As volatility has become the norm for the automotive industry, it has upended traditional profit margin dynamics. For two decades leading up to 2019, automotive suppliers’ EBIT margins were on average 1 to 2 percentage points higher than those of original equipment manufacturers (OEMs). Then came massive supply chain disruptions with the Covid-19 pandemic and global chip shortage, plus higher raw material and energy prices, and now rising borrowing costs and wage bills due to inflation. Automotive OEMs were able to ride out the supply shortage by focusing production on the highest-margin models and raising prices, but suppliers had no such strategic options.
We’re tracking the EBIT margins of a set of top OEMs and suppliers worldwide, and each quarter, we’ll publish the latest trends in this dashboard.
Here are some of the key takeaways through the second quarter of 2023:
- OEMs had an average profit margin of 9.2% in the second quarter, almost 4 percentage points higher than automotive suppliers. This was due primarily to OEMs’ richer product mix and reduced end customer discounts.
- The gap between OEMs’ and suppliers’ profit margins has been sharp since 2021, brought on by massive supply chain shocks caused by the pandemic, the global semiconductor shortage, the war in Ukraine, and other disruptions. The gap increased slightly in the second quarter, with OEM margins widening as supplier margins remained stable between 5% and 6%. Strong performance by a small number of automakers drove the gap increase, as the rest of the industry’s margins remained mostly flat.
- The challenge for suppliers is that they’re suffering from higher material and energy costs, which they can only partially pass on to OEMs. An increasing number of suppliers face liquidity challenges that will likely require special support, including from OEMs, to prevent insolvency.
- Despite OEM profitability remaining high in the second quarter, we expect significant headwinds for the next two years. A worsening global economic situation leading to declining demand, rising costs, and falling prices will likely squeeze OEM margins toward the end of 2023. Many OEMs have already announced efficiency and performance improvement programs, including a reduction of material costs, that will likely put additional pressure on suppliers.
- To prepare for this potential hurricane of external pressures on margins, both OEMs and suppliers have no time to lose to increase the resilience of their business models, enacting more fundamental cost-reduction measures while staying disciplined to maintain price levels.
The authors are grateful for the support Ingo Stein provided to this study.