” explained Jeffrey Greene, transactions leader for Ernst & Young’s pharmaceutical sector. “With high operating margins, strong balance sheets, and fears of running out of critical patient medication, a cash culture never fully developed.”

The full cash and cost benefits could be realized within 12 to 24 months from the launch of an intense working capital program, according to the report. The analysis finds that the best opportunities for improved working capital management include:

* Incentivizing cash performance
* Tightening management of payment terms for customers and suppliers
* Improving credit, billing and collections processes
* Establishing leading demand forecasting processes
* Building greater linkage and closer coordination across the entire supply chain

The study notes that there is a wide range of performance across the industry in the areas of cash-to-cash cycle, receivables, inventory and payables, indicating significant potential for improvement. Aligning performance of each pharma company with the industry average and with the upper quartile indicates potential cash opportunities of between US$11 billion and US$16 billion, respectively, for cash-to-cash performance; between US$5 billion and US$11 billion for receivables performance; between US$5 billion and US$10 billion for inventory performance; and between US$7 billion and US$14 billion for payables performance.

“Looking ahead, a number of trends will increasingly put pressure on companies to achieve higher levels of excellence across the entire working capital value chain,” said Greene.