Top 100 Suppliers: "China Is Catching Up"
Jan Dannenberg, Partner, and Tobias Keil, Principal at Berylls Strategy Advisors, in an interview, talk about China's top suppliers, future areas like electromobility and investments in new battery cell technologies.
Mr. Dannenberg, Mr. Keil, in recent years, the major German suppliers have always been the measure of all things. Have they been able to defend their leading positions among the Global Top 100 again this year?
Bosch and Conti are still the unchallenged leaders — fueled by another above-average increase in sales compared to the previous year. The two top suppliers now contribute more than ten percent to total sales of the Top 100. In 2017, when ZF climbed from the fifth to the forth position, the top three were almost dominated by German companies.
In your opinion, what were the most impressive shifts in the Top 100 list? Who are the biggest winners and losers?
Chinese suppliers are definitely on the way up. Weichai Power, CITIC and Ningbo Joyson could move up — on average by 22 places. Weichai Power, as a manufacturer of diesel engines, benefited in particular from the state-sponsored strong domestic demand in its home country. Among other things, new regulations have come into force in China that have led to a large number of new purchases of trucks and thus diesel engines. A striking number of US companies are among the descending companies. However, this is largely due to the revitalization of the Euro in 2017.
The increasing number of M&As has also led to changes in the ranks of the Top 100. How much have these transactions already affected this year's ranking?
The trend we have been witnessing in recent years has even taken up pace in 2017: Many suppliers are divesting traditional business areas and investing in future areas such as electromobility, connectivity, autonomous driving etc. One of the larger transactions in 2017 was the billion-dollar takeover of Mobil Eye by Intel. Following the acquisition by Samsung, Harman will disappear next year. American Axle's acquisition of Metaldyne — the world leader in differential bevel gears — has allowed the company to move up many places. German suppliers were also very active, above all Freudenberg with the full consolidation of Vibracoustic.
Anyone who succeeded as a supplier in China in recent years was usually also one of the world's top suppliers. Will the relevance of the Chinese market continue to increase compared to the triad markets?
Just like for many OEMs, China has become the most important sales market for many suppliers as well. For example, Webasto's sales of panoramic and sunroofs in China account for a third of the Group's total sales of € 3.5 billion. Provided that the economic policy and economic conditions in China remain stable, this market is expected to become increasingly relevant, as the "per capita quota" of private cars in China is still significantly below the ones in the triad markets.
China's President Xi Jinping has announced a further opening of the Chinese market and promised, among other things, to reduce customs duties on cars. To what extent could German suppliers also benefit from this development?
A reduction in Chinese import duties on cars can have a particularly positive effect on those German suppliers who are strongly linked to the plants of German manufacturers in the USA. BMW exported over 100,000 SUVs from its plant in Spartanburg to China in 2017 and Mercedes-Benz more than 70,000 cars from their Tuscaloosa site. A reduction in Chinese import duties of currently 25 % could lead to a further increase in demand for these already highly popular vehicles and thus fill the order books of the German suppliers concerned even more.
The joint venture regulations may also be relaxed so that foreign OEMs no longer need Chinese partners to produce locally. What would that mean for the international suppliers’ industry?
Similar to the reduction of import duties on vehicles, the relaxation of the JV regulations is also intended to ease relations between the USA and China — largely triggered by the media-effective "Causa Tesla". However, this regulation will only apply to electromobility. For many OEMs and suppliers, the "forced marriage" with a Chinese partner is both good and bad news: On the one hand, the Chinese partner opens many doors to the market, and on the other hand, decision making is not necessarily made easier.
At the same time, the trade dispute between the USA and China remains unresolved. What effects could this have on German suppliers?
The Chinese announcements are a clear sign that they are not interested in a trade war with the USA. As far as German suppliers are concerned, all companies are already represented with their own production facilities in China in order to be able to produce "local to local". Since domestic production is not affected by the trade disputes and the volume of exported vehicles from China to the USA would only have an insignificant impact on German suppliers, we currently see no reason for strategic changes.
The trade dispute between the Trump government and the EU has not yet reached a concrete conclusion either. What risks does this entail for the supplier industry?
If the US does indeed intervene massively in transatlantic trade and introduce import duties, this will lead to less "globalization" and more "regionalization". Existing and global supply chains would have to be reorganized by OEMs as well as suppliers in order to avoid possible import duties on part of the USA. This would involve extensive re-sourcing, which, however, poses a crucial problem: the quality and know-how of US suppliers simply cannot keep up with Asian or European suppliers in many areas.
Electrification — in its different forms — is picking up speed. In particular, could those companies active in this area move up in the ranking? Or will the focus on electrification pay off at a later date?
We are in the midst of the transformation of the automotive industry. Many of the top 100 suppliers have already geared their current business model to the most promising areas. The best example is Johnson Controls: the company has "transformed" itself almost completely in recent years and is hardly recognizable anymore. However, the effects of this cannot yet be seen in the ranking — the e-mobility market is currently still too small for this. So in many cases we are still dealing with a bet on the future.
Battery cell manufacturers in particular, mostly Asian companies, should benefit from the boom. What role do they play in the Top 100?
At present, battery cell suppliers still play a subordinate role. Panasonic and LG Electronics are already in the ranking, but the battery cell segments are not shown separately. However, we expect further battery cell specialists to appear in the ranking over the next five years. We are thinking, for example, of the up-and-coming CATL from China, which has won several well-known international OEMs as customers, for example VW and BMW.
Bosch has abandoned battery cell production, although the development of the e-mobility market is still in its infancy. Will the supplier change its strategy after all?
We don't believe they will. The battery cell specialists mentioned have already gained an enormous advance knowledge in cell chemistry, made substantial investments and built up numerous customer relationships that a "new" player like Bosch would have difficulty catching up with. However, a recently published study by Berylls shows that more and more companies are entering the battery pack segment. There are already overcapacities that will inevitably lead to extensive consolidations in the supplier market.
The capacities of battery cells make planning difficult for OEMs. Is this a new form of dependence? Will this dependence turn the traditional value chain upside down?
Indeed, many industry experts and media representatives are predicting an increasing dependence on these Asian battery cell manufacturers. Engine or transmission production can serve as an analogy: While the engine and transmission are manufactured in-house, individual parts and components come from suppliers — a model that is fully established by OEMs. However, the uncertainty comes more from the raw materials needed for the production of battery cells, for example cobalt. Due to the strong concentration of critical raw materials in the hands of a few countries and suppliers, certain risks are involved — especially with regard to pricing. Congo, for example, has recently drastically increased the taxation on strategic raw materials such as cobalt.
Should German OEMs and suppliers develop their own battery cell solutions to bring added value to Germany? And do they have to move away from traditional competitive thinking in order to make strategic investments as a group, similar to the approach of Here?
We believe that for these reasons it would be a hopeless task to try to keep up with the current generation of cells. Instead, OEMs should focus on the next generation of cells, e.g. solid-state battery cells. In this area, joint investments are conceivable in order to limit the required investments. Should the volume be insufficient for a OEM, a joint venture between several OEMs would also be conceivable as an internal supplier for a joint battery cell production. Completely independent of this, cross-manufacturer standards would be very advantageous.
In the digitization kit communicated by Berylls, the main topics are alternative drives, automated driving, mobility services, connectivity and big data. Which one is most in demand by your customers?
The topics mentioned above are strongly related: Connectivity is the central enabler for alternative drives, automated driving and mobility services. On the customer side, no prioritization of individual areas can be observed. Only if a company masters the entire digitization toolbox, can it master the challenges of the future.
Two models seem to dominate corporate transformation: the US model, which frees up resources for new projects through sales, and the European model, which involves targeted purchases. Which one do you consider more promising in the medium and long term?
First of all, we cannot make a strict separation between the US model and the European one: Some European suppliers are also systematically divesting parts of their businesses like American companies. For example, Faurecia sold its EUR 1.9 billion Exterior business to Plastic Omnium, which in turn sold parts of its European business to Flex-n-Gate for antitrust reasons. Instead, we should take a closer look at the company organization: While listed companies are often under pressure from shareholders to take radical steps — this includes many companies from the USA — German companies such as Bosch, ZF, and Brose, are often owned by long-term investors who think in longer periods than quarters and therefore make substantial decisions only out of absolute necessity.
Can you tell about any other German suppliers with the potential to be listed among the Global Top 100 in the coming years?
We currently see four candidates in the German midmarket: Kostal from Lüdenscheid just missed its inclusion into the Global Top 100 this year with automotive sales of around € 2.5 billion. Thanks to their product portfolio, which includes mechatronics and electronics, high growth rates are expected to continue in the coming years. Based on current sales of € 1.7 billion and the ongoing transformation towards electromobility, Elring Klinger will certainly need another five years to break the sales barrier for the Top 100. Then there are Mubea and Kirchhoff — both with a current turnover of around two billion euros — who will benefit from the trend among OEMs to outsource lightweight construction.
This article was first published by Automobil Industrie
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