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Uncer­tainty looms large in au­to­mo­tive sup­plier in­dus­try

The global EBIT mar­gins for the au­to­mo­tive sup­pli­ers in 2015 was at a record high of 7.4%. How­ever, volatil­ity in­creased and global rev­enue growth slowed, ac­cord­ing to the `Global Au­to­mo­tive Sup­plier Study 2016’ from Roland Berger and Lazard. A po­ten­tial mar­ket cool-down in 2016 and fu­ture tech­nol­ogy changes re­main at the top of the sup­plier CEO agenda.

As part of the study, per­for­mance in­di­ca­tors of more than 600 in­ter­na­tional sup­pli­ers were an­a­lysed to assess the cur­rent state as well as trends and chal­lenges in the in­dus­try. The on­go­ing year-over-year im­prove­ment that the sup­plier in­dus­try has en­joyed since 2010 has largely come to a stand­still.

Rev­enue growth is the low­est in 7 years, and sev­eral prod­uct seg­ments have ac­tu­ally seen profit mar­gins slightly be­low the 2014 level. “With prof­itabil­ity at record highs in 2015, in­ter­na­tional au­to­mo­tive sup­pli­ers are in good shape at first sight,” Felix Mogge, Part­ner at Roland Berger, said. “Be­sides shrink­ing rev­enue growth they will have to cope up with grow­ing mar­ket volatil­ity across the globe and have to face rev­o­lu­tion­ary changes in tech­nol­ogy as well as new mo­bil­ity con­cepts in the near fu­ture,” he added.

Ve­hi­cle pro­duc­tion

Ac­cord­ing to the study by Roland Berger and Lazard, global ve­hi­cle pro­duc­tion is ex­pected to grow only mod­er­ately at around 2% in 2016 and beyond. “Sup­pli­ers will have to rely on other fac­tors to sta­bilise or even drive up their mar­gins and re­main pre­pared for sud­den macroe­co­nomic tur­moil that could lead to sub­stan­tial short-term re­duc­tion in de­mand,” Christof Sön­der­mann, Di­rec­tor at Lazard, said.

In a ma­tur­ing Chinese mar­ket, dou­ble-digit growth rates will likely be­come a thing of the past. At the same time, a short-term re­cov­ery of Brazil and Rus­sia is more than ques­tion­able, and the Brexit raises new un­cer­tain­ties in Europe.

Red Sun Telem­at­ics Rad­i­cal change

“Look­ing ahead, re­cent de­vel­op­ments clearly in­di­cate that the global au­to­mo­tive in­dus­try is fac­ing the most rad­i­cal change in its history,” Sön­der­mann said. Dis­rup­tive trends in tech­nol­ogy and com­pletely new busi­ness mod­els for au­to­mo­bile us­age cer­tainly prom­ise op­por­tu­ni­ties for sup­pli­ers within the next 10 years – but there is tremen­dous uncer­tainty as to ex­actly when and where those op­por­tu­ni­ties will un­fold.

The to­tal com­po­nent mar­ket value is ex­pected to rise from EUR 700 bil­lion in 2015 to more than EUR 850 bil­lion in 2025, though profit pools will sub­stan­tially shift be­tween seg­ments and in some cases even to­wards new in­dus­try play­ers.

On the pow­er­train side, the de­vel­op­ment of e-mo­bil­ity is gain­ing a lot of mo­men­tum. While tech­no­log­i­cal hur­dles pre­vail and a con­vinc­ing busi­ness case for the end cus­tomer is nowhere close to ac­com­plish­ment yet, tight­ened emis­sion reg­u­la­tions by (supra-) na­tional and lo­cal bod­ies will likely have a cat­alytic ef­fect over the com­ing years.

“We ex­pect the mar­ket for elec­tri­fied ve­hi­cles to mul­ti­ply by a fac­tor of 7 to 10 over the next decade – lead­ing to sub­stan­tial growth po­ten­tial for e-pow­er­train com­po­nent sup­pli­ers while driving the tra­di­tional com­bus­tion en­gine seg­ment more and more into a com­mod­ity cor­ner,” said Mogge. For as­sisted/ au­to­mated driving com­po­nents, sup­pli­ers are fac­ing a mar­ket that is ex­pected to grow by a fac­tor of 5 and reach a global vol­ume of al­most EUR 30 bil­lion by 2025, but it also at­tracts fierce com­pe­ti­tion from tech gi­ants.

In­creas­ing com­plex­ity

With grow­ing com­plex­ity and cost of the con­ven­tional pow­er­train and e-mo­bil­ity not yet pick­ing up, EBIT mar­gins of pow­er­train sup­pli­ers have re­cently suf­fered and fallen be­low the in­dus­try av­er­age to 6.9%. In con­trast, chas­sis sup­pli­ers ben­e­fited from the rise of as­sisted and au­to­mated driving func­tion­al­i­ties. With an EBIT mar­gin at 7.7%, their busi­ness ranks high among the dif­fer­ent do­mains, sec­ond only to tyre sup­pli­ers.

There are not only sig­nif­i­cant dif­fer­ences by do­main, but also by re­gion. While Europe-based sup­pli­ers largely ben­e­fit from lead­ing tech­nol­ogy po­si­tions in many seg­ments, China-based sup­pli­ers have seen a de­cline in mar­gins in re­cent years due to sharply in­ten­si­fy­ing com­pe­ti­tion in their home mar­ket.

Re­gard­less of prod­uct fo­cus or re­gion, in­no­va­tion is a key to suc­cess – but not nec­es­sar­ily the only one. “On an av­er­age, prod­uct in­no­va­tors out­pace process spe­cial­ists by roughly 2% when it comes to prof­itabil­ity,” Roland Berger, Part­ner, Thomas Sch­lick said. How­ever, the best per­form­ing process spe­cial­ists earn mar­gins that are com­pa­ra­ble to those of the lead­ing prod­uct in­no­va­tors.

Port­fo­lio man­age­ment

In or­der to be suc­cess­ful in this more volatile and rapidly chang­ing en­vi­ron­ment, sup­pli­ers are re­quired to speed up their flex­i­bil­ity and agility in de­vel­op­ing and run­ning their busi­ness. “It is no longer suf­fi­cient to just fo­cus on or­ganic growth in tra­di­tional ar­eas,” Sön­der­mann said. “Profit pools are mov­ing to­ward new tech fields and sup­pli­ers may face fierce com­pe­ti­tion from new play­ers from out­side of the au­to­mo­tive sup­plier in­dus­try,” he said.

As such, ac­tive port­fo­lio man­age­ment is ex­pected to fur­ther in­crease in rel­e­vance as sup­pli­ers have to re­de­fine their core com­pe­ten­cies and adapt to cap­ture new tech­nol­ogy. How­ever, the com­plex­ity of ac­qui­si­tion­led growth will con­tinue to be sub­stan­tial due to in­tense com­pe­ti­tion for at­trac­tive tar­gets and high price lev­els. “Think­ing well ahead of the next ve­hi­cle gen­er­a­tion, sce­nario plan­ning and a more in­no­va­tive ap­proach to prod­uct de­vel­op­ment will be cru­cial,” Sch­lick said.

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