Automarket suppliers enjoy strong profitability, but uncertainties remain

15 August 2016 Consultancy.uk

The global automotive supplier market enjoyed EBIT margins of an average of 7.4% last year. The high margins were partly driven by a strong tire performance. While profitability is up, not all regions are performing equally, with particularly the NAFTA and Europe beating the average. The difference between high performers and low performers was found to be considerable, at average EBIT at 10% vs 6%.

The report by management consultancy Roland Berger and investment bank Lazard, titled ‘Global Automotive Supplier Study 2016: Being prepared for uncertainties’, explores the state of the global market for automotive suppliers.

Light vehicle production by volume

The growth in the production of new vehicles has shifted from South America, which has seen production fall by -8.3% annually since 2011 from 4.3 million units to 3 million, to China, where production was up 7.7% annually in the same period, increasing from 17.6 million units to 23.7 million. China is closely followed by the NAFTA region, which has seen production increase from 13.1 million units in 2011 to 17.5 million units last year. Globally, production was up 3.5%, with around 88.3 million units put together in 2015.

Key supplier performance indicators

The research finds that suppliers have, following the downturn in 2008 and 2009, managed to boost their growth figure significantly. In 2010 there was 21% year-on-year growth, which made up for the losses the previous year. Since then growth has been relatively steady, at around 7% CAGR between 2011 and 2014. Last year was a relatively slow year, with year-on-year growth of just 3%.The EBIT margin has been pushed up to almost 7.5% on the back of the aftermarket tire business, following robust upwards trend in the years since 2011. The market has also managed to improve slightly its return on capital employed, which stood at 13.5% in 2015.

"With profitability at record highs in 2015, international automotive suppliers are in good shape at first sight," says Felix Mogge, Partner at Roland Berger. "But besides shrinking revenue growth they will have to cope with growing market volatility across the globe and have to face revolutionary changes in technology as well as new mobility concepts in the near future,” he warns.

Key supplier performance by region 2007 vs 2015

The EBIT margin, in a more granular analysis, shows considerable bumps and troughs related to region. The NAFTA region, for instance, has managed to increase its EBIT significantly from 5.8% in 2007 to 8.2% in 2015 - the revenue increases for the region stood at 0.9% between 2007 and 2015. China has seen EBIT decrease slightly between 2007 and 2015, falling from 8% to 7.4% - revenues jumped 13.5% annually in the region in the same period. Europe, with revenue growth of 4.6% between 2007 and 2015, saw its EBIT margin increase from 6.5% to 8%. Only Korea and Japan are below the EBIT average, managing 6.7% and 6.3% respectively in 2015.

Key supplier performance indicators by product 2007 vs 2015

The supplier product with the most EBIT traction is tires, generating 11.2%, up from 6.3% in 2007 – mainly due to a strong aftermarket business and improvements to raw material costs. Chassis is the only segment to beat the average of 7.4%, up from 5.7% in 2007. Power-trains, on the other hand, are the only segment to lose EBIT ground since 2007, falling from 8.2% to 6.9%. Interior remains a low margin segment with slight improvement seeing it increase its EBIT from 4.6% to 5.8%.

Key performance indicators top vs bottom performers

According to the analysis, there is also considerable variation between low performing, and high performing, suppliers. Those in the top end have seen revenue more than double against the 2007 benchmark, while low performers were up a mere 5 points. For EBIT margins too, there is considerable disparity between top and bottom players. The top saw their EBIT margins fall to 4.1% in 2009, before hitting 10.7% in 2012 – last year it fell to around 10%. On the low end, an average of around 5.5% has held over the past number of years – with of 6% last year.

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Four ways digitalisation is transforming car brands and dealers

16 April 2019 Consultancy.uk

From changing expectations from the customer to new stakeholders entering the industry, the digital transformation of global automotive industry means it is facing the wholesale transformation of its business model. In a new white paper, global consulting partnership Cordence Worldwide has highlighted four major digital trends that are transforming the relationships between car brands and dealers with consumers.

With digital transformation drives booming across the industrial spectrum, automotive groups are no different in having commenced large digital transformation programmes to improve productivity, efficiency, and ultimately profitability. Falling sales figures mean the automotive sector is facing an increasingly difficult road ahead, something which means companies in the market are even more hard pressed to find new ways to improve their bottom lines.

While it offers major opportunities, the industry’s move to digitalise is not without complications. It has triggered a series of major internal changes, which have presented automotive entities with the challenge of becoming a “customer-oriented” industry. A new report from Cordence Worldwide – a global management consulting partnership present in more than 20 countries – has explored how automotive companies are navigating the rapidly changing nature of digital business.

New business models

The level of change likely to be wrought on the automotive industry by digitalisation is hard to overstate. Automation could well lead to significant reductions in the number of accidents, higher vehicle utilisation and lower pollution levels, while leading to a $2.1 trillion change in traditional revenues, with up to $4.3 trillion in new revenue openings arising by 2030.

As a result of this colossal opportunity, it is easy to see why almost all automotive groups now have digital departments, with generally strong communication within the digital transformation and the customer approach. The changes to society which this may have are potentially distracting automotive firms from the change it is leading to in its own companies though, according to Cordence’s paper.

The automotive market is dead, long live the mobility market

Because of this, the sector’s business model is set to transform over the coming decades. With digitalisation speeding up the appearance of concepts such as car-sharing, a subscription package model will likely become more palatable. At the same time, car and ride-sharing models will cater to the sustainability criteria of millennials, who will rapidly become one of the automotive market’s leading consumer demographics in the coming years.

Antoine Glutron – a Managing Consultant with Cordence member Oresys, and the report’s author – said of the situation, “These ‘old school industries’ are now working on creating new opportunities, but in so-doing are facing challenges and threats: new jobs, new technologies, new ecosystem of partners, necessary reorganisation, different relationship with customers, and even new businesses. The customer approach topic is in fact a real challenge for car companies as it implies changing their business model and adjusting their mind-set to address the customer 4.0: from product-centric to customer-centric, from car manufacturer to service provider.”

Digital customer experience

In the hyper-competitive age of the internet, even top companies face an uphill challenge when it comes to holding onto customers through brand loyalty. Digital disruption has resulted in changes to consumer behaviour, which is forcing a range of marketing strategists to reconsider their old, possibly out-dated strategies. As modern customers wield an increasingly impressive array of digital tools and online databases, they and are now able to quickly and conveniently compare prices, check availability and read product reviews.

The automotive sector is no exception to this trend, according to the study. In order to adapt to the needs of the so-called ‘customer 4.0’, car companies will increasingly need to change their business model and move away from product-centric companies to customer-centric ones, from car manufacturers to service providers.

Glutron explained, “As an automotive company, you can no longer expect customer loyalty simply with good products; you must conquer and re-conquer a customer that “consumes” your service. The offer now has to be global, digital and personalised. Your offer has to be adapted to this customer’s needs at any given moment. A key issue related to data control is to build customer loyalty by creating a customer experience 'tailored' throughout the cycle of use of the 'car product': purchase, driving, maintenance and trade-in of the vehicle.”

One way in which the sector may be able to benefit from this desire for a tailored experience is via connectivity. Consumers are generally positive about new connective features for automobiles, and many are even willing to pay upfront for infotainment, emergency and maintenance services. Chinese consumers, where the connected car market is set to hit $216 billion, are already particularly interested in paying a little more for navigation and diagnostic features in their future new car. This can also enable automotive companies to exploit a rich vein of customer data, enabling them to rapidly tailor their offerings to consumer behaviour.

New automotive segments

Digital transformation has also brought with it the rise of completely new application areas. As mentioned earlier, the most well-known example is the autonomous or self-driving car, where the last steps forward were not taken by major automotive groups but by technology companies such as Tesla. While this may have given such firms the edge in the market briefly, a number of keystone automotive names will soon be set to take the plunge into the market themselves, leveraging their car manufacturing prowess and huge production capacities to their advantage.

Before companies rush to invest in this market, however, it is worth their while to remember that the readiness and uptake for such vehicles differs greatly geographically. For example, following a study published in 2018, 92% of Chinese would be ready to buy an autonomous car, compared with only around 35% of drivers in France, Germany and US. Meanwhile, the infrastructure of different nations will also be significantly less accommodating of the new technology.

Use digital for steering thr activity

Elsewhere, Cordence’s analysis has suggested that hooking the cars of tomorrow into the Internet of Things is also likely to see a rapid change in the business model for car maintenance, providing real-time diagnostics for problems. This presents chances for partnerships to improve the connectivity of cars, especially with tech companies; for example, PSA partnered with IBM for a global agreement on services in their vehicle. Meanwhile, data could also be sold to other parties with an interest in this data, such as the government, which could use it to manage traffic levels, or ensure that only adequately maintained vehicles take to the road.

Glutron added, “With the increase in the amount of client data and connected opportunities, the recommendation is to set up data-centric approaches. The value is now in the customer data. The general prerequisites are to rework the data model and the Enterprise Architecture and generally build up a data lake including data from all sources (internal and external, structured and unstructured).”

From automotive to mobility

Relating further to the idea of connectivity, the report claimed that automotive firms must now adjust their models in line with the provision of end-to-end mobility, rather than treating the sale of a car as an end point in their relationship with the customer. In order to realise this transformation, transformations are likely to become more and more important.

A network of partner companies means automotive firms can provide a global mobility experience. As the vehicle is increasingly connected to its environment, new partners can also be cities, governments, and other service providers within the global mobility services industry in which the car brands want to take part.

According to the study, the target is clear. Companies must look to a holistic transport service, offering to move customers from A to B in a unique and pleasant way – otherwise they might as well take public transport. At the same time, they should extend the services reachable “on-board” (especially the enhancement of the connectivity between the car and smartphones or other connected devices), and reach high standards in terms of user experience (online sales, online payment, customised experience during and after the use of the car).

Concluding the report, Glutron stated, “These mobility market transformations could be considered a threat for the car manufacturers. Quite the opposite: if they take up the challenge and review their business model so that they become the service provider – communicating no longer to a driver but to a ‘mobility customer’ – they can then take advantage of their expertise and their position as a historical player. The most convenient means of transport are cars, and building a car is highly-skilled work.”