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On July 30, foreign media reported that Recaro Automotive, a traditional German car seat manufacturer that supplies seats to well-known car manufacturers such as BMW and Mercedes-Benz, was insolvent and filed for bankruptcy.

In the first half of 2024, about 20 German automotive parts suppliers with annual turnover exceeding 10 million euros filed for bankruptcy, an increase of 60% over the same period last year. This data comes from Falkensteg, a consulting firm specializing in industrial bankruptcy restructuring in Germany.

Prior to this, several leading German auto parts suppliers had already started layoffs. Earlier this year, Bosch Group and ZF announced plans to reduce their workforce in Germany, with tens of thousands of jobs to be cut in the next few years.

On the other hand, in China, which is actively promoting the electrification of automobiles, the survival status of auto parts companies is "mixed". With the development of the industry, a number of auto parts companies have risen rapidly and achieved performance growth. According to Oriental Fortune Choice data, as of July 24, 70% of A-share auto parts listed companies that disclosed their performance forecasts for the first half of 2024 achieved positive performance forecasts (including expected increase, slight increase, and turnaround).

But at the same time, the huge pressure of "price war" and "cost reduction" in the automotive industry has spread to the upstream and downstream of the automotive industry chain. The increasing demand for cost reduction, shortened development cycle, and extended payment cycle are becoming new challenges facing automotive suppliers.

Traditional automobile powerhouses are experiencing transformation pains

Germany was once fertile ground for the global automotive industry. Automobiles and parts, machinery and equipment, and electrical products have always been the advantageous categories in Germany's foreign trade.

Image credit: Recaro Automotive

Recaro Automotive was once a world-leading car seat manufacturer and has been focusing on this field since it transformed into seat production in 1963. The company, which produces ergonomic and sports-style seats for well-known automakers such as Aston Martin, BMW, Ford, Lamborghini, and Mercedes-Benz, did not explain the reasons for its bankruptcy. Some insiders believe that the single business and dependence on a small number of customers may be key risk factors.

Data shows that Germany produced 4.1 million vehicles in 2023, compared with 4.7 million in 2019 before the epidemic. At its peak in 2016, Germany produced 5.7 million vehicles.

French automotive parts supplier Plastic Omnium Group said that due to the fact that the demand for electric vehicles has not met expectations, coupled with factors such as regulatory uncertainty and high costs, potential buyers are hesitant. As a result, many automakers have reviewed and launched their development plans for internal combustion engine vehicles. Currently, the production of electric vehicles in the United States, Germany and France is 40% to 45% lower than expected.

In the context of reducing costs and increasing efficiency, foreign auto parts giants such as Bosch, ZF, and Continental have all reported layoffs. According to AFP on July 28, German auto parts giant ZF Group will lay off about 14,000 employees in the next few years. The company said the move was to cope with the rapid changes in the automotive industry, especially in the field of electrification. ZF plans to gradually reduce the number of domestic employees by 2028, with the ultimate goal of reducing 11,000 to 14,000 jobs, accounting for about a quarter of the total number of 54,000 employees.

ZF CEO Dr. Holger Klein said that although this is a difficult decision, it is a necessary move to ensure that the company remains competitive in the fierce market competition. He believes that the restructuring will enhance ZF's competitiveness and consolidate its position as one of the world's largest parts suppliers.

In fact, the wave of layoffs in parts companies has already appeared in 2023. In the German region, in November 2023, Continental announced that it hopes to make its troubled automotive supply department profitable again by laying off thousands of employees; Bosch plans to lay off 1,200 employees by 2026, including 950 in Germany.

Parts companies involved in the "cost reduction" competition

Although China is a pioneer in the transformation to electrification, the profit margins of the entire automotive industry chain are being squeezed amid the "involution" of the domestic auto market, and the situations of domestic auto parts suppliers are also different.

In order to cope with the fierce market competition, the demand for cost reduction by automakers is still advancing. Recently, Chery Automobile issued 14-dimensional cost reduction measures internally, and simultaneously required suppliers to follow up, including design optimization to reduce the number of parts, use of integrated parts, reduce unnecessary processing and transportation, improve the qualification rate, use of new technologies, new materials and new processes, and management of suppliers from only first-tier suppliers to second-tier and third-tier suppliers, vertical integration, etc. It should be pointed out that Chery Automobile requires in the document that cost reduction cannot relax the requirements for quality.

Generally speaking, suppliers can reduce costs for automakers by 3%-5% each year after reaching a certain production scale. However, at the beginning of 2024, several Chinese auto brands proposed at the supplier conference to reduce the purchase price of parts by 20%.

In March this year, Taizeng Consulting, together with Chery Automobile and a well-known central control display supplier, held a joint VE results conference. Relevant information shows that in a cost reduction project for the central control display of a series of Chery models, Taizeng Consulting achieved significant cost reduction through TD and VE activities, and ultimately reduced costs by 33%.

At present, parts companies that mainly rely on joint venture brands are facing shrinking orders and pressure to reduce costs; while parts companies that mainly rely on domestic brands are constantly breaking through the upper limit of operating income, but are facing the situation of increasingly long customer collection cycles.

A parts company revealed that the current payment model of the automotive industry supply chain is basically "payment after the car is loaded." In other words, suppliers will not get paid when they deliver the parts to the car company's assembly workshop, but "begin to pay" when the parts are loaded on the car. However, this does not mean that you can receive a bank transfer or remittance immediately, but that the company can get an "acceptance bill" and then need to go to the bank for settlement. "Car companies give acceptance bills every six months, and the settlement of acceptance bills takes another six months." The above-mentioned person said helplessly, "These are all fine when there is profit, but now the profit is too thin, and the company is under great pressure."

By the end of 2023, a new car manufacturer will need 221 days to fulfill its obligations to suppliers and related parties. Previously, this period was 179 days. At the same time, the cost reduction cycle is also being compressed. Some suppliers said that the cost reduction cycle was previously measured in years, but now it has been shortened to quarters or even months.

At the 2024 China Automotive Forum, Xin Guobin, Vice Minister of the Ministry of Industry and Information Technology, mentioned that disorderly competition has led to an increase in arrears between companies, affecting and impacting the stability of the industrial chain and supply chain. Li Shufu, Chairman of Geely Holding Group, said at the recent China Automotive Chongqing Forum: "The result of the involutionary price war is cutting corners, counterfeiting and selling fakes, and disorderly competition that is not in compliance with regulations." Yin Tongyue, Secretary of the Party Committee and Chairman of Chery Holding Group, also said recently: "'Price war' means reducing costs and reducing suppliers' prices. When suppliers' prices drop to a certain limit, they will sacrifice quality."

According to the data from the National Bureau of Statistics, the profit margin of my country's automobile industry from January to June 2024 is 5.0%, which is lower than in previous years. The data shows that the current profit margins of the automobile industry from 2017 to 2023 are 7.8%, 7.3%, 6.3%, 6.2%, 6.1%, 5.7% and 5.0% respectively.

Parts companies are generally facing challenges such as shortened development cycles, reduced costs, and longer payment cycles. In order to retain customers, they have to engage in a "cost reduction" competition.

Finding opportunities amidst pressure

It is an indisputable fact that the pressure on the upstream and downstream of the automotive industry chain is increasing, but with the rise of China's electric vehicle market, it has indeed brought development opportunities to Chinese parts suppliers.

"The automotive industry has entered a big cycle of reducing costs and increasing efficiency. Industry competition has become fierce, and internal competition has even spread to Tier 1 and chip companies. The entire industry is discussing how to provide differentiated, competitive, and cost-effective autonomous driving solutions to automakers." Qiu Xiaoxin, founder, chairman and CEO of Aixin Yuanzhi, believes that the rise of China's smart electric vehicles has brought development opportunities for Chinese chip companies. "Car manufacturers are willing and dare to use domestic chips, so there is no reason why domestic chips should not develop."

In the field of power batteries, Chinese companies have seized the market opportunity. The latest data released by the China Automotive Power Battery Industry Innovation Alliance shows that in the first half of this year, the cumulative sales volume of domestic power batteries was 318.1GWh, a year-on-year increase of 26.6%; CATL ranked first with an installed capacity of 93.31GWh, with a market share of 46.38%, a year-on-year increase of 2.97%.

According to the Choice data of Oriental Wealth, as of July 24, according to the industry classification of Shenyin Wanguo, a total of 82 A-share listed auto parts companies disclosed their performance forecasts for the first half of 2024. Among them, 58 companies had positive performance forecasts (including expected increase, slight increase, and turnaround), accounting for about 70%.

Among the listed auto parts companies that have released their performance forecasts or performance reports for the first half of 2024, companies that mainly engage in new energy auto parts businesses such as automotive electronics, electric drive motors, lightweight and structural parts generally achieved profit growth. Auto exports have also become one of the important factors boosting performance.

Roland Berger predicts that by 2025, the global automotive parts industry's overall revenue will exceed 1.25 trillion euros. The main driving force for growth will come from emerging businesses, namely the rapid development of electric drive systems, "autonomous driving + driving assistance" systems and vehicle networking. These three businesses will grow at an average annual rate of 30%; in contrast, the average annual growth rate of traditional businesses is only 1%.

Faced with the huge changes in the industry, German auto parts giants have also started transformation. Bosch has established the Intelligent Driving and Control Systems Division to adjust and reorganize its automotive and intelligent transportation technology businesses. Continental will reorganize its smart travel business area, and even semiconductor supplier Infineon will focus on the digitalization of the automotive field to bring new profit growth.

The automotive industry chain is long and covers a wide range. The industry's development is a win-win situation for all. Traditional fuel vehicles have been developed for more than a hundred years, while new energy vehicles have only been developed for more than a decade. The Chinese automotive industry has seized the opportunity of electrification and intelligent transformation, but how to improve the profitability of the new energy vehicle industry chain is a problem that must be faced.

Author: Liu Shanshan

Editor: Zheng Yu