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 fourth quarter of 2022:
- OEMs had an average profit margin of 8.5% in the fourth quarter, more than 3 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 throughout 2021 and 2022, brought on by massive supply chain shocks caused by the pandemic, the global semiconductor shortage, the war in Ukraine, and other disruptions. The margin gap grew in the fourth quarter, as OEMs rebounded toward the high margin levels of the first half of the year, while suppliers stayed stable around 5%.
- 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 high OEM profitability in 2022, we expect significant headwinds for the next two years. A worsening global economic situation leading to declining demand, rising costs, and falling prices will put pressure on OEM margins in 2023. To prepare for this potential hurricane of external pressures on margins, OEMs would be wise to increase the resilience of their business models by enacting more extensive cost-reduction measures, while staying disciplined to maintain price levels.
The authors are grateful for the support Ingo Stein provided to this study.
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