Declining sales in china hit automotive suppliers hard – manufacturers’ cost-cutting programs create additional financial pressure. The consequence: difficult times ahead for the global automotive supplier industry.
A look inside a mercedes factory.- picture: daimler
In the first half of 2019, car production declined by 5 percent compared to the same period of the previous year. In addition, an average EBIT margin of around 6 percent is expected for the current year, the lowest value since 2012. These are the key findings of the new "global automotive supplier study 2019" by roland berger and lazard. Key figures from over 600 suppliers worldwide were evaluated for the study.
"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 in the context of the change to "electromobility", explains felix mogge, partner at roland berger. "International trade conflicts and the ongoing savings programs of manufacturers are reinforcing the trend."
Mobility of the future and german mechanical engineering
More information, expert knowledge and the latest trends can be found at the focus conference "mobility" at the 11. german mechanical engineering summit on 15. And 16. october 2019 in berlin: powertrains, power-to-X, battery production, last mile, urban infrastructure, logistics/transport, aviation, hyper-loop and much more.
Overcapacities due to declining growth in china
China has been the growth engine of the global automotive industry in recent years. The trade conflict with the USA has meanwhile significantly changed the framework conditions. For example, automotive sales in china fell by double digits in the first half of 2019 compared to the same period last year.
"The growth forecasts were good and many suppliers have built up further capacity", says felix mogge. "Now 60 to 70 percent of new capacity remains unused at some suppliers."
Access to capital more difficult
Suppliers should now secure sufficient financial leeway that will be sustainable in the long term. Because access to capital could also become more difficult due to the negative market situation.
"Many equity investors prefer sectors other 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 sondermann, managing director at lazard.
In addition, the number of M&A transactions in the supplier sector is declining this year. Chinese companies in particular, which represented an important buyer group in previous years, are now much less active.
Managing director – successor (m/f/d)
Mokveld central europe gmbh
Ranking: the world’s 10 most valuable carmakers 2018
Whether porsche, BMW and mercedes or chevrolet, toyota and audi – these car brands are known all over the world. But which automakers has the highest brand value? This is what this ranking reveals!
Investment pressure from new trends
Suppliers also need financial leeway due to the increasing trends in the automotive industry: digitalization, new mobility concepts, autonomous driving and e-mobility are putting the entire industry under pressure to invest – from oems to suppliers.
For many of these projects, roland berger says it is difficult to predict when and if the investments will be profitable. At the same time, carmakers are trying to cut costs, including through purchasing cost-cutting programs, which in turn affect suppliers.
This creates a difficult balancing act for established suppliers. You have to continue to run the established business profitably and at the same time not miss any growth trends. In this context, large and financially sound companies tend to have a better starting position, according to the consultancy. For many smaller companies, however, the change will be very challenging.
Suppliers need individual strategies
According to the study, however, there is no one-size-fits-all approach that suppliers can take. Each company must find the right strategic approach based on its own situation and market position.
In general, many suppliers need to become more flexible to keep pace with rapid technological developments. "Above all, they need agile structures and procedures in their organization – and should also increasingly examine cooperative ventures", advises roland berger-partner mogge.
He added that consistent and active portfolio management is equally important. "Suppliers have to decide whether they can achieve or defend market leadership in areas that will 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 lazard’s christof sondermann. "The freed-up capital should be invested in areas where profitable growth is realistic."