According to a recently released study by AlixPartners, no less than 38% of all auto suppliers in North America are in “fiscal danger,” of insolvency within 24 months or less unless they take urgent counteractive measures. The study also reported that 24% of all suppliers globally face the same danger. That would be in addition to the $60 billion in major supplier bankruptcies in the U.S. alone since 2001.
The study looked at 104 automotive suppliers, 22 automakers, 18 heavy-vehicle producers and 32 automotive conglomerates worldwide, and measured and compared them across a wide range of financial and operating metrics.
The study also found that the Chinese automotive market has cooled off to such a degree that a big shake-up is most likely brewing and auto suppliers in particular, need to do much more to accelerate cost reductions, improve working capital and better manage product innovation if they want to stay competitive.
Additional research found that in 2005 the bottom 25% of suppliers worldwide experienced a significant deterioration in financial performance, with earnings before income tax (EBIT) falling 4.4%age points, to a negative 0.1%—whereas EBIT for suppliers in the top-performing quartile actually increased, by 0.8%age points, to 9.2%.
Meantime, top-performing North American suppliers are maintaining return-on-capital-employed (ROCE) numbers at levels comparable to those of the highest-performing industries of any kind.
These issues are translating into significant market capitalization differences by region, pointing out that 21 of the top 25 suppliers as measured by total value creation (change in market capitalization) in the past two years are Asian, while 15 of the 25 suppliers at the bottom of that list are North American. North American suppliers are trailing behind both their Asian and European counterparts in investment in research and development spending, a critical element in developing innovative products for future returns.
Working capital is also an issue. According to the study, aggregate working capital efficiency for suppliers worldwide has not changed markedly since 1995, while American suppliers have also seen a reduction in inventory where few suppliers in any region have been able to match accounts-payable turns to accounts-receivable turns. However, the study did find that suppliers as a whole globally are turning their assets more than 25% faster than OEMs are.
In the heavy-vehicle section of the study, research showed that even though both the operating margins and return on capital of heavy-truck makers is significantly higher than those of light-vehicle OEMs, the fastest-growing truck makers aren’t necessarily the most profitable.