The energy crisis, skyrocketing raw material prices, disrupted supply chains and a chronic shortage of skilled workers are presenting the German automotive and supplier industry with unprecedented challenges. Small and medium-sized suppliers specializing in combustion engine drive components, chassis and C-parts in particular must fear for their future. enomyc authors Wolfram Hackbarth and Christian Zeller explain what lies ahead for SMEs and the best strategies to steer them through the crisis.

Small and medium-sized enterprises (SMEs) are particularly affected by the transformation in the automotive industry. This includes many family-owned businesses that have become increasingly integrated into the supply and value chains of OEMs (original equipment manufacturers) and Tier 1 (system and module suppliers) in recent years.

The future does not look bright for many of these component or parts suppliers (Tier 2 and 3)- They face a toxic mixture of supplier competition that has been escalating for years with inflationary margin erosion, combined with the current framework conditions such as the multiplication of energy costs with simultaneously declining production volumes and declining utilization of production facilities. This is already hanging over companies like Damocles sword.

Add to this the predicted double-digit slump in sales, with the associated drop in sales and earnings, and all the lights are on red. Because if the major manufacturers and their suppliers implement adjustment measures to keep costs and liquidity under control, the downstream suppliers will quickly feel the effects.

Electrification has become a question of existence for many

The backdrop to the crisis is comprised of many various social and political developments. For example, profound changes on the consumer side and continuous weakness in demand had already become apparent before Corona: Whereas around 3.5 million new passenger cars were registered in Germany before the pandemic in 2018, the figure was only around 2.6 million in 2021. The share of diesel and gasoline vehicles decreased by about 35 percent compared to 2020.*

Socio-political shifts have also been making themselves felt by OEMs and their suppliers for some time. Sharp declines in purchasing power, changing attitudes toward mobility plus increasingly stringent emissions regulations are fueling the trend toward fewer and particularly inexpensive cars. In perspective, the overall demand for mobility is likely to change drastically in the coming years. Younger car buyers of Generation Z in particular are unwilling to buy an expensive car just for the sake of owning it. They prefer inexpensive and functional vehicles - or are mobile via car or ride sharing concepts.

Massive job cuts expected in the automotive industry

Falling volumes at OEMs and Tier 1s coupled with rising product variance and highly heterogeneous call-offs are leading to significant overcapacity and underutilized production for suppliers. At the same time, they are experiencing massive productivity losses because plant operators and production personnel are increasingly tied up in non-value-added activities such as frequent changeovers from one product type to another. Additional work and inefficiencies are also created in internal logistics, for example by processing customer orders that are below a standardized quantity and therefore packaging size.

Current "Post Corona" forecasts predict a 20 to 25 percent drop in demand and the elimination of more than 50,000 jobs by 2024 in the four large, high-revenue OEMs Daimler, VW, Audi and BMW. Plant closures and job cuts of a similar magnitude are expected at the five major Tier 1 systems and modules suppliers Bosch, Continental, ZF-Friedrichshafen, Mahle and Schaeffler.


The larger downstream tier 2 and 3 suppliers in particular will also adjust their own personnel capacities as a result of the tight cost situation. It is possible that the next twelve to 24 months will see job losses of 15 to 20 percent for the approximately 800,000 employees currently working in the German automotive industry.

Suppliers focusing on one or two product segments are particularly at risk

In addition to the powertrain, the seven supplier product portfolio pillars are chassis components, active and passive safety systems (e.g. brakes, ABS, air bags, electronic stabilizers & restraint systems), electronics & software, interior, exterior and so-called C-parts such as screws, springs or small parts that are installed in vehicles. Most of the TOP 100 automotive suppliers in Germany manufacture powertrain components (41%), followed by electronic parts (37%) and safety systems (35%).

A closer analysis reveals that around 75% of the TOP 100 automotive suppliers focus on one or two product segments. In particular, suppliers currently active in the largest product segment - powertrain components - are facing major changes and structural disruptions as part of the transformation from internal combustion engine (ICE) technology to more climate-friendly zero emissions vehicles (ZEV). In the worst case, their products, services and support will no longer be needed for the new vehicle generations. As a result, the life cycle of their products will end, and demand will be limited to a small market need and the aftermarket sector. As a rule of thumb, following the end of series production for an assembly or module generation at Tier 1, aftermarket demand is around 1 to 3 percent of series production volumes per year, depending on the product segment and the volume of OEM vehicles in the field.

In practice this means a sharp reduction in VW call-off figures is to be feared in just a few months for automotive suppliers producing, for example, engine cast blocks, transmissions, clutches, injection pumps, starters and alternators as well as brake technology for a Generation VIII Golf. Supplier production sites must be prepared for a phase-out, because the product life cycle will be over in a few years. The fact that the build cycles of the Golf generations in series production (and virtually all OEM platforms) have been significantly shortened over the past two decades from more than eight years to now only five or six years is also having a negative impact.



If you don't find a partner, you can quickly be history

A perspective realignment of suppliers who have focused on the segments of combustion engine drive components and chassis (impending end of product life cycle) and C-parts (low margin) appears difficult. Neither a diversification strategy nor product and service expansion are promising.

In their day-to-day operations, these companies have also always established an individual manufacturing strategy for their products as well as specific machines and equipment in production. The machining and cutting of engines and transmissions or carriers and housings for disc brakes require different machining and assembly equipment than the production of battery cells and e-motors for ZEVs. Survival of these companies is therefore only possible if they react quickly in the current situation.

Sensible options now are therefore strategic partnerships or merging with a financially strong strategic investor from another industry or market segment. Investors are currently very interested in siphoning off experience and know-how from German SMEs, particularly in process and manufacturing technology and large-scale production. In return, financially strong partners are prepared to provide generous liquidity at short notice. In return, the SMEs open up their production and process landscapes. In practice, such partnerships are usually contractually fixed and are a win-win situation for both sides.

A current project at a customer in southern Germany is a good example of how this can be done: The company has been supplying hydraulic valves, turbochargers and air conditioning technology to all major OEMs for more than 40 years. Now, through a market expansion, it has tapped into new customers with its technological know-how, production experience and special knowledge in the mechanical processing of cast aluminum components, assembly and high-pressure testing, namely in the areas of hydrogen drives and alternative drive fluids as well as filtration in the aviation supply industry. This realignment was only possible with massive financial support from an investor, because the company had to finance new machinery and equipment at short notice.

Five tips for the sustainable realignment of business processes in stormy times:

  1. Ensure maximum transparency of your performance management processes. An established practical tool from enomyc for this purpose is the value stream and production system analysis, which transparently maps the current process landscape. This is always particularly helpful when processes need to be adjusted quickly and consistently or when production needs to be completely realigned.

  2. Actively manage time and get to the bottom of problems. Introduce standard times for all performance-related processes in your production and check the actual times. In case of deviations, apply standardized problem-solving tools such as the PDCA cycle or the Ishikawa diagram, or visualize the causes of deviations with the help of Pareto analyses.

  3. Control your performance management processes with the help of KPIs (Key Performance Indicators) such as product throughput times, labor efficiency, on-time delivery, downtime, setup times or even rework rates due to process quality deficiencies. Here enomyc offers with the Q-K-L tool a tool for the safe control of production, logistics and quality based on key performance indicators.

  4. Lead on site and actively in production and organize regular process reviews with your managers in daily operations. This is the only way to ensure that work is actually carried out according to the defined standards. An enomyc checklist will help you get an overview. You will also find out what prevents employees from working according to standards and what reactions or restrictions there may be from direct superiors.

  5. Open up for new products and business areas. For example, if you produce metal and plastic bushings on automatic lathes for a Tier 1 company today, tomorrow you could be an experienced supplier of large series special bushings for swivel joints for construction or agricultural machinery. A good practical tool from enomyc here is the KSS analysis. It structures the competition-differentiating process- and manufacturing-specific differences, analyzes and evaluates them stringently, and derives market opportunities and benchmarks for other business areas and industries.



*Sources: KBA (German Federal Motor Transport Authority), annual reports, quarterly reports, ad hoc news, press releases (as of Aug. 1, 2022), Meyer Industry Research, Deloitte, FalkenSteg, Roland

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