Suppliers bounce back – margins and revenues rise

Munich, July 2024

Suppliers bounce back - margins and revenues rise

Munich, July 2024
T

he world’s 100 largest suppliers again recorded revenue growth in 2023. Lower raw materials and energy costs also helped to ease the pressure on margins, which were very tight in the previous year.

Last year’s biggest winners once again came from Asia. Among the various product groups, battery and semiconductor manufacturers once again recorded the highest growth rates in terms of revenue and margin, despite declining revenue growth.

In 2023, the automotive industry experienced a recovery along the entire supply chain. Both OEMs and suppliers were able to increase their revenues and margins. After supplier revenue exceeded the one-trillion-euro mark for the first time in 2022, suppliers managed to grow their revenue by a further 6.9% in 2023 and once again achieved a record figure of EUR 1,135 billion. With a revenue increase of 8.1% to EUR 1,770 billion, the ten largest car manufacturers even outperformed the growth of their suppliers. OEMs benefited above all from an upswing in demand in North America and Europe, which, contrary to many forecasts, was primarily attributable to vehicles with combustion engines.

In terms of margins, suppliers recorded the higher level of growth, also driven by an easing of the raw materials and energy crisis. The revenue-weighted margin of the TOP 100 rose by 0.7 percentage points to 5.9%, while the TOP 10 OEMs were able to improve their revenue-weighted margin by 0.6 percentage points to 8.5% in 2023. The turnaround marked the end of a three-year period in which automotive suppliers saw their margins diverge further from OEMs year on year. Suppliers from Asia in particular recorded impressive figures with high growth rates in both revenue and margins in 2023. Four of the five growth champions, in terms of both relative revenue growth and margin increase, are based in Asia.

Looking back over the year, three issues in particular influenced developments in the automotive industry: firstly, the increase in sales volume by OEMs, particularly for ICEs; secondly, the decrease in producer prices, which led to a recovery in margins; and thirdly, the continued strong performance of Asian suppliers compared to their competitors from Europe and North America. South Korean battery manufacturers in particular stood out with high revenue growth, while semiconductor manufacturers, which had grown so strongly one year earlier, were able to catch up with other product groups in terms of growth.

REVENUE AND MARGIN OF THE “TOP 100 SUPPLIER” AND “TOP 10 OEMs” 2017-2023 (IN BN. EUR AND % OF REVENUE)

1) VW, Toyota, Mercedes-Benz, Ford, GM, Stellantis, Honda, BMW Group, Saic, Hyundai

Source: Berylls by AlixPartners

Revenue increases – thanks to rising vehicle sales

The fact that suppliers and automotive manufacturers were able to increase their revenue in 2023 was largely due to the 12% growth in vehicle sales worldwide. For the TOP 10 OEMs, the higher demand for ICE models in particular led to a major increase in revenue amounting to EUR 85.6 billion. Although electric and hybrid models were characterized by high growth rates of 30% and 54% respectively in worldwide vehicle registrations, they only contributed to an absolute increase in revenue of EUR 17.7 billion and EUR 29.6 billion respectively for the TOP 10 OEMs due to the comparatively low volumes sold. Those deriving the greatest profit included suppliers with a high proportion of components for ICE vehicles in their portfolio. They recorded an above-average revenue increase of 9.6% in 2023, 2.7 percentage points above the 6.9% growth of the 100 largest suppliers. Companies with a focus on ICEs also recorded higher margin growth than the average for the sector. While the margin of the TOP 100 rose by an average of 0.7 percentage points, the increase for companies with a high proportion of combustion engines in their product portfolio was 1.1 percentage points. Companies that manufacture parts for commercial vehicles also benefited in 2023. At 16% in Europe and 14% in the USA, the growth rate for newly registered commercial vehicles was 2% higher than that of newly registered passenger cars. In China, sales of commercial vehicles rose by as much as 22%, significantly outstripping the 11% growth rate for passenger cars. The greatest profit was recorded by Weichai Power, a Chinese specialist for ICEs and commercial vehicles, which boosted its revenue by 38.5% and its margin by 5.8 percentage points in 2023. Commercial vehicle supplier Knorr-Bremse also benefited from this growth, increasing its revenue by 11.5% and its margin by one percentage point.

REVENUE GROWTH OF THE TOP 10 OEMs DIVIDED INTO DRIVE TYPE AND REGION (IN MRD. EUR)

Source: Berylls by AlixPartners

Margins rise – thanks to lower producer prices

In addition to revenue growth driven by higher demand, lower producer prices and the associated increase in margins also had a positive impact on the financial situation of manufacturers and suppliers alike. Pressure on margins has steadily risen in recent years due to geopolitical conflicts such as the war in Ukraine, Covid-19, and the shortage of semiconductors. As a result, prices for raw materials and energy both rose sharply, while margins shrank, causing Germany in particular to become less attractive as a business location in 2023, prompting numerous restructuring measures and plant closures. Bosch, the world’s largest automotive supplier, also announced job cuts in Germany. However, it remains unlikely that the decline in producer prices will herald the end of these austerity programs. Although producer prices fell by 2.4% in Germany in 2023, mainly due to a 50% drop in energy costs, the overall cost level within the country remains high in an international comparison. At –2.7% in the USA and –6.8% in China, producer prices in both countries not only fell more sharply, with an increase of 16.3% in the USA and 4.1% in China, they had already grown less strongly in 2022 than in Germany, where producer prices rose by 32.9% in 2022.

EVOLUTION OF PRODUCER PRICES SINCE 2021
(IN %)

Source: Berylls by AlixPartners

Race of nations – China in the fast lane

The above-mentioned cost advantages are also a reason why Chinese suppliers are increasingly represented in the TOP 100 ranking. Whereas Weichai Power was the only Chinese supplier in the ranking in 2012, by 2022 there were already eight Chinese companies among the world’s 100 largest suppliers. CATL in particular came into the limelight – in 2018, the battery manufacturer was among the 100 largest suppliers for the first time and even climbed into the ranks of the ten largest suppliers within five years. In 2023, another Chinese company, tire manufacturer Sailun, also made it into the TOP 100

and there is still no end in sight to the rapid rise of Chinese suppliers achieving this level. According to Berylls’ analysis, eight additional Chinese suppliers could be represented in the TOP 100 ranking by 2030 and, with CATL, the world’s largest supplier would also come from China instead of Germany in 2030, as is currently the case with Bosch. Thus, with 17 suppliers, China could well have replaced Germany in second spot behind Japan by 2030. By contrast, Germany, which currently has 17 companies in the TOP 100, would only have 13 suppliers by 2030. Japan, currently represented by 23 companies, will retain its position at the top of the list of countries with the most suppliers within the TOP 100 and is likely to further extend its lead with an expected 26 companies by 2030.

Another important point is that these Chinese suppliers are not just battery or semiconductor manufacturers. Quite the opposite: Chinese companies are increasingly gaining market share in more traditional product groups such as seats, tires, lighting, and brakes. For example, the Chinese NBHX Group, a specialist for vehicle interiors, increased its revenue by 17.9% to EUR 3 billion in 2023, narrowly missing out on a place in the TOP 100. With revenue of EUR 2.6 billion and a growth rate of 23.2% last year, the Chinese car body and interior supplier TUOPU is also a leading contender for a place in the ranking of the 100 largest suppliers. However, the strong growth of Chinese suppliers is only partly due to the rise of Chinese OEMs. In fact, Chinese suppliers have succeeded in taking market share from the competition in both Europe and the USA. While revenue measured in euros for the five largest Chinese OEMs in 2023 has only grown by 39% since 2018, the five largest Chinese suppliers managed to increase their revenue in euros by 121% during the same period.

The fact that suppliers from Europe and the USA were not among the big winners in 2023 is an alarming signal when you look at the regional growth of the OEMs. In Europe and the USA, the ten largest OEMs recorded double-digit growth rates of 15.5% and 12.7% respectively, while revenue growth in Asia was significantly weaker at 3.8%. Nonetheless, there is positive news for suppliers based in Germany: since 2017, the revenue share of German suppliers in the TOP 100 ranking had fallen continuously, but the trend was halted in 2023. As in 2022, Germany’s share of total revenue amounted to 20.6%. However, the exchange rate effects in favor of the euro in the past year must also be taken into account at this point. Compared to 2022, the Chinese yuan lost an average of 7.6%, the Japanese yen 9.2%, and the Korean won 3.8%. It is all the more impressive that Japan, whose share of revenue fell from 27.7% to 21.8% between 2018 and 2022, was also able to stabilize its share of revenue in 2023. For Chinese suppliers, the exchange rate effects even resulted in a loss of market share, albeit only slight, as instead of 9.3% in 2022, suppliers from China only contributed 9.1% to the revenue of the TOP 100 in 2023. This year, the winner in the race of nations was once again South Korea, which increased its share of revenue from 8.8% to 9.8%, mainly due to its battery manufacturers.

RISE OF CHINA WITHIN IN THE TOP 100

 

1) 2030 revenue share is based on the adjusted CAGR from 2019-2023 for the suppliers from the TOP 100 ranking and possible Chinese new joiners; CAGR adjusted according to Berylls assumptions for battery growth, one-time effects and weighting of annual growth rates between 2019 and 2030.

Source: Berylls by AlixPartners

China and Korea become auto nations

The ascendency of Chinese automotive suppliers is more than just a side effect of economic growth in China. While China’s nominal GDP in euros has risen by 36% since 2018, the revenue of the suppliers represented in the ranking has increased by 144%. China also benefited from the addition of three new companies that have made it into the ranking since 2018: the tire manufacturers ZC Rubber and Sailun and the glass manufacturer Fuyao. The difference is even more pronounced in South Korea. With revenue growth of 145%, South Korea has even outperformed the growth of Chinese suppliers, despite nominal GDP growth of just 5%. Here too, new market entrants, most of which produce new technologies for the automotive industry, contributed to revenue growth. With SK on, Samsung SDI, and LG Energy Solution, three of the Korean newcomers are battery manufacturers. The fact that new technologies in the automotive industry have experienced high growth rates in recent years is also impressively demonstrated by the example of the Netherlands. As in 2018, NXP Semiconductors was the only Dutch representative in the ranking of the 100 largest suppliers in 2023. Driven by the high demand for semiconductors in recent years, the semiconductor manufacturer’s revenue growth amounted to 101% from 2018 to 2023, significantly exceeding nominal GDP growth of 27%. Of the established supplier nations – Japan, Germany and the USA – only Japanese companies in the TOP 100 managed to grow faster than nominal GDP, even though there were five fewer Japanese companies in the TOP 100 ranking in 2023 than in 2018. However, the remaining companies were able to generate the same revenue in 2023 as all 28 companies combined in 2018. This places Japan above nominal GDP growth, which has fallen by 11% since 2018, despite stagnating revenue.

DEVELOPMENT OF TOP 100 REVENUE AND NOMINAL GROSS DOMESTIC PRODUCT PER COUNTRY (2018-2023, IN % CUMULATED)

Source: Berylls by AlixPartners, World Bank

Battery and semiconductor producers strong again – tire business weak

In 2023, battery manufacturers were once again among the companies with the highest revenue growth, despite a slump in the growth rate of 40.8 percentage points. While battery manufacturers’ revenue growth was still as high as 64.5% in 2022, it was only 23.7% last year. Market leader CATL in particular was unable to match the growth rate of the previous year and only increased its revenue in euros by 11.4% in 2023, compared to 84.5% in 2022. By contrast, things went much better for the Korean battery suppliers: With revenue growth of 62.8%, SK on recorded the highest growth of all suppliers in the TOP 100, followed by LG Energy Solution with 40.1%. Samsung SDI, the last of the three Korean battery manufacturers in the ranking, also managed to secure a place among the five growth champions with 34.6%.

However, the times of rapid growth seem to be coming to an end for the time being. In the fourth quarter 2023, the battery manufacturers included in the ranking all had to contend with weak demand. CATL, for example, recorded a 10.6% drop in revenue year on year. However, all other battery manufacturers that made it into this year’s TOP 100 also experienced a year-on-year decline in revenue in the final quarter of 2023. For battery manufacturers, the declining growth rate is an alarm signal, because driven by high subsidies, manufacturers have expanded their capacities to such a degree in recent years that 268% of global demand was covered in 2023 and battery manufacturers’ plants were theoretically only operating at 37% capacity. The consequence of overcapacity is a price war between manufacturers, which is already having an impact on margins. For example, LG Energy Solution’s margin fell from 6% in the third quarter 2023 to 0% in the fourth quarter and is thus dangerously close to reporting a loss. The margins of battery manufacturers are also expected to remain under pressure in the coming years, as high subsidies will continue to be paid for the construction of battery production facilities, despite the existing overcapacity. Demand is therefore not expected to have caught up with capacity in such a way that manufacturers will at least come close to achieving their target capacity utilization of 80% until 2040.

FORECAST OF EV BATTERY DEMAND AND PRODUCTION CAPACITY (in Gwh)

Assumptions: 80% of total capacity is used for EV; CAGR production capacity 8% from 2030, based on growth 2027-2030

Source: Berylls by AlixPartners

In addition to the battery producers, semiconductor manufacturers also saw above-average revenue growth once again. ST Micro, Onsemi, and Infineon all recorded growth of over 15%. Moreover, semiconductor manufacturers were able to increase their revenue-weighted margin by 3.6 percentage points to 31%. Thus semiconductor manufacturers once again recorded the highest absolute margin growth in 2023, even though their revenue-weighted margin of 27.4% in 2022 was already well above the TOP 100 average of 5.2%. However, the average growth of semiconductor manufacturers in the TOP 100 ranking fell substantially from 48.7% in 2022 to 13% in 2023. There are three main reasons for this decline in growth.

Firstly, car manufacturers already built up large inventories of chips in 2022 for fear of further shortages, thus significantly boosting demand in 2022. Secondly, other semiconductor manufacturers that mainly produced for the consumer goods industry have also taken note of the high demand for semiconductors in the automotive industry and now become serious competitors to the suppliers represented in the TOP 100. Qualcomm, the American industry giant for smartphone chips, was able to increase its revenue in the automotive sector by 24.1% to EUR 1.73 billion in the 2023 fiscal year. If growth remains at the same level, Qualcomm, which is theoretically in 133rd place in the ranking today, would make it into the top 100 automotive suppliers within the next three years. Most recently, the lower-than-expected demand for EVs was responsible for the decline in the growth rate, as vehicles with electric drivetrains contain up to three times as many semiconductors as conventional vehicles with combustion engines.

The only product group that did not benefit from the growth in vehicle sales was tires. Tire manufacturers recorded a 1.9% decline in revenue in 2023 due to a slump in the tire replacement business, while the revenue-weighted margin rose by an average of 0.2 percentage points, which is significantly weaker than the revenue-weighted margin of the TOP 100. The slump in the replacement tire market, which is responsible for around 80% of tire manufacturers’ revenue, primarily affected European and American producers. Revenue fell by 8% in the USA and by as much as 12% in Europe. Goodyear’s revenue dropped by 5.3%, Michelin lost 0.9%. Although Continental managed to grow its overall automotive revenue by more than 5%, figures in the tire business fell by 0.3%. The only European tire manufacturer not to record a decline in revenue was Pirelli, with growth of 0.5%. Pirelli is also the only one of the four tire manufacturers mentioned with an increase in margin. The only Asian tire manufacturer that did not manage to improve its margin was Bridgestone. The remaining five Asian tire manufacturers all recorded significant margin growth. Hankook Tires reported the largest increase with a rise of 6.4 percentage points year on year. Tougher competition, particularly from Asia, is compelling European and American tire manufacturers to continue cutting their costs. Germany as an industrial location is suffering the most: in 2023, four closures of Michelin and Goodyear sites were announced – one third of all existing tire plants in the country.

Outlook

In the dynamic world of the automotive industry, suppliers are faced with some groundbreaking challenges. A clear market strategy for dealing with China is essential, as competition from that country is increasing noticeably across all product groups. However, the Chinese market not only offers competition, but also significant opportunities, as the demand for supplier products there is likely to increase dramatically with the rise of Chinese OEMs.

A critical review of the portfolio strategy is also required. Despite the undisputed importance of electric mobility as a technology of the future, the optimum time for a complete switchover is still unclear. If growth rates for EVs continue to fall, investments in electrified vehicle portfolios must be carefully considered and adjustments made if necessary. Furthermore, suppliers need to show flexibility to be able to respond to short-term volume changes by manufacturers between EVs and ICEs.

Authors
Dr. Alexander Timmer

Partner

Dr. Jürgen Simon

Associate Partner

Gereon Heitmann

Senior Consultant

Simon Flierl

Consultant

Dr. Alexander Timmer

Dr. Alexander Timmer (1981) joined Berylls by AlixPartners (formerly Berylls Strategy Advisors), an international strategy consultancy specializing in the automotive industry, as a partner in May 2021. He is an expert in market entry and growth strategies, M&A and can look back on many years of experience in the operations environment. Dr. Alexander Timmer has been advising automotive manufacturers and suppliers in a global context since 2012. He has in-depth expert knowledge in the areas of portfolio planning, development and production. His other areas of expertise include digitalization and the complex of topics surrounding electromobility.
Prior to joining Berylls Strategy Advisors, he worked for Booz & Company and PwC Strategy&, among others, as a member of the management team in North America, Asia and Europe.
After studying mechanical engineering at RWTH Aachen University and Chalmers University in Gothenburg, he earned his doctorate in manufacturing technologies at the Machine Tool Laboratory of RWTH Aachen University.

Dr. Jürgen Simon

Dr. Juergen Simon (1986) is Associate Partner at Berylls by AlixPartners (formerly Berylls Strategy Advisors), an international strategy consultancy specializing in the automotive industry. He is an expert in sales and corporate strategies as well as M&A and can look back on many years of consulting experience.
Dr. Juergen Simon has been advising automotive manufacturers and suppliers since 2011 and has in-depth expert knowledge in the areas of holistic strategy development, business models and commercial due diligence. He also focuses on market entry strategies and topics related to the “Software Defined Vehicle”.
Prior to joining Berylls Strategy Advisors, he worked as senior consultant at the Droege Group, a consulting and investment firm.
As a graduate economist from the University of Hohenheim, he completed his doctorate at the Institute of Management at the Karlsruhe Institute of Technology (KIT) before joining Berylls.