Automotive suppliers facing hard times

Author: Duran Sarikaya
Date: 30.08.2019

Car production figures and EBIT margin decline

The automotive supplier industry is facing a tough time: Overall, car production fell by 5 percent in the first half of 2019. In addition, an EBIT margin of 6 percent is expected; the figure has not been this low since 2012. This is the result of the “Global Automotive Supplier Study 2019” by Roland Berger and Lazard. In total, data from more than 600 suppliers were collected.

“The main reasons for this negative development are weak passenger car sales in China and the general economic slowdown. In addition, there are structural changes as part of the shift to electro mobility,” explains Felix Mogge, partner at Roland Berger. “International trade conflicts and manufacturers’ ongoing cost-cutting programs are intensifying the trend.”

Growth decline in China leads to overcapacities

In recent years, China has repeatedly been described as the growth engine of the global automotive industry. However, the trade conflict with the USA has changed a lot. Overall, the number of car sales in China fell by double digits compared to the same period last year. “The growth forecasts were good and many suppliers have built up additional capacities,” says Felix Mogge. “Now, some suppliers have 60 to 70 percent of their new capacity unused.”

Capital more and more difficult to reach

The current priority for suppliers should be to build up financial leeway. This could become more complicated in the near future due to the negative market situation. “Most equity investors prefer other sectors than the cyclical automotive industry. At the same time, banks are becoming more restrictive in granting credit financing – this particularly affects smaller suppliers in product areas that will come under structural pressure in the future,” says Christof Söndermann, managing director at Lazard. The number of M&A transactions is also declining. Chinese companies, which had gained importance in recent years, are no longer as active as they were before.

New trends increase pressure to invest

Trends like digitalization, new mobility concepts, autonomous driving and e-mobility are creating strong investment pressure for the entire automotive industry. In many cases, it is impossible to say when an investment will really pay off. On the other hand, costs should also be saved, for example through savings programs in purchasing, what would hit suppliers hard once again.

This leads to a conflict for the established suppliers. On the one hand, the business should continue to be profitable, and on the other, none of the growth trends should be missed. The large and financially stable companies have a particular advantage here. Small companies, by contrast, face a hurdle that has to be mastered.

Individual strategies as the key to success

However, there is no uniform concept how companies can solve the situation for themselves. Every company has to find an individual solution. However, it can be said that in general all suppliers must work on their flexibility in order to survive in a world full of technological developments. “Above all, they need agile structures and procedures in their organization – and they should also look more closely at cooperation,” advises Roland Berger partner Mogge.

Active portfolio management also contributes to success. “Suppliers must decide whether they can achieve or defend market leadership in areas that stagnate in the long term. If this is the case, the business should be expanded and consistently focused on increasing earnings and maximizing cash flow; otherwise the exit should be considered,” says Christof Söndermann of Lazard. “The released capital should be invested in areas where profitable growth is realistic.”