"Strategies for profitable growth in the global automotive supply industry"

• Automotive suppliers have become significantly more profitable in the past five years – the gap between top and low performers is widening
• Profitability varies greatly by region, company size and product segment
• Successful suppliers applied – on average – different strategies than their low performing peers

Automotive suppliers worldwide have become much more profitable in the last five years, contrary to prevailing industry opinions. Suppliers' return on capital employed rose from 8.6 percent in 2001 to 11.3 percent in 2005. Within the supply industry the best companies (top performers) are three times more profitable than less successful companies (low performers). These are the findings of a survey by Roland Berger Strategy Consultants and investment bank Rothschild entitled "Strategies for profitable growth in the global automotive supply industry". The survey draws on an analysis of financial and business figures from some 350 globally operating automotive suppliers from the years 2000 to 2005.

"The pressure on automotive suppliers has intensified greatly over the past few years. Firstly, the price of raw materials has risen sharply, and secondly, carmakers are trying to further reduce their sourcing costs," explains Marcus Berret, Partner in the Automotive Competence Center at Roland Berger Strategy Consultants.

"Not all suppliers have been able to respond appropriately to this increase in pressure. The companies in this industry are thus being assessed in a differentiated way by the financial markets," says Thomas Kästele, Director of the Industry/Automotive section of the investment bank Rothschild.

In spite of this, automotive suppliers have improved their return on capital employed over the past few years, achieving 11.3 percent in 2005 compared to just 8.6 percent in 2001. "Most suppliers have greatly improved their operating capabilities and in particular have reduced costs significantly. Higher average returns are the payoff for this," says Berret.

However, the survey shows that profitability has developed very differently depending on products, company size and the regional focus of business. While Western European suppliers achieved consistently high returns on capital employed (12.6 percent in 2005), their US counterparts have been struggling with constantly falling profitability (9.3 percent in 2005). There were major improvements among Japanese and South Korean suppliers. Looking at company size, it is clear that mid-sized and large suppliers (sales of EUR 500 million to EUR 10 billion) are the most profitable. In 2005, they achieved ROCE of 12.4 to 15.5 percent. Small suppliers (sales of less than EUR 250 million) as well as very large ones (sales of over EUR 10 billion) are less profitable; their ROCE hovers between 8.2 and 10.1 percent. In terms of products, suppliers focusing on infotainment, interiors, chassis and tires did best, achieving ROCE of 11.4 to 13.0 percent in 2005.

Top performers have a clear recipe for success

Individual companies experienced the generally positive development within the industry to differing extents. In the period studied, the top performers grew roughly three times as fast as the low performers, with annual sales growth of 10.3 percent and 3.0 percent respectively. The top performers were also three times as profitable on average (with average ROCE of 16.3 percent versus 5.7 percent). The gap between top and low performers has continued to widen over the past five years.

The survey shows the areas in which top performers differ from low performers. The top performers' recipe for success includes a more strongly focused product portfolio, a broader and more globally aligned customer base and more consistent offshoring of production capacity to low-wage locations. They also make targeted investments in research and development as well as investing more in their plants and machinery. The top performers are also characterized by stable corporate management and customer-focused organizational structures as well as high equity input and flexible financing structures.

The outlook: Automotive supply remains an attractive but demanding industry segment

Vehicle production is likely to increase further in key markets over the next few years. "In the future, automakers will also be prepared to pay more for products that help them differentiate themselves from other brands," predicts Kästele. There is still more room for suppliers to maneuver in terms of cutting costs and boosting profitability, such as offshoring production and engineering tasks to low-wage countries, optimizing their working capital and improving their balance sheet structure.