The situation for the automotive industry could not be better: worldwide demand for cars is greater than ever before. Between 2000 and 2013, global vehicle production increased by almost 50 percent – and the winners of this boom are primarily German manufacturers. Volkswagen is on its way to becoming the global sales leader, and BMW, mercedes and audi dominate the premium business.
The situation for German automotive suppliers, on the other hand, is far less comfortable, especially for small and medium-sized enterprises (SMEs). They provide the bulk of the suppliers for the major carmakers and are increasingly overwhelmed by the rising requirements. There is a great danger that these SMEs, which form the backbone of German industry, will lose out as a result of the auto boom.
Many of these small and medium-sized companies are currently in a structural "sandwich position", says automotive expert stefan bratzel. "on the one hand, the previous sales base is deteriorating, as automotive production in germany and europe will no longer grow in the medium or long term."
Dependence on suppliers is growing
On the other hand, many mid-sized automotive suppliers lack the resources to compete with the big players in terms of internationalization, technology dynamics and cost pressures.
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Suppliers are forced to fundamentally reposition themselves and pursue new strategies in order to free themselves from the dependency of carmakers. "If no massive countermeasures are taken in the next few years, more than 1,000 medium-sized automotive suppliers in this country will be threatened in the medium term. And thus 100.000 to 150.000 jobs", writes batzel in his new book "automotive suppliers on the move".
In the German automotive industry, suppliers play a decisive role in terms of both quantity and quality. The major carmakers have been outsourcing the manufacture of components and parts of production for years. This will not change, even if insourcing has been considered again recently.
The role of suppliers is also becoming increasingly important in research and development. Their share of global research and development value added is already 40 percent today and is forecast to rise to 53 percent in 2025. In short, more and more of a car does not come from the manufacturer itself, but is purchased from suppliers.
Even if large corporations such as bosch, continental, magna or denso provide most of the work, the share of SMEs should not be underestimated. The number of employees in the automotive sector in this country is around 300.000. That’s about one-third of the total automotive supply industry.
The 2900 or so companies with up to 500 employees are the real job engines in the country, and they generate a large proportion of the technical innovations – for now. But suppliers are facing two major challenges: the shift in global demand and rising cost pressures.
Germany is becoming too expensive
The challenges are most evident in the area of internationalization. Medium-sized companies are generally loyal to their location, but more and more companies are having to think about relocating development and production for two reasons. on the one hand, suppliers are increasingly forced to follow the major automakers into their important markets.
On the other hand, many suppliers believe that germany is becoming less attractive as a location for production due to rising costs and a stagnating market. However, it is much more difficult for a company with up to 500 employees to move part of its operations abroad than for a group of companies.
At present, suppliers see rising energy prices in particular as a pressing problem. 91 percent of the companies surveyed by bratzel see this as an increasing competitive disadvantage for their german sites. In addition to energy costs, the high wage costs in germany have the potential to jeopardize existing jobs, according to 76 percent of the suppliers surveyed.
So far, higher wage costs in Germany have been offset by correspondingly higher productivity. But this cannot be increased at will.
At the same time, pressure from major customers such as volkswagen, Daimler and BMW is increasing to follow them into foreign markets. The major carmakers are increasingly shifting their production to the major growth markets. So far, this does not mean that capacities are being cut here in Germany. But new plants are being built almost exclusively outside europe.
Car production in the EU has fallen by more than eleven percent since 2000. In the same period, annual passenger car production in china grew by 17 million. Overall, vehicle production in china, Brazil, india and russia has increased almost sixfold since then. While 7.8 percent fewer cars came off the production lines in europe, the USA and japan.
Competing locally with local low-cost suppliers
Because carmakers want to save logistics costs and produce more cheaply in the growth markets due to lower labor costs, and because customer countries are increasingly stipulating local production, they are following the new markets – and demanding that their suppliers join the migration movement and build sites in china, india, mexico or russia. Quite a few small and medium-sized companies are overwhelmed by this.
The new audi plant in mexico, for example, where the successful Q5 SUV will start rolling off the production line in 2016, is expected to have a local production quota of 65 percent from the start. In the medium term, this is expected to rise to 90 percent – a general trend that also applies to other automakers. For suppliers, this means that they have to produce locally if they want to continue to be part of the game.
But in countries where demand is growing strongly, german suppliers are increasingly encountering local competition. "For less complex components, especially in china, local suppliers are increasingly coming into play, which is putting noticeable pressure on margins," says stefan bratzel.
This means that even if one of the german suppliers plans to manufacture abroad, it must either keep up with the costs of the local manufacturers or offer significantly better quality. However, many smaller automotive suppliers are entering new territory with internationalization. Only 34 percent of these companies (ten to 500 employees) are active abroad, while 75 percent of companies with between 500 and 1,000 employees are already active abroad.
At the same time, cost pressure on suppliers is growing. High cost transparency, advance performance requirements, savings and depersonalized award procedures are the main drivers of this trend. In bratzel’s survey, 59 percent of suppliers agreed with the statement that their main customer’s purchasing is predominantly price-driven.
"this is an enormous threat, especially for smaller medium-sized suppliers. Their competitive advantages lie less in low unit costs and more in the areas of quality, speed and flexible problem solving," writes Batzel. Short-term thinking buyers or depersonalized awarding of contracts are therefore "poison" for medium-sized suppliers, who can play to their strengths primarily through personal, trusting cooperation with specialist departments.
Specialists have it better
Accordingly, price and cost pressures are having a different impact on the various types of suppliers. According to Bratzel, cost pressure is particularly high for companies that are not involved in their customers’ development ("production specialists") and often serve the cost-sensitive volume segment.
In contrast, companies that are involved in development ("development specialists") and also have a unique selling proposition ("technology specialists") show significantly lower cost pressure. This is mainly the result of the better negotiating position with customers, most of whom are from the premium segment.
In the medium term, the increasing cost and competitive pressure can be compensated with increasing difficulty. "the result is falling sales and corresponding declines in employment and ultimately disappearance from the market," says bratzel.
According to his study, about 40 percent of all small and medium-sized automotive suppliers in germany have a lot of catching up to do. "at present, this group of suppliers is neither sufficiently internationally positioned nor involved in the development of its customers and is heavily dependent on the automotive industry," concludes the automotive expert.