The global automotive supplier industry is in urgent need of consolidation to regain profitability
Gaining approval from vehicle manufacturers as main problem
The automotive crisis in 2008/2009 has left behind deep scars on suppliers. In 2009 sales fell globally by an average of around 25%, with average returns (EBIT/sales) down from 5.7% (2007) to approximately -1.5% (2009). As a result, 340 suppliers worldwide filed for insolvency, including 75 companies in Germany. Despite the greatest crisis in the history of the industry, consolidation remains slow. The number of mergers and acquisitions has been falling since 2007, and even fell in 2009.These are the results of a new study conducted by Roland Berger Strategy Consultants entitled "Handbrake on – Slow progress over consolidation in the automotive supplier industry". And this is good news for Austrian suppliers, who are well-positioned in terms of capital compared to their international competitors. The approaching wave of consolidation is a unique opportunity for Austrian suppliers to get good deals on acquisitions. In this way, they can emerge stronger from the crisis.
"With very few exceptions, Austrian suppliers have come through the crisis relatively unscathed. Since most of the companies are well-positioned internationally, I'm not expecting a wave of insolvencies this year," says Rupert Petry, Managing Partner in the Vienna office of Roland Berger. But the automotive expert is not giving the all-clear just yet: "The actions companies have taken thus far have been limited mostly to operational issues and ensuring cashflow. Necessary structural changes are still being approached too cautiously." Petry is therefore calling on banks to actively push for consolidation: "Especially in the Central and Eastern European markets, there is still a great need for restructuring. If that doesn't happen, then the next crisis is sure to hit again in two years."
Four reasons currently preventing M&As
"Vehicle manufacturers have to agree implicitly to mergers and acquisitions. But in the eyes of manufacturers, many segments are already consolidated enough," says Marcus Berret, Partner at Roland Berger Strategy Consultants. In addition, many investors are holding back because of uncertainty about developments on the global automotive markets. "Many suppliers are still struggling for survival and lack the money or management resources for takeovers or mergers."
Wide variation in need for consolidation
"Manufacturers in many areas, especially product-based segments such as brakes and pistons, often have little interest in further consolidation in the industry," says Berret. "The same global competitive structure has established itself in almost all product segments: The market leader controls 30-35% of the market, the top two providers account for half of the market and the top five account for around 75% globally." With every supplier that leaves the market, competition decreases further and the market power of the remaining suppliers grows.
The situation is different in process-based segments such as aluminum alloy casting and metalworking. These areas traditionally offer lower returns, and they still show a significant need for consolidation. "In these areas the world market leader generally controls no more than 15% of the market and the top five suppliers taken together account for less than half of the total market," says Berret. "There is an urgent need for consolidation to increase the profitability of individual suppliers." However, due to the relatively low margins and high levels of excess capacity, very few investors are interested in investing in these sectors. "Consequently, if a supplier gets into trouble, the vehicle manufacturers generally follow a strategy of supporting the company by shifting orders away from more stable suppliers, say, or winding down their relationship with the company in a controlled fashion," says Berret.
Lack of consolidation driving down returns
Without the required consolidation, returns in many product segments are unlikely to recover over the long term. "The average returns (EBIT margins) of suppliers in NAFTA countries, Europe and Japan will barely go above 3-4% in the next three to four years because of the lack of consolidation and increasing price pressure," says Berret.
The automotive crisis in 2008/2009 has left behind deep scars on suppliers. In 2009 sales fell globally by an average of around 25%, with average returns (EBIT/sales) down from 5.7% (2007) to approximately -1.5% (2009). As a result, 340 suppliers worldwide filed for insolvency, including 75 companies in Germany. Despite the greatest crisis in the history of the industry, consolidation remains slow. The number of mergers and acquisitions has been falling since 2007, and even fell in 2009.These are the results of a new study conducted by Roland Berger Strategy Consultants entitled "Handbrake on – Slow progress over consolidation in the automotive supplier industry". And this is good news for Austrian suppliers, who are well-positioned in terms of capital compared to their international competitors. The approaching wave of consolidation is a unique opportunity for Austrian suppliers to get good deals on acquisitions. In this way, they can emerge stronger from the crisis.
"With very few exceptions, Austrian suppliers have come through the crisis relatively unscathed. Since most of the companies are well-positioned internationally, I'm not expecting a wave of insolvencies this year," says Rupert Petry, Managing Partner in the Vienna office of Roland Berger. But the automotive expert is not giving the all-clear just yet: "The actions companies have taken thus far have been limited mostly to operational issues and ensuring cashflow. Necessary structural changes are still being approached too cautiously." Petry is therefore calling on banks to actively push for consolidation: "Especially in the Central and Eastern European markets, there is still a great need for restructuring. If that doesn't happen, then the next crisis is sure to hit again in two years."
Four reasons currently preventing M&As
"Vehicle manufacturers have to agree implicitly to mergers and acquisitions. But in the eyes of manufacturers, many segments are already consolidated enough," says Marcus Berret, Partner at Roland Berger Strategy Consultants. In addition, many investors are holding back because of uncertainty about developments on the global automotive markets. "Many suppliers are still struggling for survival and lack the money or management resources for takeovers or mergers."
Wide variation in need for consolidation
"Manufacturers in many areas, especially product-based segments such as brakes and pistons, often have little interest in further consolidation in the industry," says Berret. "The same global competitive structure has established itself in almost all product segments: The market leader controls 30-35% of the market, the top two providers account for half of the market and the top five account for around 75% globally." With every supplier that leaves the market, competition decreases further and the market power of the remaining suppliers grows.
The situation is different in process-based segments such as aluminum alloy casting and metalworking. These areas traditionally offer lower returns, and they still show a significant need for consolidation. "In these areas the world market leader generally controls no more than 15% of the market and the top five suppliers taken together account for less than half of the total market," says Berret. "There is an urgent need for consolidation to increase the profitability of individual suppliers." However, due to the relatively low margins and high levels of excess capacity, very few investors are interested in investing in these sectors. "Consequently, if a supplier gets into trouble, the vehicle manufacturers generally follow a strategy of supporting the company by shifting orders away from more stable suppliers, say, or winding down their relationship with the company in a controlled fashion," says Berret.
Lack of consolidation driving down returns
Without the required consolidation, returns in many product segments are unlikely to recover over the long term. "The average returns (EBIT margins) of suppliers in NAFTA countries, Europe and Japan will barely go above 3-4% in the next three to four years because of the lack of consolidation and increasing price pressure," says Berret.
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