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As volatility has become the norm for the automotive industry, it has upended traditional profit margin dynamics. For two decades leading up to 2019, automotive suppliers’ EBIT margins were on average 1 to 2 percentage points higher than those of original equipment manufacturers (OEMs). Then came massive supply chain disruptions with the Covid-19 pandemic and global chip shortage, plus higher raw material and energy prices, and now rising borrowing costs and wage bills due to inflation. Automotive OEMs were able to ride out the supply shortage by focusing production on the highest-margin models and raising prices, but suppliers had no such strategic options.
We’re tracking the EBIT margins of a set of top OEMs and suppliers worldwide, and each quarter, we’ll publish the latest trends in this dashboard.
Here are some of the key takeaways through the first quarter of 2024:
- OEMs had an average profit margin of 7.8% in the first quarter, down slightly from the 8.5% average in 2023. Meanwhile, suppliers stayed basically flat at 5.6% average profit margin. This marks the 13th straight quarter in which OEM margins have exceeded those of their suppliers.
- Despite average OEM profitability remaining high in the first quarter, margins decreased for about two-thirds of OEMs, indicating softening customer demand and increased pressure on prices. OEM margins will likely get squeezed in 2024 and beyond by persistent inflation and high interest rates causing subdued demand, rising costs, and falling prices. In addition, growing uncertainty around the pace of electric vehicle (EV) adoption will likely force OEMs to shoulder the dual burden of producing both combustion engine vehicles and EVs for an extended period. Many OEMs have already announced efficiency and performance improvement programs, including a reduction of material costs, that will likely put additional pressure on suppliers.
- The challenge for suppliers is two-fold: They’re still suffering from higher input costs (even though material costs have receded from all-time highs) while OEMs increase cost pressure even further. A growing number of suppliers face liquidity challenges that will likely require special support, including from OEMs, to prevent insolvency.
- To prepare for this potential hurricane of external pressures on margins, both OEMs and suppliers have no time to lose to increase the resilience of their business models, enacting more fundamental cost-reduction measures while staying disciplined to maintain price levels.
The authors are grateful for the support Ingo Stein provided to this study.
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First published in giugno 2024