Automotive Suppliers: Quick rebound after the crisis, but...

The global automotive supplier industry is recovering at an incredible rate after the historic crisis in 2008 and 2009. Revenues in the global supply base are almost back to pre-crisis levels, while returns on sales may even reach a record high of 6% in 2010. Key drivers of this quick recovery are the booming car markets in China, Brazil and India – as well as partial recovery of the triad markets (Nafta, Europe and Japan). However, this doesn't hide the fact that the entire auto supply sector suffered dramatically during the crisis. "EUR 200 billion in revenues, EUR 75 billion in EBIT and EUR 15 billion in equity were 'lost' during the crisis worldwide," says Dr. Eric Fellhauer, Managing Director at Lazard. "In addition, 350 suppliers around the globe had to file for insolvency." However, the global supplier industry managed to be free cashflow positive in the tough year of 2009 – thanks to rigorous actions such as reducing investments, optimizing working capital or scaling back the cost base. "Revenues in the global supply base are almost back to pre-crisis levels, while returns on sales may even reach a record high of 6% in 2010," says Marcus Berret, Partner at Roland Berger Strategy Consultants. Margin squeeze and rising capital needs are upcoming challenges According to the study, the medium-term outlook for auto suppliers is less rosy. "In particular, further intensifying pressure from car makers on their suppliers will lead to lower margins," says Marcus Berret. "At the same time, the industry needs to refinance approximately EUR 130 billion by 2015. Altogether, this is a tremendous challenge." Car makers are finding themselves in a dilemma: on one hand, they can't let their competitors realize better prices at suppliers. On the other hand, the collective pressure on the supply base is leading to a large group of structurally weak suppliers with very limited innovation and investment capabilities. "Approximately 20% of the global supply base has in the meantime below-average profitability and financial stability. This group of low-performers will be in the center of the next crisis," says Dr. Fellhauer. More collaborative approach needed The study concludes that suppliers need to continue to improve their operational performance, increase their discipline in parts pricing and focus on profitable business instead of fighting for each project. Also, they need to rigorously search for new sources of financing. Marcus Berret: "At the same time, car makers should switch to a more collaborative approach regarding their suppliers and focus on revitalizing structurally weak product segments by allowing and supporting real consolidation." Major findings of the study • In line with the recovery of global car production, revenues in the global automotive supplier industry are almost back to pre-crisis levels • Suppliers' EBIT margins will even reach an all-time high of approx. 6% in 2010 - Profit recovery is particularly strong at European and North American suppliers • Rising factor costs and especially severe price pressure from car makers will lead to shrinking margins in 2011 and beyond • At the same time, the global supplier industry needs to refinance the substantial amount of around EUR 130 billion until 2015 • The crisis did not lead to real consolidation of most of the problematic segments – therefore, a large group of structurally weak underperformers (approx. 20% of the global supply base) will be the first to fail when volumes drop again