Positioning Auto Suppliers For Success Against a Backdrop of Disruption

Tier 1 and 2 automotive suppliers have long proven to be among some of the most resilient players in the auto industry. Today, however, increasing disruption may position up to 40 percent of suppliers financially and operationally at risk. Downward pressure on new-vehicle volumes, supply chains in disarray, rising raw material costs in some areas, inflation and original equipment manufacturers’ (OEM) decisions to insource many of the key components in electric vehicles (EVs) — not to mention the industry’s seismic transformation from internal combustion engines (ICE) to EVs – all contribute to an increasingly uncertain macroenvironment.

For years, suppliers produced systems, sub- systems and components for high-volume new cars and trucks with materials sourced predictably and at fairly stable costs. But now increasing disruption is resulting in ever-higher raw material costs and lower sales volumes, eroding supplier profitability.

It is in this heightened era of disruption that auto suppliers are most vulnerable and their businesses most at risk.

The Automotive EVolution Report

In this report, A&M Managing Directors Brian Irwin, Rick Kozole, Götz Klink and Senior Director Russel Hunt assess the global automotive suppliers and identifies those that are best positioned for success and those most likely to struggle with the changes and evolution in the industry. The report also provides forward-looking, tailored recommendations addressing the financial and operational practices required to achieve success.

What A&M Observed

The EVolution Report highlights insights into quadrant supplier performance, covering both ends of the spectrum — from over- to underperformance. 

Key Highlights: 

• Leaders have earned their name. 
• The Leaders’ superior performance is buoyed by gross margins that are 20 percent higher than suppliers in the remaining three quadrants. 
• In contrast, nearly 40 percent of suppliers analyzed fall into the Fighter group, which is expected to underperform operationally and financially, suggesting that they will struggle to achieve growth and profitability in the coming years.
• Fighters’ forecast revenue growth is roughly 40 percent less than suppliers in other quadrants and they have achieved roughly 25 percent less than other suppliers in terms of geographic or regional diversification. 
• Regarding financial performance, Fighters, on average, generate a return on capital (ROC) that is 45 percent lower than suppliers in other quadrants, and their ROC has declined by more than 40 percent from pre-pandemic levels.
• During the pandemic, the Leaders carefully watched their financial performance and focused on satisfying financial covenants. 
• Interest coverage for Fighters declined by 35 percent over the same pre-Covid to post-Covid period and is currently less than half that of the Leaders.
• Powertrain and Chassis suppliers were hit the hardest as a result of the shift in the industry towards BEVs.