Strategic options for automotive suppliers in declining markets – HANSE Consulting informs

Strategic options in declining markets:
What suppliers for internal combustion engine (ICE) passenger cars should do now.

After the global registration figures for passenger cars had already fallen by -5.1% in 2019, there was a massive slump of -15% to 63.7 million cars in 2020. A global increase in registration figures of just under 9% is forecast for 2021, followed by only a moderate increase in the medium term to below the “pre-Covid 19” level.

However, the challenge for suppliers of ICE cars in the automotive sector was and is even greater and, above all, sustainable as a result of the agreed climate targets: Due to the exponential increase in registrations of vehicles with alternative drive systems, these suppliers were hit harder by the collapse in registration figures in 2020 and will also benefit less from the current market recovery or have to cope with increasing losses of market share in the medium term. For example, around 3.2 million passenger cars with electric drive systems were sold worldwide in 2020, 873,020 (37.8%) more than in 2019. For conventional passenger cars, this means a drop in registration figures from around 72.6 million to around 60.5 million in 2020, corresponding to -16.6% compared with 2019. This corresponds to a -15% drop in registrations as a result of the Corona pandemic and -1.6% due to the displacement of ICE passenger cars by passenger cars with alternative drive systems.

The consequences are well known from other capex-intensive industries already affected by disruptive developments, such as the photo imaging chemicals industry. Corresponding strategies can be subsumed under the categories of confrontation or cooperation.

To cope with the foreseeable disruptive development of the automotive supplier industry, HANSE Consulting is at your side.

Confrontational strategies are about “survival of the fittest” in the Darwinian sense.

Your group of companies is one of the major suppliers of ICE cars to leading OEMs and Tier 1 suppliers, is already the cost leader in its market segments without any significant additional investment in the main sales markets, and has more financial reserves than the next strongest market competitors for a prolonged price war with falling margins and declining sales figures?

If so, you could try to force through the necessary capacity adjustments on the production side by successively squeezing out weaker competitors. As the perspective “last man standing”, you would be strong enough to further expand your cost leadership in cooperation with the OEMs by stringently reducing complexity (fewer platforms, assemblies, variants, cheaper materials, etc.) in R&D, purchasing, production and logistics, so that your purchasing, production and transport lots do not become smaller and smaller, your purchasing prices do not become worse and worse, your R&D expenditure per product sold and your administrative, setup and logistics expenditure do not become higher and higher – and your profitability and cash flow do not become worse and worse.

By cooperative strategies, we at HANSE Consulting understand the coordinated reduction of production capacities either through the conversion of market competitors, who are inferior in certain regions or with regard to certain product ranges, from make to buy or a proactive buy & build strategy by financially strong strategic or financial investors. The former has been successfully practiced in the photo imaging chemicals industry over a certain period of time; for the latter, for example, the “Best Owner Group” intends to acquire investment capital of half a billion euros in order to take over the first ICE suppliers from mid-2021. The prerequisite for this venture is also a clear strategic focus through the acquisition of market-leading companies or company divisions as “crystallization seeds” for the further buy & build strategy in order to be able to develop into the ultimate supplier in this market segment in the long term. Capital alone will not lead to success without cost leadership. Furthermore, the above-mentioned measures for complexity and cost reduction naturally apply analogously here.

What strategy could your group of companies pursue if you were to act as an automotive supplier for both ICE passenger cars and passenger cars with alternative drive systems?

The following preliminary work is necessary to develop a promising strategy:

• what contribution margins do you generate in the two divisions, what is their probable development (volumes and DB margins) in the future?
• What structural costs can each of the two divisions cover in the future?
• How strong is your performance profile with regard to alternative drives compared to your leading market competitors, and are you strong enough in development and finance to maintain a leading position in competition?
• Could your ICE division be a seedbed for a buy & build strategy due to its cost leadership?
• Or is it still so profitable, at least in the medium term, that you can generate capital for the further development of your product line for alternative drives by means of a carve-out and sale to a strategic investor and focus completely on this business area?

These brief explanations are not even the tip of the iceberg; answering the questions that become potentiated in the required drill-down is complex and time-consuming – especially in addition to day-to-day business – and the changes are increasingly dynamic.

Here, by adding external experts, you can save one thing in particular that you don’t have: Time! Upon request, HANSE Consulting supports you quickly, professionally and entrepreneurially with:

• Commercial transparency:
  Sparring of your contribution margin and planning calculations incl. mapping of subsequent measures
• Strategic options for action:
• joint development of individual promising strategies for your group of companies
• Mergers & Acquisitions:
• Preparation, execution and follow-up of acquisitions or sales of companies/parts incl. DD, Carve Out and PMI
• Optimization and digitalization of your success-determining business processes depending on your strategic focus (e.g. reduction of time to market or COGS)
• and many other topics such as taxes

Through our cooperation partner Warth & Klein Grant Thornton, we can also act globally in the area of tax, for example, if required, and access a wide range of expertise.

Your contact at HANSE Consulting: Dr. Thomas Zubke-von-Thünen, Managing Partner