The automotive industry will be facing enormous challenges over the next few years. In the wake of the expected growth, OEMs and suppliers will have to deal with the next wave of structural change. While this will open up new opportunities, it will also require huge investments. Even today, the financial scope for manoeuvre of many suppliers is limited – not least due to low profitability and increasingly demanding investors. This means that the classic medium-sized automotive suppliers are walking a fine line. If they want to accept structural change 2.0 and the associated costs, they will have to work primarily on their strategic orientation and operational excellence, thereby ensuring their profitability and creditworthiness. These are the findings of the Oliver Wyman study on the impact of the structural change involving the supplier industry.
In the next few years, globalization and technological progress will bring dynamism and growth to the automotive industry across the world. The major emerging countries are still developing rapidly, and so further accelerating the regional market shift. In China alone, annual car production volume will almost double by 2020 (from 18 to 33 million vehicles). In India it is expected to nearly triple from four to 11 million. Traditional automotive regions such as Western and Southern Europe are stagnating due, in particular, to low sales. In June 2013, for instance, the Western European car market lost more than five percent compared to June 2012.
Furthermore, OEMs, owing to their increasing focus, will in the future assign an increasing number of tasks to suppliers. Especially in research and development and in production, suppliers will gain additional value components. According to Oliver Wyman, automotive value creation in 2025 will amount to 1.25 billion euros. Of this amount, 69 percent will go to suppliers – a clear increase as against the 61 percent from 840 billion euros in 2012. Ultimately, the complexity of the product range is taking on new dimensions. More than ever, the automotive industry will be shaped in the next few years by new vehicle concepts, new models and new technologies.
High capital requirements – cheap debt financing but only with an intact business model
The imminent growth will trigger the next wave of structural change. For all players in the automotive industry, this will open up major opportunities. But the fact is that only profitable and financially strong suppliers will be able to make the necessary investments in global structures and new technologies. “It is precisely the medium-sized supplier landscape that is under huge pressure from the creation of structures for the expected growth outside their home region,” emphasizes Lars Stolz, a partner at Oliver Wyman. “Many could see their profitability severely impaired for a long time”. In fact, over the next few years there will be high investment requirements. Even the structural adjustments of recent years required enormous expenditure and had significant consequences for profitability. Total depreciation on investments in value-creation structures and expenditure on research, product development and management increased from 2008 to 2011 on an annual average from 19.1 to 20.3 percent of sales, while operating income fell internationally on average from 7.5 to 5.5 percent.
However, much higher investment and additional expenses will be needed for the forthcoming structural change and the related, but repeated, transition to a new value system. This will put profitability once