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The European Car Crisis – Implications on the North American Supply Base

2013

Roland Berger Strategy Consultants has released a study that analyzes the pulse of the North American automotive supplier industry and their exposure to Europe. The study provides an analysis of the current health of the European automotive market and its impact on the performance of North American suppliers operating in the region. The study provides insights on how some suppliers have managed to convert adversity into opportunity and what lessons can be learned by the suppliers in order to transition from an "average" supplier to a "top" performer.

As global light vehicle sales recovered after the crisis, all regions except Europe bottomed out and are further showing signs of positive growth. Europe, meanwhile, has continued to decline since 2007 and has reached the lowest sales level for almost 20 years. "Looking ahead, we expect the European automotive market to further shrink in 2013 with only a slow recovery in Q4," says Thomas F. Wendt, responsible Partner for the North American Automotive supplier business at Roland Berger Strategy Consultants. As a result, the importance of Western Europe as a production hub is declining and the effect is most pronounced in the larger volume segment. "We expect unutilized capacity of approx. 7 m units in Western Europe" says Thomas F. Wendt. "There is no resolution in sight for the overcapacity situation".

In this vulnerable environment, the supplier base is facing the heat with profitability declining significantly since 2010. After record level margins in 2011 and an impressive recovery after the crisis, even North American suppliers started to see an impact on their business 2013 and had to revise annual targets because of the situation in Europe.

Also the Street is heavily discounting European exposure of the suppliers relative to other regions. "The Street generally values revenue growth, increase in profitability, increase in capital productivity and alignment of strategy with change in market conditions" says Thomas F. Wendt, Partner with Roland Berger Strategy Consultants. "Suppliers exposed to the European environment currently do not check most of the boxes".

The "common" supply base reaction in this environment is rightsizing of operations. "Up to sixty thousand jobs have been temporarily affected so far and we expect more than 10% of the 750,000 supplier jobs, or up to 85,000, being permanently at risk within the next 3-4 years" says Wendt. "The key question is whether this reaction is sufficient and/or is this the only reaction possible?"

Even in a challenging market environment, some suppliers have managed to convert adversity into opportunity and have outperformed the Roland Berger supplier index as well as the S&P. These top performers managed to grow revenues in a difficult environment while maintaining high margins.

Therefore we feel that there is a clear path to navigate through the challenges in Europe. "What top performers do better than others is drive towards technology leadership, ensure sustained R&D investments and tap into growing revenues pools. This differentiates them from the broader supply base and shows in their financial performance" says Thomas F. Wendt.

The study provides insights into these strategic levers and their potential impact by showing the correlation between the top suppliers' performance and the differentiating strategies they deploy even in a vulnerable environment.

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