The automotive supply industry last year recorded its highest EBIT margin ever, recent research from Roland Berger finds. However, at the same time the outlook is mixed, with several long term fundamentals for the industry unergoing rapid change, including new market uncertainties and massive changes in supply and demand.
In the study ‘Global Automotive Supplier Study 2014’, global consulting firm Roland Berger Strategy Consultants and banking institution Lazard look into the market performance and long term outlook of the automotive supply industry.
The authors find that the automotive supplier* market is booming. The average EBIT (earnings before interest and tax) margin in the industry has reached an an all-time high of about 7.5% in 2014. “After an excellent year 2013, international automotive suppliers are also expected to end 2014 with an EBIT margin of some 7.5% making 2the year a record year for the industry,” explains Felix Mogge, Partner at Roland Berger Strategy Consultants.
Key drivers of the growth are the rise in vehicle production volumes along with high capacity utilisation at suppliers. Especially the powertrain and tire suppliers businesses were profitable with margins of 8% and more, with the interiors margin still at around the 5% in 2013.
The report also finds that companies investing in R&D (research and development) were the most successful. Roland Berger Partner Marcus Berret explains: “What’s most important is to innovate across all product segments. Suppliers offering innovative products can generate margins that are – on average – 2 percentage points higher than those of their process-focused peers.”
In the medium term the report concludes that the global market for vehicle components is anticipated to grow to around €800 billion in the period through 2020 – which equates to a €125 billion increase in the market volume. Revenue growth has also grown steadily in the period with year on year growth of 5% in 2014.
While financial metrics reveal good news, the industry as a whole will move into a period of uncertainty according to the report. Global end-customer demand continues to shift to Asia and increasing numbers of OEMs (original equipment manufacturers) are relocating their R&D centres to China and their production sites to new markets beyond the BRIC states. In addition, there is a growing number of European automotive suppliers being acquired by investors from emerging nations and an evolution of new technological developments in areas such as the powertrain, driver assistance systems and connectivity. All of which, according the researchers, leads to the emergence of new competitive structures and a redistribution of profit pools among suppliers.
While revenue may continue to rise in the coming years, the report also points to a levelling out projection, with EBIT potentially dropping significantly in the coming two years or levelling out. The reports notes that there is a growing risk of some companies seeing their profit margins shrink.
“Suppliers need to prepare well for this new scenario,” advises Berret. “In the short term, increasing the organisation’s efficiency should be at the top of CEOs’ 2015 agendas. But suppliers need to achieve that without limiting their flexibility. They need to focus on smart efficiency improvements.” Predominantly this means reducing product and production costs. But it's important for the company's entire value chain – from research and development to production to the support functions – to remain flexible.
* Automotive suppliers produces vehicle components, with tires, powertrains, exterior, chassis, interior, electronics as the main specialisation types.