Profiting Globally

Despite a wave of bankruptcies, downsizing and debt refinancing, auto suppliers globally have increased their profitability in recent years, and about 50 suppliers are significantly outperforming the market in revenue growth and profitability, a new study finds.

For its 2006 Global Automotive Supplier Study, German-based Roland Berger Strategy Consultants explored financial and operational data of about 350 global auto suppliers between 2000 and 2005 and incorporated interviews with more than 100 supplier executives.

Assisting Roland Berger in the study was the Rothschild Group, an independent investment bank.

The study finds average supplier profitability has been going up, and that parts makers have outperformed auto makers by a wide margin for the past several years.

In 2005, the study shows the 350 global suppliers achieved return on capital employed (ROCE, a measure of profitability) of 11.3%, while the top 13 global auto makers posted only 7.9%.

The profit gap between suppliers and OEMs has grown since 2003, when the study found 10.4% ROCE for suppliers and 9.1% for OEMs.

“The bottom line is that suppliers are still doing better than OEMs around the world,” says Erkut Uludag, a partner in Roland Berger's global automotive practice.

Since 2000, OEMs were more profitable than the 350 suppliers studied in only one year, 2001. Supplier ROCE equaled 8.6%, lagging the 9.3% tally for OEMs.

The report also finds the 350 suppliers achieved earnings before interest and taxes (EBIT) of 6.0% in 2004 and 5.9% in 2005. OEMs, on the other hand, posted EBIT of 5.2% in 2004 and 5.4% in 2005.

From 2001 to 2003, OEMs outperformed the 350 suppliers with regard to EBIT by a slight margin.

Regionally, suppliers based in Western Europe, South Korea and other parts of the world maintained steady profitability between 2000 and 2005, while Japanese suppliers posted ROCE gains of 3.2% for the period, the study finds.

Profitability for North American suppliers declined 3.6% between 2000 and 2005.

Of the 350 global suppliers, the most profitable in 2005 were those reporting annual sales between $6.5 billion and $13 billion. As a group, they reported ROCE of 16.7%, well above the 11.3% average for the 350 suppliers studied.

Smaller suppliers with annual sales above $660 million also were better than average, while the largest suppliers with sales above $13 billion were slightly below average.

Hardest hit in the group were the smallest suppliers, with annual sales below $330 million. Those suppliers recorded ROCE of 8.4%, well below average, the study finds.

By sector, suppliers in powertrain, chassis, interiors, tires and infotainment posted above average ROCE, while those in exteriors and electronics were below average, according to the study.

Common among successful suppliers is a narrowly focused product portfolio, broad customer base globally, low reliance on business with Detroit's Big Three and aggressive use of component sourcing from low-cost regions of the world.

Uludag cites Continental AG, a tire, chassis and electronics specialist, as an example of a successful supplier.

“It helps that Continental is working in other sectors beyond automotive,” says Uludag, adding in some cases Continental is able to pass along raw-material price increases to customers. “Tire production in some parts of the world is profitable.”

The study says the automotive supply business will remain attractive for years to come, as vehicle production volumes overall continue to grow.

Still, supplier executives participating in the survey expect more parts makers to go bankrupt, and the financial community continues to view the auto parts sector pessimistically.