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Risks for Automotive Suppliers Increasing

How Low Can We Go?

Global Automotive Barometer survey of A.T. Kearney and SupplierBusiness reveals severe sales declines, high risks for business disruptions and a lack of sustainable strategies to overcome the crisis.

The opinion of suppliers about the business situation compared to two months ago has deteriorated for North America while more positive opinions are expressed for Europe according to a new survey conducted by SupplierBusiness and global management consulting firm A.T. Kearney. The business situation in NAFTA countries is viewed as dire, with little hope for short- and mid-term recovery. The European outlook is slightly less troubled. However, the threat of bankruptcies is seen higher than ever but sustainable solutions yet to be found. Only for Asian markets there is a relatively high degree of optimism that business will bounce back soon.

Over 90% of suppliers are expecting revenues to fall in 2009 against 2008; about two thirds expect rates of more than 20%. 44% of NAFTA based suppliers expect a revenue decrease of over 30%, also 34% of European based suppliers assuming the same for this year.

The change in business climate over the past two months is equally up and down amongst suppliers, while NAFTA based and small suppliers see more downs than Europe based and large suppliers: 44% of the NAFTA based respondents perceive the market situation as worse than two months ago, while only 30% of EU based respondents perceive it as being worse than two months ago. On the other side, 32% each of NAFTA and EU based suppliers perceive the business situation as being better than two months ago. Small suppliers report a deteriorated business situation more intensively than large ones: 44% of suppliers with sales below US$ 250 mil. have a more negative view about the business situation while only 29% of suppliers with sales of more than US$ 250 mil. have a more negative view.

Despite the negative current situation, the survey also shows some optimism for the Asian and European markets: a solid majority of respondents see Asia back in 2010/11 and Europe in 2011/12 compared with 2007 levels. A similar majority sees the US market back in 2013, while 14% see the US market even to recover as late as 2015!

"The perception of suppliers reflects very well the large insecurity that is currently visible on the American market", says Edmund Chew, Managing Editor of SupplierBusiness. "The future competitive OEM landscape cannot be precisely foreseen for the American market. The situation for the European and Asian OEMs is different: although they are also hit by the sales drop, they are given higher chances to manage the crisis and stay in business."

"Our survey confirms the severe business downturns for almost all suppliers but identifies signals of recovery, at least for some of the players. The impact of the crisis and the vulnerability of the automotive suppliers obviously strongly depend on the individual situation of each supplier", says Martin Haubensak, Partner of the Global Automotive Practice at A.T. Kearney: "However, we see an increased risk of bankruptcies and insolvencies regardless of size or type of company."

Half of the respondents consider more than 15% of their suppliers as endangered. Over 90% of survey participants believe there will be more bankruptcies amongst suppliers in the future than in the past. Over 85% of Tier-2 suppliers believe that some of their Tier-1 customers will economically fail in the next 12 months. On top, nearly 85% of American and 70% of European suppliers expect some of their OEM customers to fail also within the next 12 months.

Half of the suppliers consider such economic failures as a threat to the existence of their own business, with a more pessimistic view of US based vs. EU based ones and smaller suppliers vs. larger suppliers. "Although there are signals of recovery for some suppliers, OEMs and Tier-1's have to closely monitor the market and apply effective risk management tools to identify critical companies within their customer and supply base", says Martin Haubensak.

However, more than half of the suppliers have not yet even considered helping out their own distressed suppliers. Conversely, about a third of suppliers report that OEMs extended already long payment terms by additional 20 days or more, and over half of Tier-2 suppliers note deteriorating payment terms from their Tier-1 customers compared to last year.

"Overall, this industry seems to be in a state of shock and working from day to day. The facts and threats are clearly articulated and seem fully shared amongst all parties, but the lack of sustainable solutions is a concern. OEMs and large Tier-1's need to develop their future supply base and make targeted investments in strategic partners they want to rely on in the future - or develop new business models." says Martin Haubensak.

A signal in this direction was given through the question how companies master the crisis where more than half of the respondents answered "Enter new business outside of Automotive" as most likely measure. This answer is followed by downsizing the business and shifting capacities to other regions.

The Global Automotive Barometer Survey reflects the current situation very well: besides the sales drop, the market is characterised by a high level of insecurity resulting from the unclear future of the American OEMs. Many suppliers fear taking investment decisions and show a "wait-and-see" mentality. "It is getting time that the industry players develop strategies for their sustainable restructuring", concludes Martin Haubensak.