in the heat of the mobility revolution how …...handelsblatt online – 07/19 years of...

In the heat of the mobility revolutionHow automotive suppliers can master the industry's transformation

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3In the heat of the mobility revolution

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The automotive industry is changing rapidly, driven by the MADE trends (new Mobility, Autonomous driving, Digitalization and Electrification).

The pace of change continues to accelerate and the impact on industry players is becoming increasingly noticeable, hitting businesses' bottom lines. Production volumes have been falling worldwide for about a year now, and many automotive suppliers are seeing their returns shrinking. There is currently no recovery on the horizon for 2019 – on the contrary, the economic pressures on suppliers are growing and so are the challenges.

For OESs, this means taking action now to turn things around before it's too late. As the transformation is having a tangible impact on their revenues and even more so on their margins, suppliers will need to come up with strategies and measures to enable them to still be competitive in the market in 5–10 years' time.

This is all the more relevant in view of the conflicting objectives companies are caught between. On the one hand, they need to bring costs down, as all OEMs are already driving serious cost reduction programs and passing their own pressure on up the supply chain. And then they also need to invest in future technologies, which hold new growth potential but also have their risks.

Automotive suppliers therefore need to be proactive in responding to the changes wrought by MADE and future-proof their business models and strategies.

4 In the heat of the mobility revolution

"Weakening sales – Automotive economy

cooling down."

Handelsblatt Online – 07/19

Years of record-breaking results come to an abrupt haltThe scale of this development has come as a surprise to automotive suppliers. After the financial crisis was over, the industry's players just kept going in one direction. That direction was up. One record-breaking year followed the next from 2010 through 2017. Despite environmental issues and the industry's transformation being the subject of broad social debate, many suppliers still did not react. Their focus was firmly on their day-to-day business and they determined for the time being that nothing much was actually changing and the numbers were good.

Against this backdrop, many OESs failed to address structural weaknesses and position themselves for the future. Relying on promising growth forecasts, they even expanded their capacities. Now the slump in China, which is partially but not exclusively attributable to trade policy tensions with the USA, is causing particular headaches in the industry. The fact that the market is stagnating in North America and slightly declining in Europe exacerbates the problem. Some suppliers are seeing 60 to 70 percent of their newly built capacities standing idle as a result.

The decline in vehicle demand is evident across the globe this year. In the first half of 2019, the number of units produced totaled 46 million, 5 percent less than the same period in 2018. And the trend is likely to continue, as most suppliers do not expect a positive turnaround in the second half of the year.


Global light vehicle production volume

H1/18 vs. H1/19 [m units]1

Others

Japan/South Korea

South America

NAFTA

Europe2

China3

Source: IHS Automotive, Lazard, Roland Berger

1 Global light vehicle production volume 2 Excluding CIS and Turkey 3 Greater China

H1/2018

48.4

46.0

H1/2019

12.413.5

11.2

11.9

8.6

8.7 1.7

1.7

6.5

6.6

5.6

6.0

-5%


Revenue growth [%]

Indexed [2012=100]

Key supplier performance indicators, 2012-2019e (n=~600 suppliers)

5 7 6 62 3

1

100

107

113

123

120

127126

YoY [%]

2012 2013 2014 2015 2016 2017 2018 2019e

Automotive suppliers' KPIs(global industry average)

Source: Company information, analyst forecasts, Lazard/Roland Berger supplier database

~120-125

The development of revenues confirms this trend. While companies saw their sales grow seven years in a row since 2012, rising by more than a quarter overall, growth went into reverse in 2019, falling by about 5 percent.

The slump in demand for passenger cars is thus clearly reflected in the industry's key figures. And profitability is suffering even more than revenues: while suppliers recorded an EBIT margin of 7.2 percent on a global industry average in 2018, the expectation for 2019 is just 6.0 to 6.3 percent. This marks the first time since 2012 that EBIT has dipped below 7 percent.

To understand which players are especially affected by this development, it's worth taking a look back at the past year. Automotive suppliers based in China were able to defend their well above average EBIT margins in 2018 (9 percent on average). They benefit from their proximity to OEMs old and new, who are producing more and more cars in China. The slump of recent

-5%

up to -5%


Source: Company information, analyst forecasts, Lazard/Roland Berger supplier database

2012 2013 2014 2015 2016 2017 2018 2019e

EBIT margin [%]

6.8

7.27.3

7.17.17.27.2

~6.0-6.3

months, particularly severe in their home market, will affect them all the more. Nevertheless, we expect companies from China to reframe the competition in the medium term. Ranking the global suppliers by revenue reveals that more and more Chinese companies have been graduating to the leading group for the past decade or so.

In North America too, automotive suppliers achieved above average profitability in 2018 (EBIT margin of 8.4 percent). By contrast, European OESs saw margins fall (EBIT margin of 7.1 percent). The negative impact came from declining volumes and the problems caused by the introduction of the new WLTP fuel economy standard. Only South Korea (EBIT margin of 6.6 percent) and Japan (EBIT margin of 6.1 percent) performed worse. The market slump in 2019 is expected to cause a further decline in profitability in these regions.

At first glance, the figure of around 6 percent still looks like a generous margin. But appearances are deceptive: at 6.0 percent, suppliers are approaching a place where both self-financing and refinancing on the capital market become more difficult. Car manufacturers expect their suppliers to invest heavily in relevant future technologies. The problem? The new investment projects do not meet the proven financial return logic of the past. The necessary level of spending often represents an uncertain bet on the technology of the future for OESs.

-17%

Key supplier performance indicators, 2012-2019e (n=~600 suppliers)


Source: Lazard, Roland Berger

Current developments within the automotive industry

Prerequisites for electric vehicles constantly getting better, e.g. further emission regulations and ICE city bans, decreasing battery costs or improving infrastructure

Besides new forms of mobility, the mobility mix itself is changing

Uncertainty remains over technical development path and legal framework for autonomous driving

Data-based and digital business models enable new business potential

Sales potential for certain products likely to fall dramatically

Customers continue to push suppliers for cost reductions

New players entering the automotive business across the entire value chain

The required employee skill set is changing dramatically

Access to capital is becoming tougher given the declining relative attractiveness of the automotive sector

The new car industry ecosystemWhat is special about the current situation is that the scale and speed of developments, as well as their economic consequences for companies, are unprecedented and unforeseeable. At the moment it is hard to predict which of the market trends will prevail in 15 years or what the most promising business models will be.

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Market trends

Impacts

In the heat of the mobility revolution

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MSP

OEM

OES

2019



MSPs1

Traditional OEMs

New OEMs

OESs

New OESs

All in all, these factors combined will lead to considerable shifts in the automotive industry ecosystem over the next decade. New mobility providers will occupy positions of increasing strength. For incumbent OEMs, this means they will have no choice but to establish new business models. If they fail to gear themselves up properly, their role in tomorrow's mobility world will be secondary or, in the worst case, non-existent.

OEMs' path toward a mobility ecosystem scenario 2030+

1 MSP = Mobility Service Provider

2030

MSP

OEM

OES


Railway companies

OEMs with mobility service

offerings

Established premium/sports

car OEMs

Traditional suppliers and volume OEMs

Technology suppliers

Selected traditional suppliers

and OEMs

Traditional

Pure MSP

Integrated MSP

CaaS lifestyle brand

Device manufacturer

Service enabler/ component

manufacturer

New mobility ecosystem 2030+

Sample candidates

Ø out of business

Ride hailing

providers

Consumer electronics

manufacturers

New xEV OEMs

Semi-conductor or battery

manufacturers

New

In 10 years, it's quite conceivable that the scenario could involve customers buying not just a vehicle but a certain form of mobility adapted to their needs. Assuming this is no longer just the vehicle itself, then the OEM becomes the primary supplier – possibly of a tech company – and the current OESs slide one rung down the ladder. Not only transforming the supply chain, but also exerting further pressure on the margins of today's automakers and suppliers.

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Negative impact on business↓

↓OEM/OES

business 2019

↓New MaaS business slower than expected to ramp up

Fierce competition due to new entrants with

advantages over established players

Late to follow up: Traditionally leading OEMs in follower

position

Strong need for investment into automated driving,

artificial intelligence and to scale up

Decreasing brand loyalty and design relevance

New mobility concepts

2025

More intensive competition due to new entrants with advantages

over established players

Falling margins due to electrified vehicles

Lower EBIT due to rising costs and portfolio shifts

Heavy investments in powertrain electrification and

new technologies

High costs associated with personnel transformation

Traditional core

business

Pressure on traditional OEMs

OEMs are under growing pressure... For incumbent automakers, the changes in the industry present a double challenge. New emission limits and the threat of fines, as well as electrification, are weighing on earnings in the core business. At the same time, new Mobility-as-a-Service offerings are becoming established and the future profit pool of OEMs is shrinking. The pressure on automobile manufacturers is therefore growing on several sides simultaneously.

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"Automotive suppliers feel the impact of OEM crisis."

Automobil-Industrie – 08/2019

...and they're ramping up the pressure on suppliers To meet these challenges, OEMs have launched cost-cutting programs to shave billions off expenditures. In addition to in-house efficiency measures and changes to the product portfolio, the reduction of material costs is almost always a core issue. Manufacturers are thus passing on the pressure they are feeling to their suppliers to an even greater extent than before. For OESs, this means they have to develop and implement their own strategies and measures to protect their profit margins. They need to cut costs in order to meet the OEMs' demands but they also have to make investments in future technologies, which represent attractive growth potential but come with significantly higher risks than before.

There is no magic formula for balancing these conflicting objectives; each supplier will have to come up with the right strategic approach for their own situation and market position. Roland Berger and Lazard have subdivided the supplier ecosystem into six archetypes to make it easier for companies to determine where they currently stand and assess the need for action:


SUPPLIER ARCHETYPES

NEED FOR CHANGE

STRATEGIC MISSION

MISSION STATEMENT

Small traditional

player

Cost optimization throughout the entire

organization is key

SUrvival of the fittest

Aftermarket player

Compensate for negative business implications from e-mobility trend

Eat or be eaten

Global commodity

leader

Process excellence is the basis to generate capital and to ensure

long-term success

Defend current

positioning

Global newentrant

with new technologies

Leverage existing know-how to generate

new business within automotive industry

If you can think it, you can

do it

Traditional diversified

player

Focus on cost efficiency or proactive portfolio transition to

future growth segments

Offense is the best

defense

Technology system

integrator

Make the company irreplaceable for OEMs

and leverage positioning to move into new fields

Remain system relevant


Summary: Strategic directions per supplier archetype

HighLow


By first determining their position, companies can derive an individual approach for how they should deal with the current challenges in the market. Below is an example of a turnaround program (real Roland Berger project for a leading German automotive supplier):

Roland Berger performance improvement program

Problem/initial situation• Decreasing margins• Partly loss-making business• Increasing capital

requirements

• Declining equity ratio• Commoditized portfolio• Portfolio adaption and growth strategy

failed

Result/achievements• 4% absolute EBIT improvement over 3 years• More than EUR 100 m of working capital improvement• More than 2,000 individual improvement measures• Sustainable turnaround

The selected company acknowledged that it was increasingly struggling with the erosion of its EBIT margin. This situation was triggered by its acquiring businesses at a loss for strategic reasons, coupled with inadequate performance in the plants and startup problems, alongside a commoditized product portfolio in a competitive market. As a countermeasure, the company first initiated a performance program for a large problem plant and, following sustained success, expanded it in two stages, first for one region and then worldwide. Finally, more than 2,000 measures with an absolute EBIT effect of +4 percentage points over the next three years were developed within the overall program. This example shows that sustainable performance improvement is even possible with traditional product portfolios.


Roland Berger program focus

One focus plant

Starting point

Multiple focus plants

Program extension

Company-wide focus plants

Full-scale program

Region

>5 plants

Country

1plant

Global

>50plants


Take the transformation of the industry seriously!

Performance programs are a must for many suppliers – for small businesses they're vital.

Structural measures will be essential for suppliers to cope

with the growing pressure on margins through 2025.

The broader your product portfolio, the easier it will be to master the challenges.

Acquisitions are recommended for large and financially

strong OESs; smaller suppliers should consider selling, merging or increasing their equity.

Protect your financial flexibility in the

medium and long term!

For investments in innovative areas with good growth prospects, seeking venture capital providers or cooperation with partners

is recommended to share the burden.

Lasting success requires employees with skills and qualifications that are fit for the future.

There is no "one size fits all" strategy – but the following

message applies to all:

ACT NOW!


Key recommendations for automotive suppliers

Suppliers have to act now in order to remain successful in the future

Felix Mogge Senior Partner+49 89 [email protected]

Ken Oliver Fritz Managing Director+49 69 [email protected]

Florian Daniel Principal +49 89 [email protected]

Thomas Schlick Senior Partner +49 69 [email protected]

Christof Söndermann Managing Director+49 69 [email protected]

Roland Berger:

LAZARD:


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If you would like to know more about the transformation of the automotive industry and our recommendations for dealing with the challenges, download our detailed presentation on the subject: www.rolandberger.com/AutomotiveSuppliers2019

Your contacts

http://www.rolandberger.com/AutomotiveSuppliers2019

http://www.rolandberger.com/AutomotiveSuppliers2019

Roland Berger, founded in 1967, is the only leading global consultancy of German heritage and European origin. With 2,400 employees working from 35 countries, we have successful operations in all major international markets. Our 52 offices are located in the key global business hubs. The consultancy is an independent partnership owned exclusively by 230 Partners.

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Lazard, one of the world's preeminent financial advisory and asset management firms, operates from 43 cities across 27 countries in North America, Europe, Asia, Australia, Central and South America. With origins dating to 1848, the firm provides advice on mergers and acquisitions, strategic matters, restructuring and capital structure, capital raising and corporate finance, as well as asset management services to corporations, partnerships, institutions, governments and individuals. For more information on Lazard, please visit www.lazard.com. Follow Lazard at @Lazard.

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This publication has been prepared for general guidance only. The reader should not act according to any information provided in this publication without receiving specific professional advice. Roland Berger GmbH shall not be liable for any damages resulting from any use of the information contained in the publication.

© 2019 ROLAND BERGER GMBH. ALL RIGHTS RESERVED.

PublisherRoland Berger GmbHSederanger 180538 MunichGermany+49 89 9230-0

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