Special
Leading automotive suppliers expect
another tough year
Insights Special
Page 2
Leading automotive suppliers expect another tough year
Leading automotive suppliers expect 2006 to be even
tougher than 2005, according to a survey by Roland
Berger Strategy Consultants and SupplierBusiness,
which incorporated the opinions of 100 senior executives
in the global automotive supplier industry.
North America and Asia will be more challenging. Most predict
that production volumes in North America and Europe will be
difficult for suppliers, and a growing number, albeit still less
than a quarter of all suppliers, are worried about the volume
outlook for Asia.
2005 was a tough year for the supplier industry, particularly
in North America, with major industry players such as Delphi
going into chapter 11 administration – a major challenge in
itself for some of the respondents. Seventy percent of the
suppliers surveyed expect the number of first-tier supplier
bankruptcies to increase further in 2006 (figure 1).
On the other hand, suppliers say that rising raw material
prices will be less of an issue in 2006 than in 2005 –
reflecting the easing of steel and oil prices over the year.
While some raw material prices still give cause for concern
(copper price highs were mentioned by several respondents),
anxiety about steel and resin costs has fallen (figure 2).
Figure 1: Expected bankruptcies among first-tier suppliers
in 2006 vs. 2005
Most suppliers (51%) say that relations between OEMs and
suppliers deteriorated further in 2005, compared with just
10% who say that relations improved. A significant number
of suppliers (43%) expect relations to deteriorate further in
2006.
63%
Three quarters of the supplier respondents expect pricing to
be a major source of disagreement with OEMs in 2006, and
just under half predict disagreement with car makers over
payment for research and development work by suppliers,
as well as payment for module and system management
to second-tier suppliers (figure 3).
26%
7%
1%
Much less
3%
Less
Stay the
same
More
Much more
The survey, conducted in late December 2005, found that
supplier executives expect the pricing environment for
automotive components to be even tougher in 2006 than
it was in 2005 – and think that market volumes in Europe,
Sixty eight percent expect an increase in the pace of globalization in 2006. China and India are considered most likely
to see increases in OEM sourcing. Most expect the increase
to be led by sourcing of second-tier components and aftermarket parts, but more than three times as many respondents
(46%) think it likely or very likely that first-tier activities will
also be transferred to emerging markets, compared with 13%
who believe this to be unlikely or very unlikely (figure 4).
Insights Special
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Figure 2: Challenges affecting automotive suppliers in 2006 vs. 2005
Pressure from OEMs to
reduce price
Weak production volumes
in North America
Weak production volumes
in Europe
Other material price increases
30%
65%
12%
42%
14%
36%
Steel price rises
15%
31%
Pressure from OEMs to
improve quality
Pressure from OEMs to
increase level of innovation
Weak production volumes
in Asia
15%
29%
24%
10%
17%
5%
+24
50%
40%
7%
-3
48%
-8
47%
+14
46%
-9
44%
+10
34%
+9
22%
+17
Extremely important
Very important
Figure 3: Expected areas of disagreement between OEMs and suppliers in 2006
Price
38%
37%
Payment for research
and development
10%
39%
49%
Payment for system/
module management
9%
40%
49%
Payment for tooling
9%
Intellectual property
Warranty
Quality
Product content
33%
15%
25%
4%
34%
8%
+5
+22
54%
29%
19%
95%
65%
38%
27%
Resin price rises
Changing market demands
Change vs. 2005
[% pts.]
42%
40%
38%
10%
4% 6%
Overwhelmingly disagreement
Mainly disagreement
75%
Insights Special
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Figure 4: OEM sourcing from low-cost countries and
activities transferred to low-cost countries
OEM sourcing from low-cost countries in 2006
India
China
18%
62%
23%
Transfer of activities to low-cost countries
Second-tier
sourcing
80%
56%
Production for
aftermarket
79%
First-tier
sourcing
Eastern Europe
Central and
South America
Increase a lot
15%
57%
72%
41%
43%
87%
62%
52%
20% 22%
15% 17%
Testing
Increase
55%
21%
9%
Research and
development
14% 16%
32%
Very likely
Likely
Most executives (58%) predict a pick-up in merger and
acquisition activity but an even larger majority (89%)
expect an increase in joint ventures and alliances (figure 5).
The most important long-term challenge for the supplier
base is seen as winning new customers (76%), reflecting
the turmoil among OEMs and the reordering of the industry
that is now going on at a global level (figure 6).
Figure 5: Expected value of M&A activity in the supplier
industry in 2006 vs. 2005
Seventy two percent believe that product innovation is
very important or extremely important for suppliers in the
long run. Interestingly, suppliers see process innovation,
which can have an impact on both costs and quality, as
almost as important as product innovation for their longterm competitiveness.
56%
Thirty eight percent of suppliers expect research and
development spending to increase in 2006 (figure 7).
28%
14%
2%
0%
Much less
Less
Stay the
same
More
Much more
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Figure 6: Long-term strategic challenges for the supplier industry
Winning new customers
Product innovation
34%
32%
Slow growth of vehicle
markets
Logistics
24%
38%
Move to low-cost countries
24%
37%
11%
Improvements in quality
12%
67%
63%
45%
18%
Managing second or thirdtier suppliers
67%
45%
22%
Process innovation
68%
48%
20%
More intense competition
with other suppliers
72%
45%
27%
Labor costs
76%
41%
34%
62%
61%
49%
61%
43%
Extremely important
56%
Very important
Figure 7: R&D spending dynamics and introduction of new technologies
Supplier industry's spending on research and
development in 2006 vs. 2005
Rate of introduction of new technologies in the
automotive industry
43%
48%
37%
41%
18%
9%
1%
Decrease Decrease
a lot
1%
Stay the
same
Increase
Increase
a lot
1%
Decrease Decrease
a lot
1%
Stay the
same
Increase
Increase
a lot
Insights Special
Supplier executives are divided about how important hybrids
will be by 2010. Thirty seven percent believe that they will still
account for 2% or less of the global light vehicle market by the
end of the decade, while 20% of respondents think the hybrid
share could reach 6% of the market or more.
Hybrids and alternative fuels such as hydrogen are the most
frequently mentioned key technologies for the long term, but
diesel technologies are thought to be important by almost as
many respondents. Electronic applications across the vehicle
are also cited frequently, and emissions and environmental
concerns are mentioned by several executives. Fewer respondents identify materials or safety technologies as critical.
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100 executives from leading tier-one suppliers responded
to our survey. Forty six percent of the respondents work for
companies headquartered in Europe, 38% for North American
firms and 16% for Asian suppliers. The response was evenly
split between companies with sales of over USD 500 million
and smaller component suppliers.
Roland Berger Strategy Consultants recently launched a largescale study on the automotive supplier sector in order to
> Analyze how the financial performance of the automotive
supplier industry has developed globally in past years
> Identify high and low performers
Despite the emergence of hybrids and the Japanese lead in
this sector, European companies are seen as the technology
leaders in most component sectors. Eighty one percent of
respondents believe that European firms lead technologically
in their sector, 11% think the lead is taken by companies in
North America, and nine percent say that their sector is led
by Asian companies.
Contact
Marcus Berret, Roland Berger Strategy Consultants
Mobile: +49-160-744 74 19
E-mail: marcus_berret@de.rolandberger.com
> Determine which supplier strategies have been most
successful
> Derive the conclusions for the CEO agenda among
automotive suppliers
This study will be published in May 2006.