BOSTON—October 31, 2022— During its analysis of 30 of the top 100 global auto suppliers, Bain & Company found that about a quarter of those suppliers are not prepared to handle conditions brought on by what is considered as a “moderate storm” in terms of economics. In its new report: “How Auto Suppliers Can Navigate the Industry’s Perfect Storm,” Bain assessed supplier readiness for a “moderate storm scenario” in which global production volumes are flat, supplier costs increase by 7% and financing costs increase by 20%; a result of hiked interest rates. While automotive suppliers’ profit margins are under extreme pressure after more than two years of stop-and-go production, Bain is encouraging executives within the auto industry to consider solutions that will protect cash positioning and ensure long-term profitability, despite impact by current economic and geopolitical trends.

“Suppliers find themselves in a perfect storm,” said Dr. Klaus Stricker, global sector lead within Bain’s Automotive & Mobility practice. “In order to avoid running out of cash, manage their debts, and have the capacity to invest in necessary technologies, an integrated response is required to address these immediate pressures. Our research shows that there are four elements suppliers should focus on to thrive.”

Responding to the Storm: Four Key Elements

The four key elements of an integrated response to the perfect storm include:

• Fundamentally resetting costs now, to ensure future viability: Suppliers who proactively restructure their business and take far-reaching action to reset costs during periods of disruption have a unique opportunity to improve their performance and distance themselves from competitors. Those with a high level of agility in cost restructuring during the 2008–09 financial crisis massively outperformed their competitors when the economy bounced back. The most effective programs address purchasing, labor costs, financing costs, supplier selection and management, product complexity, design-to-cost decisions and supply-chain operations. They also cut down sales, general and administrative (SG&A) costs, and redesign the manufacturing footprint to remove excess capacity.
• Sharing the cost burden: Suppliers can secure valuable relief for their financial position, and improvements are achievable. Ultimately, success on passing through cost increases comes down to suppliers demonstrating the value of their components and working relentlessly to prove that they are fully committed to reducing costs. They must be able to show that finding and switching to another supplier would cost the original equipment manufacturer (OEM) even more, and cause further implementation risks. Suppliers in distress need to show transparently that they continue to be a reliable partner and share some of their increased cost burden.
• Stepping cash management and balance-sheet flexibility up a gear: Managing supply and demand through the high volatility of the past two years has been challenging for suppliers, making cash management a top priority. Stepping up efforts to generate and conserve cash, and ensure a degree of balance-sheet flexibility will be essential both to maneuver through the difficult months ahead and to allow companies to invest in the technologies that will keep their business model relevant in a transformed car industry. Suppliers are building up sustained cash-management capabilities, such as profit-and-loss scenario modeling and improved liquidity forecasting, to ensure they have the headroom to get through the period of volatility.
• Setting businesses up for the electric and software-driven future: The three responses above are bound together by the fourth: the right strategic foundation. While companies are taking rapid action to fundamentally reset costs, improve pricing, and aggressively manage cash, they must do so with clear targets for the future in mind. The long-term transition to electric vehicles (EVs), the growing importance of software for autonomous driving, new profit pools in mobility services and growing competition from new market entrants, will be front of mind. Responding to these transformational trends will inform suppliers’ M&A roadmap, capex priorities, and customer targets. Suppliers can take three key actions to set the right strategic direction including:

1. Evaluate each business in the portfolio based on margin, profit growth and relative market position
2. Examine how to increase profitability even further from businesses that score highly in all areas through operational and commercial excellence, product refinements and innovation
3. Explore acquisition opportunities to build or strengthen leadership positions in the most attractive areas and to acquire access to new technologies

Radical Transformation Now, Not Later

According to Bain, auto suppliers have no choice but to transform their operations if they wish to survive the perfect storm; actions that will ultimately reshape the car industry. And while companies are faced with having to make hard decisions, Bain is reminding suppliers that the time for transformation is now.

“There is no one universal answer,” said Pedro Correa, Americas sector lead within Bain’s Automotive & Mobility practice. “With no going back to the way things were, pursuing operational and commercial excellence will be critical to ensuring auto suppliers’ survival and positioning their portfolios to take full advantage of a remade auto industry in the years ahead.”

Editor's Note: For any questions or to arrange an interview, please contact Dan Pinkney at dan.pinkney@bain.com or +1 646-562-8102.