Top Suppliers Supplement - June 27, 2022 - S3

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Despite sales bounce, suppliers feel squeezed
John Irwin
jirwin@crain.com
O
n the surface, 2021 appeared to be a
strong bounce-back year for the biggest
auto suppliers.
Of the 100 parts and material
companies on this year's edition of the Automotive
News top suppliers ranking, 84 reported
year-over-year revenue gains from 2020,
when pandemic-related work stoppages
wreaked havoc on the industry.
The 10 suppliers who topped the list brought
in a combined $321.5 billion in revenue for the
year - a 10 percent jump from 2020 and even
a 2.2 percent increase from 2019.
But dig beyond those surface-level revenue
numbers, and it becomes clear that suppliers
are still bearing the brunt of increased material
costs and supply-chain shortages since at
least last year, even as sales grew.
" If I didn't know what was happening with
automakers, I would say that the suppliers are
doing quite OK right now, " said Mark Wakefield,
a managing director at AlixPartners. " But
knowing how well the automakers are doing
suggests that suppliers are getting squeezed. "
Indeed, 2021 was a banner year for automakers'
bottom lines, as low inventories and
high consumer demand pushed profit margins
into the stratosphere. Toyota Motor Corp.
smashed its fiscal-year operating profit record,
making $24.61 billion in its most recent fiscal
year. Automotive News Europe reported in
March that operating profits before interest
and taxes at the largest American, European
and South Korean vehicle manufacturers doubled
to $115.2 billion in 2021.
While automakers have used those profits to
reduce debt by $103 billion between 2020 and
2021, suppliers' debt was reduced by only
about $2 billion, remaining near record levels,
according to AlixPartners.
Wakefield said the profit dynamics between
automakers and suppliers have been turned
upside down over the past two years amid an
unprecedented barrage of supply-chain issues.
Margins on suppliers' earnings before interest,
taxes, depreciation and amortization had
typically stood between 11 and 12 percent before
2019, while automakers' clocked in at
around 10 percent, according to Wakefield.
But that profit relationship has reversed. In
2021, automakers were at 13 percent EBITDA
margins, while suppliers were " just clawing
their way " back up to 11 percent, he said.
'Extra costs'
" Automakers have pricing power, " he said.
" They've increased prices almost three times
more than they've seen increases in their
costs, in aggregate. Meanwhile, you have suppliers
who have not had price increases that
even match their cost increases. "
Meanwhile, automotive manufacturing has
become much less efficient
over the past couple of
years. According to AlixPartners,
it takes about 263
workers to produce a component
to supply 1,000 vehicles,
up from about 200 in
the third quarter of 2020. It
takes automakers about 127
workers to build 1,000 vehicles,
up from 89.
" There are now lots of extra costs on each of
Thomas: " Costs
are going up. "
those vehicles, " he said. " Automakers have
been able to raise prices, but suppliers have
had a difficult time raising prices and are less
able to absorb those costs. "
That's in large part because of contracts that
can lock in costs for extended periods and can
be difficult to adjust.
But suppliers are trying anyway.
'Tough' talks
Paul Thomas, executive vice president of mobility
solutions at Robert Bosch, told reporters
during a June media event that the German supplier
giant is approaching all of its customers to
increase its pricing " aligned with the cost increases "
it is experiencing in the market. He said
Bosch and automakers have had " healthy exchanges "
and have discussed localizing materials,
finding cheaper alternatives or trying to " internalize "
the supply chain as much as possible.
" The conversations are robust, " he said. " But
the reality is costs are going up, and we have to
find a way to make both parties whole. "
Robert Bosch retained its No. 1 position on the
the top suppliers list, with sales of $49.14 billion
to automakers worldwide in 2021.
Likewise, Canadian supplier Magna International
Inc. has been talking with automakers
about ways to strike a better balance financially.
Magna ranked No. 4 on this year's list, with sales
of $36.2 billion to automakers worldwide.
" We continue our discussions with customers
at various levels almost on a daily basis, " Magna
CEO Swamy Kotagiri said during a call with analysts
in April.
He said talks between
Magna, the largest North
American auto supplier,
and automakers have been
" open and transparent "
but sometimes " tough. "
" Going forward, we will
Kotagiri: " New
economics "
try to reflect the new economics
in our primary
markets in North America
and Europe, " Kotagiri said. " Inflation has been
stable and modest for a long time, as an example,
but now it's high. ... We are looking at different
arrangements going forward to see how
we can recover the increased costs. "
Newcomers, risers
Despite the many challenges suppliers are
facing, mergers, acquisitions and other deals
continued at a steady pace as companies
looked to prepare for a boom in electric-vehicle
production and continued advancements
in driver-assistance technologies.
Perhaps the most high-profile was Faurecia's
acquisition of a controlling stake in Hella,
which was announced in late 2021 and closed
in 2022. Faurecia ranked No. 8 on the 2021 edition
of the Automotive News top suppliers,
while Hella ranked No. 41.
The combined company is now known as
Forvia and made its debut on the 2022 list at
No. 7, with sales of $25.88 billion to automakers
in 2021.
Other newcomers to the list include drivetrain
supplier Vitesco Technologies, a former
unit of German supplier Continental, at No.
26, and Freudenberg Group at No. 47.
The five largest suppliers in the world were unchanged
from 2020. Bosch ranked first, followed
by Denso Corp., ZF Friedrichshafen, Magna and
Aisin Corp.
Continental, No. 6 on the 2020 list, fell to No.
8 on this year's edition following the spinoff of
Vitesco Technologies. It sold $24.2 billion in
parts to automakers in 2021.
German supplier BASF entered the top 10 after
finishing No. 13 in 2020, having sold $21.35
billion to automakers in 2021. Hyundai Mobis,
meanwhile, rose from No. 7 last year to No. 6
this year.
U.S. supplier Lear Corp. finished No. 10,
down from No. 9 last year, while French supplier
Valeo fell out of the top 10.
'Remain optimistic'
When pressed on the state of the industry,
many suppliers signal optimism that they will
persevere through today's challenges and
emerge as major players in the EV era.
Bosch announced in June that it will invest
$420 million in its North American manufacturing
to retool its component plants and gear
up for electrification. Bosch executives said
they were pressing ahead to invest, refusing to
take their eyes off potential long-term gains,
even while handling the more immediate
headaches of the last two years.
" Are there challenges ahead? Surely. There
are a lot of them, " Bosch North America President
Mike Mansuetti said. " But despite these
challenges, we remain optimistic about our
prospects for Bosch in North America, and we
continue to invest here in the region. " n
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Top Suppliers Supplement - June 27, 2022

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