Short-time work and again 35-hour week at Schaeffler, Job removal at Bosch, possible factory closures at Continental – The weakening demand in the automotive industry means less business for suppliers in Germany, and they are already having consequences.
It is by far not only the big ones who are sometimes even more flexible than smaller companies in responding to the looming crisis. The entire supplier industry puts a “full stop”, concedes a study by the management consultants Roland Berger and the investment bank Lazard, the manager-magazin.de is present.
While global auto production in the first half of the year fell by 5 percent compared to the same period in the previous year, suppliers would not only have to adjust their capacities, but would also have to make a sizeable loss in the profitability of their business: Operational return on sales in the current year is likely to be only at 6 percent on average – the lowest level since 2012. In the previous year, it was still 7.2 percent.
The authors immediately see a whole bundle of causes, which have recently been formulated several times in the light of the sometimes reflexive reactions of the industry:
the car demand in China, which saw double-digit percentage declines in the first half of the year compared to the same period of the previous year
the general economic slowdown with car manufacturers’ austerity programs
the downward trend of increasing trade conflicts
the structural changes in the course of the transition to electromobility.
Success-spoiled suppliers have also made mistakes
However, the authors of the study also do not save with criticism. Pampered by the record-breaking years from 2010 to 2017, suppliers have been focusing too much on day-to-day business, but failed to address their “structural weaknesses and position themselves for the future”. Suppliers too have relied too much on promising growth forecasts and greatly expanded their capacities. For some companies, 60 to 70 percent of the new capacity has been left unused, the authors write.
Now you might think that a 6 percent margin would not be so bad in a downtrend and that better times would come. But the study warns: With 6.0 percent, the suppliers approached a border, in which both the self-financing, as well as the refinancing on the capital market would be difficult. In other words, liquidity could be a problem, especially for smaller players.
The automakers in particular expected their suppliers to invest heavily in relevant future technologies. The problem: whether the investments pay off is by no means settled. The necessary expenditures are for the suppliers “often an uncertain bet on the technology of the future”.
From their analysis, the authors derive a number of recommendations for action. So suppliers should:
increase their skills for new technologies (“critical to success”);
Investing in innovative and promising areas, look for venture capitalists, or seek partners to spread the burden across broader shoulders;
considering acquisitions with sufficient size and financial strength. Conversely, smaller suppliers should consider selling parts of the business or a merger;
initiate structural measures to counteract the increasing pressure on margins until 2025 – which basically means nothing more than setting red pencils stronger
But it is also clear that there is no universal strategy for everyone.