New "Global Automotive Barometer" report from A.T. Kearney and SupplierBusiness indicates rebound of global automotive supplier industry in 2010. Market success in China is of increasing importance.
The outlook for the global automotive supplier industry looks much more favorable than a few months ago. Following the significant business downturn in 2009, more than 90% of suppliers surveyed now expect a more positive business climate than last year. Three quarters of participants questioned foresee double-digit business growth. This market assessment is the result of the latest "Global Automotive Barometer" study undertaken by A.T. Kearney and SupplierBusiness, in which about 200 executives from global automotive suppliers took part at the end of March 2010. Growth prospects for suppliers are predominantly seen in China. As a consequence, the establishment of local capacities in China - not only for manufacturing but also for new product engineering - is set to be increasingly important, according to the survey. On the other hand, suppliers are also aware of barriers to market entry and growth in China. Competition is perceived as being more intense than in the respective home markets, while labor costs are expected to rise significantly and the majority of suppliers see weaknesses in the infrastructure and in legal protection.
"Whereas at end of last year growth expectations for 2010 were quite modest, the majority of automotive suppliers now view prospects for the next 12 months more positively. The majority of participants in the survey are even envisaging double-digit growth in 2010. Only 4% expect a negative business climate this year. This appraisal is supported by an anticipated increase in order receipts in the current year," says Martin Haubensak, Partner of the Global Automotive Practice at A.T. Kearney.
Less financial distress - growth back in focus
Expectations with regard to supplier insolvencies are also changing: while one year ago most participants in the "Global Automotive Barometer" survey foresaw an increase in insolvencies, only one third are of that opinion this time. More than one third even expect a decrease in financial distress.
However, the skeptical view of suppliers regarding the stability of automotive OEMs remains unchanged. Most suppliers still expect some of their OEM customers to fail economically over the next three years.
"It is evident that suppliers are again preparing for growth. The majority of suppliers surveyed confirm that they are investing in new fields of business as well as in regional expansion," says Haubensak. Large-scale acquisitions do not seem to be on the agenda of suppliers - this was not the case before the crisis. For example, less than 20% of participants questioned are currently considering acquisition of competitors.
Despite the positive signals regarding the overall development of the industry, one bitter pill remains, as some suppliers report a deterioration in payment terms, while only very few expect an improvement in payment terms.
China: driving force of growth
Developing Asian markets, particularly China and India, are expected to remain the driving force of industry growth. Two thirds of respondents expect a further increase in the importance of China for their business. Accordingly, they regard it as increasingly important to establish local manufacturing capacities in China, both to supply the Chinese market and to serve as a global export hub. Moreover, while application engineering has already been established in China by the vast majority, participants in the survey now consider the localization of core product development in China to be increasingly important for the future.
"The dynamic development of China is a major opportunity for most suppliers. The challenges, on the other hand, should not be underestimated," says Jian Sun, Partner and leader of the A.T. Kearney Asia-Pacific automotive practice.
The intensity of competition in China is already perceived to be higher than in the respective home markets of participants in the survey. They expect that by 2015 local Chinese suppliers will be the key competitors in China rather than international suppliers with a presence in China. "Looking at the expected wave of consolidation of Chinese suppliers and taking into account the then even stronger business entities, competition will clearly intensify further in China," according to Sun.
"The complex industry structure in China, with private and state-owned OEMs and foreign brands with multiple joint ventures, all with different buying criteria, also presents challenges to suppliers", remarks Dr. Stephen Dyer, Principal in A.T. Kearney's Greater China automotive practice. Supplier executives surveyed indicated a preference for working in China with European and U.S. joint venture OEMs in the short term but recognize the long term benefits of working with Asian and local Chinese OEMs. "Suppliers expect future winners among the Chinese OEMs to be those who adopt extensive platform sharing strategies across vehicle models, shift to a true "pull" manufacturing approach, and establish overseas assembly operations rather than simply trying to export complete vehicles", says Dyer.
In the final analysis, suppliers need to examine carefully the business environment to derive a suitable market strategy for China. Based on the survey results, suppliers should take into account the following key challenges in China: increasing labor costs, unreliable infrastructure, e.g. energy supply and transportation of goods, and limited legal protection. The main positive aspects on the other hand are: high workforce availability, proximity to higher education, and good availability of raw materials.
"Bottom line, the opportunities clearly outweigh the risks. The road to success, however, needs to be built carefully," adds Haubensak.
About the Global Automotive Barometer Survey
The Global Automotive Barometer Survey by A.T. Kearney and SupplierBusiness is an indicator of how suppliers are assessing the current economic crisis and how the crisis has impacted their way of doing business. The surveys conducted since May 2009 focus on reviewing 2009 and giving an outlook for the year 2010 and beyond. About 200 executive respondents from across the global automotive supplier industry participated in the latest study. 83 percent of those surveyed classified themselves as either Tier-1 or Tier-2 suppliers. The survey was conducted globally with respondents representing mainly Europe, NAFTA and Asia. This March 2010 study was also supported by Gasgoo.com as the China survey partner.
About A.T. Kearney
A.T. Kearney is a global management consulting firm that uses strategic insight, tailored solutions and a collaborative working style to help clients achieve sustainable results. Since 1926, we have been trusted advisors on CEO-agenda issues to the world's leading corporations across all major industries. A.T. Kearney's offices are located in major business centers in more than 35 countries. For more information, please visit www.atkearney.com.
About SupplierBusiness
SupplierBusiness is a business research company focused on automotive supply base issues. SupplierBusiness provides the most comprehensive coverage of the global automotive supplier community, adding between twenty and thirty original stories to the archives on developments every week. All editorial coverage is originally researched by SupplierBusiness. In addition to news-based subscription products, SupplierBusiness also publishes and compiles reports and databases on the global supply base. For more information, please visit www.supplierbusiness.com.
