Automotive Supplier Profit Margins Hit Recession Levels
29 June 1998
Automotive Supplier Profit Margins Hit Recession Levels, Says The Automotive Consulting Group, Inc.
ANN ARBOR, Mich., June 29 -- Automotive suppliers business
performance is declining despite rising sales and gross profits, according to
a study conducted by The Automotive Consulting Group, Inc. (ACG), Ann Arbor,
Mich.
The study looked at business performance among 51 publicly traded
automotive suppliers for the period 1992 to 1997.
"Since reaching a peak of 8.2 percent in 1995, automotive suppliers gross
profit margins have eroded to 1992 recession levels of 6.5 percent," said
Dennis Virag, president of ACG. Other indicators such as return on assets,
debt to assets, and cost of goods sold also depict declining business
performance within the supplier sector of the automotive industry, he said.
The findings could spell trouble ahead for vehicle manufacturers,
according to Virag.
"With low business performance, the vast majority of automotive suppliers
might be unable to invest in new product and process technology," Virag said.
"Other problems could also arise if vehicle sales begin to decline. With debt
levels at record highs, some suppliers might be unable to support their
current debt load."
Component, material, sub-system and system suppliers to the automotive
industry are under tremendous pressure to increase engineering support,
product development, global capabilities and warranty assumption, while at the
same time meeting tough target costs and continuous improvement requirements,
Virag said.
These new responsibilities require suppliers to develop new core
competencies in program management, international management, global
procurement, activity based management, and integrated supply based
management. Those companies developing these core competencies have
flourished, he said.
"While we found automotive suppliers in general are really struggling, our
analysis shows that best-in-class high performance companies have managed to
accelerate the learning curve to achieve superior results," Virag said. "The
top performing companies show significantly better performance and consistency
since the restructuring of the supply base began. Essentially, these
companies have the ability to react quickly and effectively to change."
ACG describes the performance gap between high performers and low performers
as the Lopez Effect, named after GM's infamous purchasing czar. After
presenting his mandates for lower-cost systems or modules, high performance
companies reacted in a systematic manner to improve internal operations,
manage strategic acquisitions, and leverage the knowledge of their suppliers.
Low performance companies merely reacted without the proper systems and skills
to manage the changes necessary to meet the new demands and responsibilities.
The difference in results is significant. In 1997, high performance companies
had earnings before income tax (EBIT) of 13 percent with cost of goods sold
(COGS) at 73 percent. In comparison, low performers had EBIT of 3 percent and
COGS at 82 percent.
"Our analysis shows the best-in-class companies manage costs and assets
significantly better than their competitors," said Hiro Mori, ACG's Japanese
Business Practice Manager. "They've read the book on lean manufacturing, and
they continue to innovate and meet the expectations of the OEMs. Other
suppliers will have to work really hard to catch up to them."
About The Automotive Consulting Group, Inc.
The Automotive Consulting Group is recognized as a leading management
consulting firm serving the global automotive industry. Specializing in
strategic business, market and technology planning, the company helps clients
through a combination of project consulting, industry analysis and management
support. ACG is located in Ann Arbor, Michigan. Its Internet address is
http://www.autoconsulting.com. ACG can be contacted through email at
acg@autoconsulting.com, as well as by phone at 734-971-1110, or by fax at
734-971-1451.