Falling car production mounting pressure on OEMs and suppliers

21 October 2019 Consultancy.eu

The ailing global car sales market is driving original equipment manufacturers (OEMs) and suppliers into dodgy waters, warns a new report by Roland Berger and Lazard. 

China has been the growth engine for the global automotive industry for several years now. But that situation has changed considerably following weakening car sales and dropping production volumes. In 2018, the production of cars in the country fell by 3%, and in the first half of this year that drop accelerated to 10%.

The main reasons for the deteriorating car market are the worldwide economic slowdown, which has seen appetite for new car purchases and therefore also production fall, and the trade conflict between the US and China, which has made some cars – especially those reliant on imported materials – more expensive. China is one of the globe's largest manufacturing hubs for cars, and not surprisingly this has led the country to be hit hard by scaled back production plans. 

Global light vehicle production volume by region, 2012-2017

Due to the importance of China to the global automotive market, the development means bad news for original equipment manufacturers and suppliers to the industry. In 2018, global light vehicle production did not grow, and in the first six months of 2019 the volume of cars produced was 5% lower compared to the same period last year. 

The growing pessimism is not just limited to China. Across major markets, manufacturers are busy re-calibrating their outlook. In Europe for instance, the nearing Brexit and the tariffs imposed by the US are large distorters. To remain profitable, manufacturers are reducing their costs through operational savings, which in turn affects suppliers. As a result, margins of supplies companies are under pressure – with a current average EBIT margin of 6% they have now reached their lowest point since 2012.

“International trade tensions and continuous cost savings from car manufacturers contribute to this pressure,” explained says Casper Veenman, a partner at Roland Berger in the firm’s Automotive practice. Coming on top of this is the fact that many suppliers are facing higher costs in their value chains as they until recently have been building their plans on a growth outlook. “The growth expectations were positive and many suppliers have therefore built up extra capacity. At some suppliers, up to 70% of their capacity now remains idle.”

To remain competitive, Veenman says that it is key that suppliers ensure their operations are agile enough to adapt to changing demand. “Suppliers in the automotive industry must adopt flexible structures and processes, as well as strike horizontal/vertical collaborations with other players in the market.” He adds that firms should also explore how they can optimise their financial flexibility and working capital management.

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