Volatility has become the norm for the auto industry, upending traditional profit margin dynamics.
At Bain & Company we’ve been tracking the EBIT margin of a set of leading manufacturers and suppliers around the world. Here are some key data for Q4 2022:
- Original equipment manufacturers (OEMs) had an average profit margin of 8.5% in the fourth quarter, which was 3 percentage points higher than automotive suppliers. This was primarily due to better product mix from manufacturers and lower discounts passed on to end customers.
- The gap between the profit margins of manufacturers and suppliers has widened throughout 2021 and 2022. This has been caused by massive supply chain disruptions caused by the pandemic, global semiconductor shortages, war in Ukraine and other riots. Margin differentials widened in the fourth quarter, as OEMs regained the high margin levels of the first half of the year, while vendors remained stable at around 5%.
- Suppliers are faced with rising material and energy costs, which can only be partially passed on to manufacturers. In addition, more and more providers are facing liquidity problems, which will require special support, including from manufacturers, to avoid bankruptcy.
- Despite the high profitability of manufacturers in 2022, we expect them to face difficulties in the years to come. A slowdown in global economic conditions, which will lead to lower demand, higher input costs and falling prices, will put pressure on manufacturers’ margins in 2023.
Bain & Company recommends that, to prepare for these potential external margin pressures, manufacturers should increase the flexibility of their business models by implementing comprehensive cost reduction measures while trying to maintain price levels.
Keep in mind that during the two decades leading up to 2019, automotive suppliers’ EBIT margins were on average 1 to 2 percentage points higher than original equipment manufacturers (OEMs). But with the Covid-19 pandemic came massive supply chain disruptions and global chip shortages, along with rising raw material and energy prices. To all this, we must now add the cost of borrowing and increase in wages due to inflation. Automakers were able to avoid supply shortages by concentrating production on higher-margin models and raising prices, but suppliers had no such strategic option.