Automotive Supplier Outlook

The automotive sector is currently “under re-construction” in many regions. Both on product and value chain level, regulators are asking for “net-zero” solutions and increasingly penalize non compliance. Companies are in full process of transformation, which profoundly challenges their innovation competence and their investment budgets.

At the same time, the sector is hit by the impact of recent global events, including those of COVID-19, inflation and the war in Ukraine. (See Exhibit 1.)

Exhibit 1: Europe and Asia have been particularly affected by the war in Ukraine and late Covid-19 effects

This combination has resulted in the industry facing major disruptions and substantially increased costs. At the same time, the industry is starting to also experience reduced (and oscillating) demand. This is clearly impacting their financials.
Not all the players are sharing the burden equally, however. While OEM’s margins have largely recovered since 2020, returning to earlier record levels of around 8%, those of automotive suppliers are running at just two-thirds their historical levels, at a little over 50% of the OEMs’ (See Exhibit 2), and have recently come under increased pressure again. This could well cause problems for the sector as a whole – currently no vehicle can be built without substantial supplier contributions.

Exhibit 2: Automotive manufacturers' margins have increased since the pandemic while supplier margins have come under pressure again

Based on the agendas of key stakeholders – regulators, OEMs, banks/ investors and the suppliers themselves - we have taken a look into potential solutions for automotive suppliers and ways to re-invent collaboration.

We see several strategic options for the industry players right now:

Conflicts of interests between affected stakeholders (supplier, automotive manufacturers, banks, policy makers) will become a driving force
Financial distress and investment requirements will drive (further) consolidation of the supplier landscape
Strong players will consider a full exit of the automotive industry while financially constrained players will increasingly face the risk of insolvency
Combustion engine-reliant suppliers are left with few strategic options and need to act quickly

The present bumpy road is likely to continue for some time into the future. The way can be smoothed substantially, and the sector kept on the road if manufacturers, suppliers, banks and regulators work together to find innovative ways to meet their common goals.