Sustainable Value Margin

The absolute amount of Sustainable Value created is directly linked to the size of the company in question. In financial analysis, larger companies are generally expected to generate higher profits, sales and cash flows. This size effect complicates matters when attempting to compare the performance of different companies. Financial analysis compares performance parameters, such as profit or cash flow, with other indicators that reflect the size of the company. Profit, for example, is frequently assessed in relation to capital employed or sales. Meaningful analysis of companies is possible using key ratios such as return on capital or net profit margin. The Sustainable Value shows, in absolute terms, how much excess return is created by a company using its resources more efficiently than the benchmark. The same problem arises when attempting to compare different companies: Bigger companies generally use greater quantities of resources and therefore tend to create a bigger (positive or negative) Sustainable Value.

As with the financial analysis method, allowances for the company’s size therefore need to be made when comparing the Sustainable Value of different companies. To this end, this study looks at the Sustainable Value of a company in relation to its sales. This relative ratio expresses how much Sustainable Value a company generates for every Euro of sales, and is defined as the Sustainable Value Margin. This ratio allows meaningful comparisons to be made of the sustainability performance of those companies studied.

The figure below shows the Sustainable Value Margin, i.e. the ratio of Sustainable Value to sales, for each manufacturer.

Sustainable Value Margin of car manufacturers

A comparison of the Sustainable Value Margin (see figure below) with the absolute Sustainable Value data of carmakers shows that the negative/positive signs are identical in each case: a manufacturer that uses its bundle of resources more efficiently than the industry average over the review period and subsequently creates positive absolute Sustainable Value, inevitably achieves a positive Sustainable Value Margin as well. As with our analysis of Sustainable Value, only the BMW Group, Honda and Toyota have a consistently positive Sustainable Value Margin; FIAT Auto and GM always fall below the industry average in every year studied.

It seems that the anomalous positions of Toyota and General Motors in terms of absolute Sustainable Value can partly be attributed to the size of both corporations. Although Toyota is one of the leaders, while General Motors is one of laggards when it comes to Sustainable Value performance, the difference to the other companies studied is not as pronounced as in the analysis of absolute Sustainable Value. By contrast, the BMW Group and FIAT Auto have extreme positions when it comes to the analysis of Sustainable Value Margins, although their (positive or negative) Sustainable Value is relatively modest as far as amounts are concerned. Relative to company sales, the BMW Group beats the previous leader Toyota in seven of the nine years studied (however by a small margin), while the performance of FIAT Auto puts it well below the previous laggard General Motors between 1999 and 2004. A similar effect can also be seen with Isuzu: while the absolute Sustainable Value analysis only showed modest changes due to the company’s small size, its Sustainable Value Margin followed a far more erratic trend. Starting off in last place with a Sustainable Value Margin of -5.22% in 1999, its performance significantly improved in the second half of the review period, reaching a positive value of 4.53% in 2003.

A regional comparison of the Sustainable Value Margin is also worthwhile. The figure above provides a graphic representation of the performance of the Sustainable Value Margin of European and North American automobile manufacturers. We can see that the BMW Group occupies a unique position in this region. BMW is the only carmaker in this group to consistently report a positive Sustainable Value Margin. Not just the consistency of this performance, but also the significant gap between the BMW Group and other European and North American manufacturers is very noticeable. This is especially so in 2001, when the BMW Group shows a Sustainable Value Margin of around 7%.

FIAT Auto and GM lie well into negative territory over the entire review period. FIAT Auto, however, recovers towards the end of the review period. Daimler (after having separated from Chrysler) stages a marked recovery in 2007 and finally manages to revert to the relatively high level of a Sustainable Value Margin it achieved in 1999. The Sustainable Value Margin of Renault follows a similar path until 2004, when the company moves into positive territory for the first time and ranks second among European and North American manufacturers. In the three following years, however, Renault drops back below the industry average. The Volkswagen Group only manages to achieve a positive Sustainable Value Margin in 2001, 2002 and 2007. Ford and PSA achieve a very modest Sustainable Value Margin over the entire review period and towards the end of it are positioned in the negative and slightly positive zone respectively. Ford also achieves a modest Sustainable Value Margin from 1999 to 2005, revolving around the benchmark, but subsequently drops markedly.

If we compare the performance of the Sustainable Value Margin of the Asian manufacturers (see figure above), the first thing we notice is that every company with the exception of Mitsubishi managed to steadily improve their Sustainable Value Margin in the period 1999 to 2001. This means that all the Asian companies (apart from Mitsubishi) succeeded in generating a higher Sustainable Value per unit of sales than in the previous year. In 2002, however, the Sustainable Value Margin of most Asian manufacturers declined slightly and in some cases did not start to improve again until 2003. In 2004 six of the eight Asian manufacturers managed to maintain more or less the same level. The only exceptions were Hyundai and especially Mitsubishi, which both fell away sharply. In 2005, six of the eight Asian companies experienced more or less marked improvements. Compared with the performance of absolute Sustainable Value, where many of the Asian manufacturers were bunched tightly together, the analysis of the Sustainable Value Margin provides a more meaningful comparison, as it takes into account the size of the company.

Of all the Asian manufacturers, Toyota is the one with the highest Sustainable Value Margin in every single year of the review period. Suzuki, and above all Isuzu, showed a clearly positive trend over the years studied, but suffer a decline in 2007, with Suzuki falling below the sector average. Although Hyundai had quite a high Sustainable Value Margin of well over 5% in 2001, it suffered a sharp and continuous decline over the next three years and achieves a Sustainable Value Margin of between 1% and 2% towards the end of the review period. Honda also shows a consistently positive Sustainable Value Margin. With the exceptions of 1999 and 2007, Nissan achieves a moderately positive Sustainable Value Margin of around 1%. By contrast, Mitsubishi and Daihatsu fall well behind other Asian manufacturers. Compared with the European and North American automobile manufacturers, the most obvious difference is that the gaps to the leader are not as great, and the performances of each company are more evenly spaced. The one exception is Mitsubishi’s performance in 2004.

(C) 2009 - All rights reserved

Print this page