Steering success
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Automotive suppliers are facing tough times. With car makers demanding cheaper parts at high quality, and rising energy prices, suppliers have had to embrace new strategies to remain on top.
A new study by investment bankers Rothschild and Roland Berger Strategy Consultants identifies 13 key elements to sustainable success in the automotive supplier market. Entitled "Navigating turbulent waters" the study is based on seven-year (2000 to 2007) analysis of financial and performance data from approximately 400 automotive suppliers with global operations.
Over the past year, the pressure on automotive suppliers has increased drastically. Many car manufacturers have stepped up their demands for significantly higher discounts on purchased parts and systems compared to last year. At the same time, energy and raw material prices are rising dramatically, increasing suppliers' production costs. But this does not spell bad news for all: a number of suppliers announced record growth figures this year, even in this difficult global situation. Others, however, are floundering.
"Despite fierce competition in 2006, average global automotive suppliers' EBIT margins remained high. Initial estimates indicate that this figure will see a modest rise in 2007," Marcus Berret, Partner in the consultancy's Automotive Competence Center and co-author of the study explains. 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 Rothschild.
These figures show that if automotive suppliers play their cards smartly, growth can still be achieved despite adverse circumstances. Successful companies have been able to cut costs effectively - even more so than the automobile manufacturers themselves. Others have profited from a research and design outsourcing wave from car makers to suppliers.
A new study by investment bankers Rothschild and Roland Berger Strategy Consultants identifies 13 key elements to sustainable success in the automotive supplier market. Entitled "Navigating turbulent waters" the study is based on seven-year (2000 to 2007) analysis of financial and performance data from approximately 400 automotive suppliers with global operations.
Over the past year, the pressure on automotive suppliers has increased drastically. Many car manufacturers have stepped up their demands for significantly higher discounts on purchased parts and systems compared to last year. At the same time, energy and raw material prices are rising dramatically, increasing suppliers' production costs. But this does not spell bad news for all: a number of suppliers announced record growth figures this year, even in this difficult global situation. Others, however, are floundering.
"Despite fierce competition in 2006, average global automotive suppliers' EBIT margins remained high. Initial estimates indicate that this figure will see a modest rise in 2007," Marcus Berret, Partner in the consultancy's Automotive Competence Center and co-author of the study explains. 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 Rothschild.
These figures show that if automotive suppliers play their cards smartly, growth can still be achieved despite adverse circumstances. Successful companies have been able to cut costs effectively - even more so than the automobile manufacturers themselves. Others have profited from a research and design outsourcing wave from car makers to suppliers.
While a number of suppliers are doing exceptionally well, smaller companies are floundering. Aside from size (larger companies are generally more profitable), product and regional focus play a role in the degree to which a firm will be able to ride the current wave.
The study shows that 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 lower than in 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).
Regional differences play a role
The strength of the regional car market also seem to play a role: 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 heavy losses (2000: 13.7%; 2006: 11.1%).
The Asian market is a completely 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%).
The study shows that 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 lower than in 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).
Regional differences play a role
The strength of the regional car market also seem to play a role: 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 heavy losses (2000: 13.7%; 2006: 11.1%).
The Asian market is a completely 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%).
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 leading companies in the industry by almost a third. Their growth looks stable enough to continue into the near future.
Their growth rates hover between 40-100% per year, with sharply improving profitability. In many cases, these suppliers are eager to follow their domestic market success, by carving out a greater slice of the global automotive market pie for themselves. Many of them are investing in increasing their technological know-how and customer contacts by acquiring foreign suppliers.
Top performers have shared strategy
Irrespective of their country of origin, top performers in the automotive supplier industry all follow a similar strategy, which the study examines closely. The authors identify thirteen key levers for long-term growth.
These include a focused product portfolio, combined with a diversified customer base and highly globalized operations. Leaders in the business were quick to build production facilities in low-wage countries and show a greater consistency in realizing these plans than their less successful competitors. At the same time, they have managed their working capital very effectively. In addition, their debt-equity ratio is roughly as much as three times lower than that of low performers, providing the flexibility needed to realize further outstanding growth figures.
If you have questions regarding this, or any other story, please don't hesitate to contact us:
Their growth rates hover between 40-100% per year, with sharply improving profitability. In many cases, these suppliers are eager to follow their domestic market success, by carving out a greater slice of the global automotive market pie for themselves. Many of them are investing in increasing their technological know-how and customer contacts by acquiring foreign suppliers.
Top performers have shared strategy
Irrespective of their country of origin, top performers in the automotive supplier industry all follow a similar strategy, which the study examines closely. The authors identify thirteen key levers for long-term growth.
These include a focused product portfolio, combined with a diversified customer base and highly globalized operations. Leaders in the business were quick to build production facilities in low-wage countries and show a greater consistency in realizing these plans than their less successful competitors. At the same time, they have managed their working capital very effectively. In addition, their debt-equity ratio is roughly as much as three times lower than that of low performers, providing the flexibility needed to realize further outstanding growth figures.
If you have questions regarding this, or any other story, please don't hesitate to contact us:
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