Thin air for German auto suppliers

Structural problems threaten even seemingly healthy companies. Without consistent transformation, the money runs out. But who will finance this transformation?

The fundamental upheaval in the automotive supplier industry is becoming a litmus test in Germany: The supplier landscape in Germany, which often tends to be dominated by midsize companies, is under immense pressure - and could soon be caught in a vicious circle that could jeopardize the continued existence of former industry giants.

The specific problems arise from a combination of challenges: The complete shift towards e-mobility and the shift in competencies towards electronics and software are mostly understood as a work order. However, access to scarce raw materials is a risk factor in this country more so than with the competition from China or the United States, especially in view of intensified trade conflicts. European regulation, which is detached from the traditional cycles of the automotive industry and can in some cases be unclear, is also putting considerable pressure on companies.

All in all, this transformation demands massive investments from the supplier industry: According to our calculations, around 40% of the approximately $250 billion in automotive capital expenditure worldwide is currently being spent on this transformation. In some companies, the rate is significantly higher. More than $100 billion is therefore required year after year - and only those who can raise the money will remain in the game.

Legacy strength is not necessarily a bonus

As car sales in Europe stagnate, the question is growing as to where, of all places, the capital for the transformation is to come from. While European car sales were still 20 million units in 2019, the expectation for 2023 is just 16 million. Even the target figures of 18 million vehicles for 2030 show that the level of the pre-Coronavirus era is over in Europe. The German export model is also crumbling - and not just because the main sales markets of China and the U.S. are increasingly closing off. Suppliers from these countries have long since been setting important automotive trends and, for their part, are pursuing export and settlement intentions in Europe. This is doubly bad news for German suppliers because these rivals are bringing their established supplier structures with them wherever possible.

Not only is investment stalling, but the divestment necessary for rationalization is often not happening either. One out of two automotive companies we work with currently is looking to close European plants or sell parts of divisions but is unable to implement the downsizing due to a lack of cash. This by no means concerns modernization or downsizing - there is no money for either.

Financiers are skeptical

While sales volumes and margins are coming under pressure, rigid price constraints and rising operational costs in almost all relevant areas are putting suppliers under strain - from raw materials to energy and logistics to wages. At the same time, rising interest rates are putting suppliers under increasing pressure. Working capital management is becoming an increasingly important issue.

Banks are keeping a critical eye on the structurally generated cash and profitability weakness of suppliers: Because financiers no longer consider the automotive industry to be future proof per se, a vicious circle looms. Poor performance makes it increasingly difficult to obtain external financing, which means there is a lack of funds for investment and performance continues to decline. Even companies that are healthy today can lose their ability to act if they lack capital and critical size or are still too focused on dwindling segments.

As a recent Oliver Wyman survey of German banking shows, the topic of environmental, social, and governance (ESG) also affects the banking industry's business relations with the automotive industry. If sustainability obligations are neglected or the carbon footprint in the value chain remains unclear, the bank may wave it off. Suppliers must cover the topic of ESG comprehensively, especially in restructuring concepts. Some banks are already considering capping their loan portfolios in energy-intensive industries, which could lead to cutthroat competition for financing.

Implementation strength of the management is central

In our view, anyone hoping that new players will emerge to capitalize the industry in light of the reluctance of established financiers is making a risky bet. However, our annual restructuring study shows that financiers are still willing to help automotive suppliers in a crisis situation if they present a convincing strategy and a resilient financial plan.

The basic prerequisite for this is the completion of the usual "homework" of every supplier in the current situation. These include securing liquidity, reducing costs, increasing profitability and consolidating sites. Inflation costs must be passed on to OEMs and adequate prices should be enforced.

In order to achieve the investment-intensive transformation on this basis, an excellently positioned management team is also required. They should not only be able to clearly formulate the strategy for the desired change, but also present a resilient business plan for at least three years.

A management team that is strong in implementation also distinguishes itself through good and active communication with financiers and OEMs alike. The information needs of manufacturers are increasingly similar to those of banks - whether in terms of strategy change or ESG implementation.

Unlike in previous crises, the topic of business model adaptation is increasingly coming into focus. Without a long-term target picture that includes customers, products and concrete paths of change, no one will be willing to make an investment.