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In the heat of the

mobility revolution
How automotive
suppliers can master
the industry's
transformation
The automotive industry is changing rapidly, driven
by the MADE trends (new Mobility, Autonomous
driving, Digitalization and Electrification).

The pace of change continues to accelerate and the


impact on industry players is becoming increasingly
noticeable, hitting businesses' bottom lines.
Production volumes have been falling worldwide
for about a year now, and many automotive
suppliers are seeing their returns shrinking. There
is currently no recovery on the horizon for 2019
– on the contrary, the economic pressures on
suppliers are growing and so are the challenges.

For OESs, this means taking action now to turn


things around before it's too late. As the
transformation is having a tangible impact on
their revenues and even more so on their margins,
suppliers will need to come up with strategies and
measures to enable them to still be competitive in
the market in 5–10 years' time.

This is all the more relevant in view of the conflicting


objectives companies are caught between. On the
one hand, they need to bring costs down, as all
OEMs are already driving serious cost reduction
programs and passing their own pressure on up
the supply chain. And then they also need to invest
in future technologies, which hold new growth
potential but also have their risks.

Automotive suppliers therefore need to be


Cover photo: bgton/iStock

proactive in responding to the changes wrought


by MADE and future-proof their business models
and strategies.

In the heat of the mobility revolution 3


Years of record-breaking results
come to an abrupt halt
The scale of this development has come as a surprise to automotive
suppliers. After the financial crisis was over, the industry's players just kept
going in one direction. That direction was up. One record-breaking year
followed the next from 2010 through 2017. Despite environmental issues
and the industry's transformation being the subject of broad social debate,
many suppliers still did not react. Their focus was firmly on their day-to-
day business and they determined for the time being that nothing much
was actually changing and the numbers were good.

Against this backdrop, many OESs failed to address structural weaknesses


and position themselves for the future. Relying on promising growth
forecasts, they even expanded their capacities. Now the slump in China,
which is partially but not exclusively attributable to trade policy tensions
with the USA, is causing particular headaches in the industry. The fact that
the market is stagnating in North America and slightly declining in Europe
exacerbates the problem. Some suppliers are seeing 60 to 70 percent of
their newly built capacities standing idle as a result.

The decline in vehicle demand is evident across the globe this year. In
the first half of 2019, the number of units produced totaled 46 million,
5 percent less than the same period in 2018. And the trend is likely to
continue, as most suppliers do not expect a positive turnaround in the
second half of the year.

"Weakening sales –
Automotive economy
cooling down."
Handelsblatt Online – 07/19

4 In the heat of the mobility revolution


Global light vehicle production volume

H1/18 vs. H1/19


[m units]1

-5%

48.4
Others 6.0 46.0
5.6

Japan/ 6.6
South Korea
6.5

South America 1.7


NAFTA 8.7 1.7
8.6

Europe2 11.9
11.2

China3 13.5
12.4

H1/2018 H1/2019

1 Global light vehicle production volume 2 Excluding CIS and Turkey 3 Greater China

Source: IHS Automotive, Lazard, Roland Berger

In the heat of the mobility revolution 5


The development of revenues confirms this trend. While companies
saw their sales grow seven years in a row since 2012, rising by more than
a quarter overall, growth went into reverse in 2019, falling by about
5 percent.

Automotive suppliers' KPIs


(global industry average)
127
126
Revenue growth [%]
Key supplier performance 123
indicators, 2012-2019e 120
(n=~600 suppliers)
Indexed [2012=100]
~120-125
113

107

-5%
100

YoY [%]
7 6 6
5
2 3
1

up to -5%
2012 2013 2014 2015 2016 2017 2018 2019e

Source: Company information, analyst forecasts, Lazard/Roland Berger supplier database

The slump in demand for passenger cars is thus clearly reflected in the
industry's key figures. And profitability is suffering even more than revenues:
while suppliers recorded an EBIT margin of 7.2 percent on a global industry
average in 2018, the expectation for 2019 is just 6.0 to 6.3 percent. This
marks the first time since 2012 that EBIT has dipped below 7 percent.

To understand which players are especially affected by this development,


it's worth taking a look back at the past year. Automotive suppliers based in
China were able to defend their well above average EBIT margins in 2018
(9 percent on average). They benefit from their proximity to OEMs old and
new, who are producing more and more cars in China. The slump of recent

6 In the heat of the mobility revolution


months, particularly severe in their home market, will affect them all the
more. Nevertheless, we expect companies from China to reframe the
competition in the medium term. Ranking the global suppliers by revenue
reveals that more and more Chinese companies have been graduating to
the leading group for the past decade or so.

In North America too, automotive suppliers achieved above average


profitability in 2018 (EBIT margin of 8.4 percent). By contrast, European
OESs saw margins fall (EBIT margin of 7.1 percent). The negative impact
came from declining volumes and the problems caused by the introduction
of the new WLTP fuel economy standard. Only South Korea (EBIT margin
of 6.6 percent) and Japan (EBIT margin of 6.1 percent) performed worse.
The market slump in 2019 is expected to cause a further decline in
profitability in these regions.

EBIT margin [%]


Key supplier performance
indicators, 2012-2019e
(n=~600 suppliers)
7.3
7.2 7.2 7.2
7.1 7.1

6.8

-17%

~6.0-6.3

2012 2013 2014 2015 2016 2017 2018 2019e


Source: Company information, analyst forecasts, Lazard/Roland Berger supplier database

At first glance, the figure of around 6 percent still looks like a generous
margin. But appearances are deceptive: at 6.0 percent, suppliers are
approaching a place where both self-financing and refinancing on the
capital market become more difficult. Car manufacturers expect their
suppliers to invest heavily in relevant future technologies. The problem?
The new investment projects do not meet the proven financial return logic
of the past. The necessary level of spending often represents an uncertain
bet on the technology of the future for OESs.

In the heat of the mobility revolution 7


The new car industry
ecosystem
What is special about the current situation is that the scale and speed of
developments, as well as their economic consequences for companies,
are unprecedented and unforeseeable. At the moment it is hard to predict
which of the market trends will prevail in 15 years or what the most
promising business models will be.

Current developments within the automotive industry

Prerequisites for electric vehicles constantly getting


better, e.g. further emission regulations and ICE city bans,
decreasing battery costs or improving infrastructure

Besides new forms of mobility, the mobility mix


itself is changing
Market
trends
Uncertainty remains over technical development path
and legal framework for autonomous driving

Data-based and digital business models enable new


business potential

Sales potential for certain products likely to fall


dramatically

Customers continue to push suppliers for cost reductions

New players entering the automotive business


Impacts across the entire value chain

The required employee skill set is changing dramatically


Photo: darekm101/Getty Images

Access to capital is becoming tougher given the declining


relative attractiveness of the automotive sector

Source: Lazard, Roland Berger

8 In the heat of the mobility revolution


In the heat of the mobility revolution
OEMs' path toward a mobility
ecosystem scenario 2030+
All in all, these factors combined will lead to considerable shifts in the
automotive industry ecosystem over the next decade. New mobility
providers will occupy positions of increasing strength. For incumbent
OEMs, this means they will have no choice but to establish new business
models. If they fail to gear themselves up properly, their role in tomorrow's
mobility world will be secondary or, in the worst case, non-existent.

MSPs1
MSP

OEM
Traditional OEMs

New OEMs

OES
OESs

New OESs

2019

1 MSP = Mobility Service Provider


Source: Lazard, Roland Berger

10 In the heat of the mobility revolution


In 10 years, it's quite conceivable that the scenario could involve customers
buying not just a vehicle but a certain form of mobility adapted to their
needs. Assuming this is no longer just the vehicle itself, then the OEM
becomes the primary supplier – possibly of a tech company – and the
current OESs slide one rung down the ladder. Not only transforming the
supply chain, but also exerting further pressure on the margins of today's
automakers and suppliers.

Sample
candidates

Traditional New

Railway
Pure MSP

MSP
companies
Ride
hailing
providers
OEMs with
Integrated MSP mobility service
offerings

Established
New xEV
CaaS lifestyle brand premium/sports
OEMs

OEM
car OEMs

Traditional Consumer
Device manufacturer suppliers and electronics
volume OEMs manufacturers

Selected
traditional
Ø out of business suppliers
and OEMs

OES
Service enabler/ Semi-conductor
Technology
component or battery
suppliers
manufacturer manufacturers

2030 New mobility ecosystem 2030+

In the heat of the mobility revolution 11


OEMs are under growing
pressure...
For incumbent automakers, the changes in the industry present a double
challenge. New emission limits and the threat of fines, as well as
electrification, are weighing on earnings in the core business. At the same
time, new Mobility-as-a-Service offerings are becoming established and
the future profit pool of OEMs is shrinking. The pressure on automobile
manufacturers is therefore growing on several sides simultaneously.

Pressure on traditional OEMs

New
mobility


concepts
2025
Traditional
core New MaaS business slower


business than expected to ramp up

Fierce competition due


to new entrants with
More intensive competition due advantages over established
to new entrants with advantages players
over established players
Late to follow up: Traditionally
Falling margins due to leading OEMs in follower
electrified vehicles position

Lower EBIT due to rising costs Strong need for investment


and portfolio shifts into automated driving,
artificial intelligence and
Heavy investments in to scale up
powertrain electrification and
new technologies Decreasing brand loyalty
and design relevance
High costs associated with
Photo: fanjianhua/Getty Images

personnel transformation

OEM/OES
↓ Negative impact on business business 2019
Source: Lazard, Roland Berger

In the heat of the mobility revolution 13


...and they're ramping up the
pressure on suppliers
To meet these challenges, OEMs have launched cost-cutting programs to
shave billions off expenditures. In addition to in-house efficiency measures
and changes to the product portfolio, the reduction of material costs is
almost always a core issue. Manufacturers are thus passing on the
pressure they are feeling to their suppliers to an even greater extent than
before. For OESs, this means they have to develop and implement their
own strategies and measures to protect their profit margins. They need to
cut costs in order to meet the OEMs' demands but they also have to make
investments in future technologies, which represent attractive growth
potential but come with significantly higher risks than before.

There is no magic formula for balancing these conflicting objectives; each


supplier will have to come up with the right strategic approach for their
own situation and market position. Roland Berger and Lazard have
subdivided the supplier ecosystem into six archetypes to make it easier for
companies to determine where they currently stand and assess the need
for action:

"Automotive suppliers
feel the impact of
OEM crisis."
Automobil-Industrie – 08/2019

14 In the heat of the mobility revolution


Summary: Strategic directions per supplier archetype

SUPPLIER NEED FOR STRATEGIC MISSION


ARCHETYPES CHANGE MISSION STATEMENT

Small Cost optimization SUrvival


traditional throughout the entire of the
player organization is key fittest

Compensate for
Eat
Aftermarket negative business
or be
player implications from
eaten
e-mobility trend

Process excellence is
Global Defend
the basis to generate
commodity capital and to ensure
current
leader positioning
long-term success

Global new Leverage existing If you can


entrant know-how to generate think it,
with new new business within you can
technologies automotive industry do it

Focus on cost
Traditional Offense
efficiency or proactive
diversified portfolio transition to
is the best
player defense
future growth segments

Make the company


Technology Remain
irreplaceable for OEMs
system and leverage positioning
system
integrator relevant
to move into new fields

Low High

Source: Lazard, Roland Berger

In the heat of the mobility revolution 15


By first determining their position, companies can derive an individual
approach for how they should deal with the current challenges in the
market. Below is an example of a turnaround program (real Roland Berger
project for a leading German automotive supplier):

Roland Berger performance improvement program

Problem/initial situation
• Decreasing margins • Declining equity ratio
• Partly loss-making business • Commoditized portfolio
• Increasing capital •P ortfolio adaption and growth strategy
requirements failed

Roland Berger program focus

Country Region Global

1 >5 >50
plant plants plants

One Multiple Company-wide


focus plant focus plants focus plants
Starting point Program extension Full-scale program

Result/achievements
• 4% absolute EBIT improvement over 3 years
• More than EUR 100 m of working capital improvement
• More than 2,000 individual improvement measures
• Sustainable turnaround

Source: Lazard, Roland Berger

The selected company acknowledged that it was increasingly struggling with


the erosion of its EBIT margin. This situation was triggered by its acquiring
businesses at a loss for strategic reasons, coupled with inadequate
performance in the plants and startup problems, alongside a commoditized
product portfolio in a competitive market. As a countermeasure, the
company first initiated a performance program for a large problem plant and,
following sustained success, expanded it in two stages, first for one region
and then worldwide. Finally, more than 2,000 measures with an absolute
EBIT effect of +4 percentage points over the next three years were developed
within the overall program. This example shows that sustainable performance
improvement is even possible with traditional product portfolios.
16 In the heat of the mobility revolution
Suppliers have to act now in order
to remain successful in the future

Key recommendations for automotive suppliers

Take the transformation of the industry seriously!

Performance programs are a must for many suppliers –


for small businesses they're vital.

Structural measures will be essential for suppliers to cope


with the growing pressure on margins through 2025.

The broader your product portfolio, the easier it will be


to master the challenges.

Acquisitions are recommended for large and financially


strong OESs; smaller suppliers should consider
selling, merging or increasing their equity.

Protect your financial flexibility in the


medium and long term!

For investments in innovative areas with good growth prospects,


seeking venture capital providers or cooperation with partners
is recommended to share the burden.

Lasting success requires employees with skills and qualifications


that are fit for the future.

There is no "one size fits all" strategy – but the following


message applies to all:

ACT NOW!

Source: Lazard, Roland Berger

In the heat of the mobility revolution 17


Your contacts

Roland Berger:

Felix Mogge
Senior Partner
+49 89 9230-8346
felix.mogge@rolandberger.com

Thomas Schlick
Senior Partner
+49 69 29924-6202
thomas.schlick@rolandberger.com

Florian Daniel
Principal
+49 89 9230-8374
florian.daniel@rolandberger.com

LAZARD:

Ken Oliver Fritz


Managing Director
+49 69 170073-69
ken.fritz@lazard.com

Christof Söndermann
Managing Director
+49 69 170073-221
christof.soendermann@lazard.com
Photos: Roland Berger GmbH; Lazard

If you would like to know more about the transformation of the automotive
industry and our recommendations for dealing with the challenges, download
our detailed presentation on the subject: www.rolandberger.com/
AutomotiveSuppliers2019

18 In the heat of the mobility revolution


Roland Berger, founded in 1967, is the only leading global
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2,400 employees working from 35 countries, we have successful
operations in all major international markets. Our 52 offices
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Lazard, one of the world's preeminent financial advisory and


asset management firms, operates from 43 cities across
27 countries in North America, Europe, Asia, Australia, Central
and South America. With origins dating to 1848, the firm
provides advice on mergers and acquisitions, strategic matters,
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more information on Lazard, please visit www.lazard.com.
Follow Lazard at @Lazard.
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