Management consultancy Bain & Company predicts the auto industry will halve its margins after pushing them to record levels in response to the current crises. The margin recently averaged 8.5 percent. Bain explains this high by saying that the manufacturers have changed tactics as a result of the material shortage caused by Covid-19, especially for semiconductors. Now, however, a burglary is imminent.
The car industry was able to outsmart the crisis thanks to larger margins for more expensive models and higher prices at the same time. But now the consulting agency sees “harder times” coming for the manufacturers. Bain predicts cut-throat competition due to a clearly deteriorating overall economic situation with a simultaneous easing in the supply of semiconductors.
“Hurricane Scenario”: Halving in two years
The high prices should therefore not be able to be maintained, and at the same time there are rising costs due to inflation. That could most likely bring the margin down to 4 to 6 percent over the next two years. Bain vividly calls this the “hurricane scenario.” “In particular, volume manufacturers will suffer from the fact that their customers will be reluctant to buy new cars due to the economy,” the consultants conclude.
The suppliers, on the other hand, have not been able to make any comparable short-term profit from the situation; on the contrary, they have been suffering from declining profitability for two years. According to Bain, their average EBIT margin in the first three quarters of 2022 fell to just around 4.5 percent from 5 to 8 percent before the outbreak of Covid-19. Suppliers continue to suffer more from disrupted supply chains, the shortage of semiconductors and increased material and energy costs.
The graphic presents three possible scenarios.
Stabilize business models with the workforce and works council
Bain advises car manufacturers to use the successful phase of high profit margins now to make their business models more stable, “this requires strict efficiency and transformation programs as well as fundamental structural improvements” and should happen during the ongoing transition to electromobility on the way to climate neutrality. Such far-reaching measures can only be implemented if “the board gets the entire workforce and the works council on board.”
In addition, this is not possible without close cooperation between manufacturers and suppliers. It is also important not to overwhelm your partner. It would serve no one if the industry soon had to support system-relevant suppliers.
Five point plan
In order to mobilize efficiency reserves during ongoing operations and to accelerate the transformation, the automotive industry should keep five points in mind:
- Defending the achieved price level. This also includes introducing customers to the higher prices for electromobility. The demand on the market that has already been achieved is helpful in maintaining higher margins.
- customize structures. Breakeven utilization should drop from often over 80 percent to 60 percent or better. A reorganization and an adjustment of the capacities to the sales planning are unnecessary.
- Deepen cooperation with suppliers. Manufacturers and suppliers should reduce costs together.
- minimize risks. This includes becoming less dependent on individual sales markets such as China. Several pillars spread the risk.
- Keep decarbonization in mind. The ongoing transformation can be used for synergy effects, for example with closed material cycles for batteries.
(fpi)
