Together with Rothschild we launch study on situation of automotive suppliers

• Pressure on suppliers grows around the world: automakers push for higher price reductions
• Suppliers face contradictory situation: downward pressure on costs versus record growth in sales and profits
• Sales and profits of suppliers from growth markets rising sharply
• 13 levers identified for success in the parts supply industry

The pressure on automotive suppliers has increased drastically over the last twelve months. Many car manufacturers have stepped up their demands for significantly higher discounts on purchased parts and systems compared to last year. What is more, as energy and raw material prices rise dramatically around the globe, costs for suppliers are increasing steadily. However, the study unveiled and interesting dichotomy: While many suppliers have recently run into financial difficulties, many others are announcing record growth in sales and profits year on year. For 2007 and 2008, suppliers are working at full capacity and their order books are full. Entitled "Navigating turbulent waters – Levers for success in the global automotive supplier industry," the study by investment bank Rothschild and Roland Berger Strategy Consultants is based on an analysis of financial and performance data from approximately 400 automotive suppliers with global operations. It covers the years 2000 to 2007.

"Despite fierce competition in 2006, average EBIT margins enjoyed by automotive suppliers around the world remained high. The initial estimates indicate that this figure will see a modest rise in 2007," explains Marcus Berret, partner in the Competence Center Automotive of Roland Berger Strategy Consultants. In relation to sales it reached 5.3% in 2006 and is expected to increase slightly again in 2007.

Return on capital employed (ROCE) shows similar results. "For the automakers this figure has been holding steady for years, at between 11 and 12%. In 2006 it measured 11.5%," says Thomas Kästele, Director of the Industry/Automotive Division at the investment bank Rothschild.

There are a number of reasons why suppliers are doing so well. For one, global growth in the automotive industry is very stable, with increases in sales of around 4% per year. In addition, suppliers have often worked much harder in recent years to cut costs more than many automobile manufacturers themselves. In many cases automakers have outsourced research and development to their suppliers. That often means paying higher prices.

However, it is not good news for every supplier. Stark differences occur between the profitability of the different suppliers. The key factors here are company size (as a rule, the bigger the company, the more profitable), product focus (chassis and powertrain are best) and regional focus.

Size matters

Smaller suppliers with revenues of under EUR 500 million a year showed an average return on capital of 8.5% for 2006. That is some 3-4% below the industry average. Their performance is around three percentage points down on the year 2000. By contrast, companies with annual revenues of EUR 5-10 billion are currently the big winners. In 2006 they enjoyed an average return on capital of 16% (up 4.8% on 2000).

In recent years, automotive suppliers from Western Europe have generally enjoyed stable returns on capital at rates slightly above the industry average (2000: 11.2%; 2006: 11.8%). Yet they still show slower growth than the market as a whole. North American suppliers, by contrast, have not been able to maintain the high profit levels that they achieved in 2000. Following the crisis among the North American vehicle manufacturers, they have had to cope with some heavy losses (2000: 13.7%; 2006: 11.1%).

Asia tells a different story. Suppliers in Japan in particular have seen significant increases in their ROCE in the wake of the successes enjoyed by Japanese auto manufacturers. (2000: 8.4%; 2006: 11.2%).

Suppliers from emerging markets come out on top

Increasing polarization is another clear trend seen in the supplier market. A group of around 50 top performers (characterized by above-average revenue growth and profitability over the last six years) continue to achieve excellent results. And the gap between this group and the 50 or so "low performers" has almost doubled in the last six years.

The clear winners among the top performers are companies from Asian growth regions such as China and India. From 2005 to 2006, they increased their share among the top performers by almost a third. And the forecast is for further growth.

These companies generate growth rates of 40-100% per year, while achieving above-average and sharply improving profitability. They also have the determination to follow up their successes on domestic markets by taking a greater slice of the global automotive market. Many of them are also trying to get hold of technological know-how and customer contacts by acquiring foreign suppliers.

Top performers have shared strategy

Irrespective of their country of origin, the top performers in the automotive supplier industry all follow a similar strategy, which the study examines closely. Authors identified thirteen key levers for companies to remain successful in the supplier business.

Top performers, their finding show, have a much more focused product portfolio, combined with a diversified customer base and highly globalized operations. They have also built production facilities in low wage countries earlier and are more consistent than their less successful competitors. At the same time, they are able to manage their working capital much more effectively. In addition, their debt-equity ratio is roughly as much as three times lower than that of low performers. This provides the flexibility needed to realize further superior and profitable growth.