Automakers' profit margins continued to outpace their suppliers in the first quarter, but there are signs of tougher times ahead.
Automakers' profit margins continue to be higher than suppliers'.
Volatility has become the norm for the automotive industry, upsetting traditional margin dynamics. For the 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 major supply chain disruptions with the Covid-19 pandemic and global chip shortages, higher raw material and energy prices, and now rising borrowing costs and wage bills due to inflation. Automotive OEMs were able to weather the supply crunch by focusing production on the highest margin models and raising prices, but suppliers had no such strategic options.
Here are some key takeaways from the first quarter of 2024:
OEMs had an average profit margin of 7.8% in the first quarter, a slight decrease compared to the average of 8.5% in 2023. Suppliers remained stable with an average margin of 5.6%. This marks the 13th consecutive quarter in which OEM margins exceeded those of their suppliers. Although average OEM profitability remained high in the first quarter, margins declined for nearly two-thirds of OEMs, indicating softening customer demand and increasing pressure on prices. OEM margins are likely to be squeezed in 2024 and beyond due to persistent inflation and high interest rates, which are causing demand to decline, costs to rise and prices to fall. In addition, growing uncertainty about the pace of electric vehicle (EV) adoption will likely force OEMs to shoulder the dual burden of producing both internal combustion engine vehicles and EVs for an extended period. Many OEMs have already announced efficiency and performance improvement programs, including material cost reductions, which will put additional pressure on suppliers.
The challenge for suppliers is twofold: They are still suffering from high input costs (even though material costs have come down from all-time highs), while OEMs are further increasing cost pressure. A growing number of suppliers are facing liquidity issues that will require specialized support, including from OEMs, to avoid bankruptcy.