Negative sentiment in the European automotive supply industry continues into 2024, and more challenges lie ahead. Demand could decline, bringing uncertainty. That is the overall outcome of the Pulse Check, conducted by McKinsey Research.
Negative sentiment in the European automotive supply industry continues into 2024, and more challenges lie ahead. Demand could decline, bringing uncertainty. That is the overall outcome of the Pulse Check, conducted by McKinsey Research. The Pulse Check is a questionnaire distributed to members of CLEPA, the European automotive suppliers, and is conducted twice a year. McKinsey has listed a number of expectations, challenges and opportunities and some will be discussed in this article.
In 2023, demand for supplier parts remained stable. Currently, that still seems to be the case, however, demand is expected to decline. The cause is twofold. First, the backlog of orders in recent years, caused by the materials crisis, among others, has almost been cleared. Second, growth in demand for EV components is levelling off and projects are being postponed. As one interviewee stated, "variability in volumes, persistently high interest rates and a slowdown in OEM development plans are creating a negative scenario for growth and margins".
Industry's overall forecast in 2024
Besides possibly declining demand, suppliers are struggling to pass on higher operating costs to their customers, the OEMs. This expresses itself in lower profitability. While before the COVID crisis suppliers had higher profit margins than OEMs, this has now been reversed and OEMs are recovering a lot better. All this adds up to negative sentiment and uncertainty among suppliers, which increased in the latest Pulse check in 2024 compared to 2023. Despite the negative sentiment, the majority does expect sales to grow, however, the expectation is more conservative than in previous Pulse checks.
The challenges and opportunities for suppliers
Suppliers were also asked what they now see as the challenges that have the greatest impact on their business. On the operational side, there are difficulties with passing on costs to OEMs, 74% of suppliers indicated this in the top three challenges, up from 52% in 2023. Second comes uncertainty, which increased from 23% to 52%. On the strategic side, there are concerns about marco-economic developments. The EU's competitiveness is declining due to high production costs, relative to other marcos. In addition, there are difficulties with accelerating technology implementations and new OEM requirements. The challenge with reducing emissions is seen as less of a problem, however, reducing emissions in operations remains difficult.
Opportunities lie in strategic decisions and CAPEX management. At the strategic level, suppliers are mainly looking at renegotiations with customers and optimising the technical subject matter of parts, material use and manufacturing. CAPEX management, i.e. managing fixed asset investment, is the least managed expenditure item and contributes directly and significantly to profits. Proven optimisations in CAPEX management with management toolkits can significantly improve capital efficiency and revenue growth.
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