1. New automotive supplier study by Roland Berger and Lazard: Average EBIT margins among automotive suppliers to reach record levels of around 7.5 percent in 2014
2. Market growth set to slow in 2015; volatility and uncertainty in the markets to increase
3. Shift in the global demand and relocation of production and R&D sites coupled with new technologies will bring structural changes
4. Short term, suppliers need to raise their efficiency levels and maintain maximum flexibility, while adapting their strategy to the new demands of the markets medium term

Munich, December 9, 2014

The global supplier market is booming, with the average EBIT margin in the industry set to reach an all-time high of about 7.5 percent 2014. The business of powertrain and tire suppliers is more profitable than most, with margins of 8 percent and more. But in the wake of the very good development, the pace of market growth in the supplier industry is expected to slacken in the coming two years, and the level of uncertainty in international markets is expected to rise even further. This is the result of the new "Global Automotive Supplier Study 2014" jointly published by Roland Berger Strategy Consultants and Lazard.

Still, the global market for vehicle components is anticipated to grow to around EUR 800 billion in the period through 2020 – which equates to a EUR 125 billion increase in the market volume. Market shares in the supplier industry are expected to change given the structural shifts the sector is currently experiencing – there is a sea change under way as regional end markets shift, R&D and production sites are relocated and new technologies emerge. Companies need to prepare for this in good time if they would like to benefit from arising opportunities and to mitigate risks, according to the advice given by the experts.

Supplier profitability at record levels

"After an excellent year 2013, international automotive suppliers are also expected to end this year with an EBIT margin of some 7.5 percent, making 2014 a record year for the industry," says Felix Mogge, Partner at Roland Berger Strategy Consultants. The key drivers of this growth are the rise in vehicle production volumes along with high capacity utilization at suppliers.

Yet despite the favorable economic situation, supplier performance varies greatly depending on region, company size, product focus and business model. NAFTA-based suppliers are currently around 1 percentage point more profitable than their European peers, for example. Large global suppliers achieve very high EBIT margins of around 8 percent, while small suppliers are left behind. There is also major variation between product segments. Powertrain and tire-focused suppliers currently achieve the highest profitability, with levels topping 8 percent. Interior suppliers, on the other hand, continue to struggle with EBIT margins of just 5 to 6 percent.

"What's most important is to innovate across all product segments," explains Roland Berger Partner Marcus Berret. "Suppliers offering innovative products can generate margins that are – on average – 2 percentage points higher than those of their process-focused peers." But it's not all about the P&L. "Along with the operational performance, many suppliers substantially improved their liquidity and financing situation and find themselves in a more stable position than in 2007," says Christof Söndermann, Director at Lazard.

Rising uncertainty puts profitability under pressure

However, the market volatility is expected to slow the auto industry's international growth in the year ahead. The number of cars sold in Europe will likely remain at a low level and rise only moderately in the NAFTA states. Countries like Japan can even expect sales figures to fall. The only potential for growth lies – after difficult years 2013/2014 – in markets like Brazil, Russia and India, though even here there is a clear risk of further stagnation. China remains the most significant growth driver for the industry, with the Chinese automotive market likely to grow a further 6 to 8 percentage points per year in the next two years.

The slower pace of demand in the automotive market is thus increasing the pressure on OEMs: Falling prices in many markets, rising production costs and growing complexity are putting higher squeeze on profit margins. Many OEMs have responded by launching cost reduction programs, with the targeted savings making life more difficult for the supplier industry. "We expect the growth of the automotive supplier industry in 2015 and 2016 to be slower that it has been of late," says Berger expert Felix Mogge. "But profit margins will likely remain at a decent level in 2015 even though profitability will decline."

Structural change calls for new strategies

The automotive supplier industry is on the threshold of a radical change. Global end-customer demand continues to shift to Asia and increasing numbers of OEMs are relocating their R&D centers to China and their production sites to new markets beyond the BRIC states. Added to that is the growing number of European automotive suppliers that are being acquired by investors from emerging nations, and the evolution of new technological developments in areas such as the powertrain, driver assistance systems and connectivity. All of that leads to the emergence of new competitive structures and a redistribution of profit pools among suppliers.

Though margin levels throughout the industry will remain good next year, there is a growing risk of some companies seeing their profit margins shrink. "Suppliers need to prepare well for this new scenario," advises Roland Berger Partner Marcus Berret. "In the short term, increasing the organization's efficiency should be at the top of CEOs' 2015 agendas. But suppliers need to achieve that without limiting their flexibility. They need to focus on smart efficiency improvements." Predominantly this means reducing product and production costs. But it's important for the company's entire value chain – from research and development to production to the support functions – to remain flexible.

At the same time, suppliers need to prepare themselves to benefit from the structural industry shifts and mitigate the associated risks. "Suppliers' strategies will have to be reviewed and adjusted more frequently and more accurately than before to cope with the more volatile environment," says Dr. Eric Fellhauer, Co-Head of Lazard Germany. This holds true on the corporate strategy level – as innovative technologies and products give suppliers the opportunity to stand out from their peers – as well as on the product, customer and regional strategy level – where it is equally important to develop the right strategies to realize above-average growth and margin potentials on a sustainable basis.