The global auto parts industry

Challenges in the Global Auto Parts Sector

Although on the surface performance appears to be solid, the global auto parts sector faces greater challenges than the majority of people understand. A record 88 million vehicles were sold globally in 2016, an increase of 4.8 percent from the year before. Additionally, suppliers’ and automakers’ profit margins are at a 10-year high. The industry appears to be in serious peril, though, when the performance metrics are examined in more detail.

Return on Invested Capital (ROIC)

Under the guise of return on invested capital, the top 10 automakers, commonly referred to as OEMs (original equipment manufacturers), generated a meager 4 percent in returns in 2016, which is roughly equal to the cost of capital for the sector. The leading 100 suppliers have done a bit better though having just beaten their costs of capital to enjoy a small positive return after several years of negative net returns.

Outweighing Positive Sales and Earnings Results

These numbers are almost outweighing the positive sales and earnings results. They portray a picture of a sector that is a less lucrative or less attractive place to invest than other industries. This assessment establishes that there will be relatively few winners in the auto parts industry during the next five years and beyond. Those that do stand out will be the companies that harness their already limited capital resources in ways that are creative to navigate through a still-unfolding and unfamiliar landscape.

Rates of Return on Capital

Rates of return on capital have been a problem prevalent in the auto parts industry for years which is one reason for the many near liquidations or bankruptcies among automakers particularly in the past decade or so. Automotive companies that are still surviving have famously bent over backward to save pennies on every component or car they make. The situation is, however, becoming direr as the cost of capital is unlikely to go down from its already low inflation-adjusted levels, and new capital outlays are rising for advances in other areas like the connected car and autonomous driving technology.

Innovative Developments and Challenges

Innovative developments in software may make tomorrow’s vehicles exceptionally expensive. Automakers and suppliers must earmark resources for recruiting experienced technical talent and acquiring new technology. Majority of the new features going into cars require the expertise of software engineers who prefer the purportedly more dynamic environments of Silicon Valley startups to those of the automobile industry. As a result, some of the recent acquisitions and mergers in the motor vehicle sector were undertaken to increase in-house technical capabilities and knowledge. For instance, ZF Group German supplier paid $12.4 billion to acquire TRW in 2015 to expand into the connectivity, and electronic safety market took a 40 percent stake in-vehicle radar supplier called Ibeo Automotive Systems in 2016.

Reshaping Structures and Relationships

Innovation-related challenges are reshaping traditional auto parts industry structures and relationships and in particular by threatening the existing distribution of boundaries and profits between automakers and tech companies. Tech companies like Google Inc. and Apple Inc. are looking for ways to get their technologies into cars. Some suppliers will fold as their business goes away completely while others will struggle because changes in technology content will bring automakers or non-automotive suppliers as new competitors into their markets (Automotive Parts & Accessories Stores, 2017).

Solutions for Improving ROIC

There is no easy formula that automakers or suppliers can use to improve their return on capital; although the solution will come from a combination of actions. Parts of the solution lie in consolidation which minimizes the capital requirement for the industry by eliminating competition and combining manufacturing and design footprints into one. However, consolidation is not the only solution and not even an attractive resolve for companies struggling to fund innovations. Automakers need to examine diplomatic channels for relief and should take several actions which may include sharing platforms and manufacturing, offloading more development work to technology suppliers and redesigning distribution models.

The Importance of Sharing Platforms and Production

Sharing platforms and production is increasingly becoming a necessary move for the auto parts industry for it to survive. This is because each automaker is building and designing its transmissions, engines, and related equipment giving room to an extraordinary amount of duplication within the industry. This is particularly wasteful because consumers rarely buy cars for the platform, but they focus on attributes such as quality, styling, and reliability. Some automobile companies have already started adopting this but on a little scale. For instance, Nissan has a deal with Daimler to jointly develop the MFA platform that is used on Nissan’s Infiniti QX30 model and Mercedes’ GLA and CLA models. In the U.S. Ford and GM are jointly designing a new ten-speed transmission and in both cases, the companies will expect cost savings particularly in materials and R&D procurement. If automakers expanded their cooperation efforts, the industry would start smart-sizing (Auto Industry trends, automotive market research and automotive SEO & PPC, 2017).

The Consequences of Poor Decisions and Growth

The mushrooming number of automakers and auto parts suppliers in many segments has prompted hasty investments and partnerships in the past. To avoid falling behind competitors, poor decisions have been arrived at instead of maintaining a suitable, logical path for growth. An automaker would hear about a hot market and then immediately go on to establish a plant or distribution arm only to find out that its brands and models were not a good fit for that region. Automakers often deliberate too much energy and money on vehicle components and design that has little impact on the decisions of customers leading to their exit in particular regions like GM is planning to sell its European operations to PSA.

Future Growth and Challenges

Overall, the Auto Parts Industry is expected to grow steadily over the next five years to 2017 as per capita disposable income and demand for auto parts bolstered by corporate profit. Demand for industry products in the short term has grown due to favorable car usage trends. However, advancement in motor vehicle technology has made it increasingly difficult to repair and maintain vehicles without professional help by vehicle owners. As a result, many consumers are rather opting to take their vehicles to auto mechanics instead of purchasing auto parts for individual or do-it-yourself repairs which have threatened the growth of the industry. Industry revenue is expected to grow at the same rate over the five years to 2022. E-commerce car parts sales will reach $8.9 billion in 2017, thus posting a 16 percent increase over 2016. E-commerce sales of car parts are projected to grow by 15 percent in 2017 and 2018. Automotive Aftermarket Association (AASA) expects the total aftermarket to have an annual growth compound rate of 3.6 percent through 2019. Personal consumption of auto parts excluding tires is even better because December 2016 closed with nearly a 3% increase over December 2015 (Auto Industry trends, automotive market research, and automotive SEO & PPC, 2017).

References

Auto Industry trends, automotive market research and automotive SEO & PPC. (2017, February 1). Retrieved from Hedges & Company: http://www.hedgescompany.com

Automotive Parts & Accessories Stores. (2017, July 3). Retrieved from first research: http://www.firstresearch.com

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