Detroit, Michigan – More than 40 per cent of China’s auto suppliers surveyed face severe liquidity issues in 2009 and several may fail in the next 12 to 18 months without aggressive measures, according to business advisory firm AlixPartners.
The annual study, 2009 AlixPartners China Auto-Suppliers Outlook, analyzed data gathered from interviews with 40 senior executives from foreign and domestic players in China’s auto supply sector, coupled with research of the industry in China.
According to the research, China’s auto suppliers were both unprepared for and slow to react to the dramatic automotive slowdown. In a similar survey in China a year ago, 55 per cent of suppliers expected to see more than 20 per cent revenue growth from 2008 to 2010, along with healthy profit margins. Now, 40 per cent say they face severe problems with cash needed to sustain normal business activities due to the downturn. More than 20 per cent in the current survey said they endured net losses in 2008, and for 2009, more than 50 per cent said they expected to see net profit margins of below five per cent.
“With external financing difficult to come by, and 2009 likely to be another year of margin compression and slower growth rates, China’s auto suppliers need to radically improve their cash management to generate sufficient liquidity,” said Ivo Naumann, managing director of AlixPartners. “The days of both easy credit and reliatvely easy cash-flow generations are long gone in the Chinese auto supply market. Going forward, the winners in this market will be those who maximize all areas of cash management, starting with working capital and operational improvement.”
The study revealed that China’s suppliers now having working capital requirements more than double the level of their global peers, due to efficiencies in their supply chains and business operations. Average working capital requirements for Chinese suppliers in the fourth quarter of 2008 were 74 days, compared with 37 days for European Union and U.S. suppliers. The research also showed that, in terms of profitability, Chinese suppliers today are performing significantly worse than most of their global counterparts, with only U.S. suppliers enduring lower average profit margins.
The study also found that one area of opportunity is in aftermarket to retailers and consumers, which is generally more profitable to suppliers than are sales to automakers. Taking advantage of such opportunities requires a shift in business model, however, which might prove a challenge to many suppliers.