How European Auto Suppliers Should Think About the Future
September 12, 2023
Economic headwinds are stalling the recovery of the continent’s auto suppliers. What are the short-term and long-term actions they can take for survival — and growth?
European carmakers are continuing the long road to recovery following the massive slump of the COVID-19 pandemic. In April, sales of new vehicles were up for the ninth straight month, increasing by 16 percent to 964,932, according to the European Automobile Manufacturers’ Association.1 Yet, the road is not so smooth for one segment of the European automotive industry: suppliers. Many are facing severe financial strain due to several ongoing issues.
Start with inflation, which has contributed to huge cost increases in raw materials, energy and labour over the last two years, affecting the profits and losses of suppliers and straining liquidity. Between 2021 and 2022, the cost of gas soared by more than 1,000 percent, while electricity shot up by more than 250 percent in some European regions. Another issue is the volume of new-car sales, which, despite the recent recovery, is still far below the figures from before the start of the pandemic. This has led to an overcapacity of production by suppliers. Last but not least, supply chain disruptions remain, leading to high call-off volatility.
All these issues place European suppliers under extreme pressure. Some may find their very existence threatened. However, suppliers can take certain actions to reduce the pressure and potentially improve operability, both in the short and long term.
Short Term: Operational Actions
Like any business under financial strain, the first action suppliers should consider — if they haven’t done so already — is to look for ways to cut costs. Reducing capacity is a good starting place; in particular, company leaders need to review their firm’s footprint to reassess the size of the organisation and identify the best-performing locations and state of the general infrastructure.
Leaders should ask themselves what the firm’s core competencies are. Would it be more cost-effective to produce certain products in-house or buy them from external vendors? Where can the firm consolidate? Is reorganising the answer?
Another critical short-term survival tactic is to find new ways of collaborating with customers (that is to say, original equipment manufacturers, or “OEMs”) and renegotiate contracts if possible. To get started, suppliers need to have a firm understanding of their own positions by doing volume and cost-walk analyses, for instance. They should evaluate claims and future pricing models as well.
Company leaders should try to stabilize their supply chains as best they can. This includes reviewing the make-or-buy approach of products mentioned above, reaching out to their customers and their own suppliers to enhance relationships, and identifying opportunities for improving transportation and warehousing efficiency.
Long Term: Strategic Actions
As auto sales continue to rebound in Europe and elsewhere, European suppliers should consider a variety of growth opportunities. Two that have recently emerged offer excellent potential: the electric vehicle (“EV”) market and the Chinese automotive industry.
As we noted in an earlier article, China’s vehicle brands grew their production by 25 percent between 2019 and 2022. Contrast that with a decline of 8 percent for international brands. Globally, China’s production volume rose by 11 percent in 2021-22, compared with only 5 percent for all other brands. Within this context, China’s EV sales are dominating the planet, accounting for 61 percent of all vehicles sold in 2022.
Although they currently have low market share, Chinese OEMs and suppliers are focused on expanding worldwide, with a particular emphasis in Europe. Several Chinese OEMs and suppliers have already announced distribution and partnerships on the continent.
As China becomes a stronger player in the EU and begins to build plants on the continent, European suppliers should look to Chinese OEMs as potential new customers. German OEMs, meanwhile, are expected to invest more in research and development partnerships in China itself.
Looking west to the United States, the growing demand for EVs and the expanding manufacturing base hold great potential for suppliers who can tap into the market. Two recent government laws are intended to promote expansion with substantial funding: The Infrastructure Investment and Jobs Act of 2021 allocates USD$7.5 billion “to build a national network of 500,000 EV chargers.” And the Inflation Reduction Act of 2022 “provides credits to help manufacturers retool existing facilities for EVs.”2 Both laws are expected to attract significant investment.
Amid this fast-changing scenario, consolidation among European suppliers is a real possibility in the next few years. In fact, given the current economic environment, suppliers in a more stable position might want to think about increasing market share through acquisition. Alternatively, an ailing supplier might want to improve profitability not only as a means to survive, but to attract new investment or a merger opportunity.
1: Includes new vehicle registrations in the European Union, Britain and the European Free Trade Association.
2: “Fact Sheet: President Biden’s Economic Plan Drives America’s Electric Vehicle Manufacturing Boom.” The White House. (September 14, 2022). https://www.whitehouse.gov/briefing-room/statements-releases/2022/09/14/fact-sheet-president-bidens-economic-plan-drives-americas-electric-vehicle-manufacturing-boom/