In January, PwC provided an alarming report that 42% of all automotive suppliers qualified as distressed in Q3-21 from a mere 22% in 2019. This qualification was based on a pareto of performance indicators including EBITDA-margin, equity ratio, net debt/EBITDA ratio, operating cash flow and others as published by these companies. More interestingly, the number of distressed suppliers had considerably increased in 2021 vs. 2020 and the trend seemed to be accelerating.
At the same time, major OEM’s reported record-breaking profits in 2021, while the industry as a whole suffered nearly 9.6 million units volume losses globally in the wake of the semiconductor shortage crisis.
The explanation is quite simple. While the OEM’s were able to pass onto their customers the rising costs of material, labor and the cost of lesser operational efficiency induced by the volumes shortfalls – otherwise recognized as inflation by the consumers, the suppliers were locked into fixed pricing agreements with the OEM’s and for the most part forced to absorb these variations. The OEM’s were operating in a market of high demand and low supply, while the suppliers could not retool their manufacturing footprint and product offering fast enough to capture other possible markets demands.
This situation could be at the origin of the next crisis. By taking a more transactional vs. strategic view of their suppliers, the OEM’s are weakening their supply base and fostering the conditions for further disruptions in the supply chain that will weaken them in return. Suppliers’ bankruptcies may force more expensive and risky resourcing of components than the cost of a pricing adjustment. Lack of liquidities may prevent investments in R&D to support new technological advances.
Considering the importance of the automotive industry for our region, we can only hope for some rebalancing in the profit distribution and for a more robust and resilient supply base.