Roland Berger Offers Global Outlook on Auto Suppliers

January 12, 2008 // Published as a news service by IHS

For 2007 and 2008, suppliers are working at full capacity and their order books are full.

"Despite fierce competition in 2006, average EBIT [earnings before interest and taxes] margins enjoyed by automotive suppliers around the world remained high," said Marcus Berret, partner in the Competence Center Automotive of Roland Berger Strategy Consultants.

"The initial estimates indicate that this figure will see a modest rise 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%," said Thomas Kästele, director of the industry/automotive division at Rothschild, which also participated in the analysis. "In 2006, it measured 11.5%."

There are a number of reasons why suppliers are doing so well, analysts said. First, global growth in the automotive industry is very stable, with sales increasing approximately 4% per year.

Suppliers have also worked hard in recent years to cut costs, maybe more than many automobile manufacturers themselves. In many cases automakers have outsourced R&D to their suppliers.

Yet this is not good news for every supplier. Analysts said stark differences occur between the profitability of different suppliers. The key factors are company size (as a rule, the bigger the company, the more profitable), product focus (chassis and powertrain are best) and regional focus.

Smaller suppliers with revenues under €500 million a year showed an average return on capital of 8.5% for 2006. Analysts said that is 3%-4% below the industry average. Their performance is around three percentage points down on the year 2000.

By contrast, companies with annual revenues of €5-€10 billion are currently the big winners. In 2006, they enjoyed an average return on capital of 16% (up 4.8% on 2000).

In recent years, 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%), analysts said. Yet, they still show slower growth than the market as a whole.

By contrast, North American suppliers have not been able to maintain the high profit levels they achieved in 2000, analysts said. Following the crisis among the North American vehicle manufacturers, they had to cope with some heavy losses (2000-13.7%; 2006-11.1%).

Asia tells a different story. Analysts said suppliers in Japan have seen significant increases in their ROCE in the wake of the successes enjoyed by Japanese auto manufacturers (2000-8.4%; 2006-11.2%).

Increasing polarization is another clear trend seen in the supplier market, analysts said. A group of approximately 50 top performers (characterized by above-average revenue growth and profitability over the last six years) continue to achieve excellent results. The gap between this group and the 50 or so "low performers" has almost doubled in the last six years.

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 top performers by almost one-third. And the forecast is for further growth, analysts said.

These companies generate growth rates of 40%-100% per year, analysts said, while achieving above-average and sharply improving profitability. They also have the determination to follow up their successes on domestic markets by taking a greater slice of the global automotive market. Many of them are also trying to get hold of technological know-how and customer contacts by acquiring foreign suppliers.

Analysts said top performers have a much more focused product portfolio, combined with a diversified customer base and highly globalized operations. These stakeholders have already built production facilities in low wage countries and are more consistent than their less successful competitors.

At the same time, they are able to manage their working capital much more effectively. In addition, their debt-equity ratio is roughly as much as three times lower than that of low performers. Analysts said this provides the flexibility needed to realize further superior and profitable growth.

Source: Roland Berger Strategy Consultants.