Increasing pressure on automotive suppliers

Evidence of a decline in the automotive industry was mounting, even before the COVID-19 pandemic.

Volume growth in global light vehicle sales was negative in 2019, as China’s economy slowed and trade pressure began to take its toll.i OEMs announced cost reduction programs with increasing breadth and depth, citing a need to protect growth investments in technologies like electric powertrains and autonomous driving in the face of a future downturn.ii

Now, the world economy faces a certain recession – the only question is how long and how deep it will be. Increasingly, economists warn that a “V-shaped” quick recovery is unlikely, and that meaningful relief may not come until 2021.iii As OEMs announce further delays in re-opening shuttered assembly plants and vehicle sales plummet, it is clear that the implications of COVID-19 will be particularly severe for automotive.iv

Automotive suppliers face an immediate threat to their survival

As a sector, the financial health of automotive suppliers was marginal even before the COVID-19 crisis. Of the largest publicly traded automotive suppliers, nearly all had experienced year-over-year declines in operating profit in the year before the pandemic. Additionally, more than half of suppliers do not appear to have enough cash and other current assets (without tapping additional long-term financing or making other liquidity-enhancing moves) to cover their financial obligations for more than 120 days.v

This would not be a problem under normal circumstances, but can lead to near-term liquidity pressure as OEM production shutdowns turn off cash flows. This pressure will likely bring the solvency of particularly vulnerable suppliers into question as the crisis drags on. Going into the crisis, roughly a third of suppliers either had credit ratings below investment grade, or were already in the “danger zone” according to common statistical measures of bankruptcy risk.v As the crisis pulls all suppliers into a more precarious financial position, they should adapt and operate differently for the foreseeable future.

Increasing pressure on automotive suppliers


NOW: The survival mindset

For the immediate future, suppliers need a survival mindset.

The first priority is to ensure the health and safety of employees, and to frequently engage all stakeholders – from customers, to shareholders, to governments (Refer to the 'Survival to Revival Playbook', Section 1). This must come with a clear focus on the current cash position of the company and how it could evolve based on likely "What if?" recovery scenarios – including both volume forecasts and key assumptions such as technology penetration as well as OEM and region specific recovery paths (Refer to the 'Survival to Revival Playbook', Section 2).

What if recovery scenarios

What if the lockdown of operations at specific OEM assembly plants continues beyond current estimates?

What if the demand patterns in automotive sales do not recover to a normal level – or take 24 to 36 months to do so?

What if new outbreaks emerge or re-emerge in specific countries, and cause a new round of operations lockdowns?

What if recovery is uneven on a geographic level – for example with North America or Europe lagging Asia in returning to growth?

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Depending on the financial position of the supplier, varying degrees of interventions may be necessary. Some will be able to rely on careful cash management and long-term financing, while others will need to draw on all readily available sources of cash, such as revolving credit facilities, now. Stronger measures will be necessary in some cases, including asset sales or even restructuring inside or outside of bankruptcy. Management teams should have a clear understanding of the business conditions that would make these contingencies necessary, and prepare accordingly.

Operations and supply chain teams will also play a critical role, as they help manage both short-term disruptions and possible aftershocks as we move into the fall (Refer to the 'Survival to Revival Playbook', Section 3). The complex nature of the automotive supply chain means that a shutdown of activity in even one country can create broader disruptions across the network. Teams must be prepared to both ramp up and ramp down production with agility, while securing the integrity of their own supply base. Importantly, suppliers must be prepared to sustain this survival mindset for at least the next 12-18 months as they weather the immediate storm and move towards something resembling normal operations.

NEXT: Preparing for revival and future growth

In parallel, suppliers should prepare for what’s next – revival and future growth in an industry transformed by both new and existing pressures. Technology shifts in the industry will continue, but their trajectories may be altered by the crisis. Regulation plays a key role in driving adoption of electric powertrains and in the evolution of active safety features towards autonomous driving. Governments will likely emerge from the crisis saddled with debt and distracted by the consequences of the pandemic across many sectors of the economy, creating more uncertainty around policies relevant to the automotive industry.

This makes it essential for suppliers to refine or re-affirm their strategic positioning – to be clear on both short and medium-term actions to adjust their portfolio (Refer to the 'Survival to Revival Playbook', Section 4). With this clarity, suppliers should move quickly to redeploy resources across functions in support of this strategy (Refer to the 'Survival to Revival Playbook', Section 5). A whole-of-business approach is needed to redirect spending across all functions in a transformational way, including both digital and traditional levers. Correctly sequencing and managing the transformation across functions and initiatives will also be essential to realize its benefits.

Leading suppliers will emerge stronger than before

Those that successfully manage both the crisis and the recovery can encounter historic opportunities to transform their portfolios along the way. Suppliers with stronger financial positions and strategic clarity will likely be able to acquire at a lower cost – whether this means taking share within their existing portfolio, buying new technology capabilities, or even expanding into new industries (Refer to the 'Survival to Revival Playbook', Section 6).

For leaders at automotive suppliers, the next 18 months could be the most important moment of their careers. Rarely does a deep economic crisis coincide with a historic technological shift within an industry. Now is the critical time that will decide who will survive, who will revive and become stronger, and who will change the game for their business. Take decisive and bold action now.


(i) LMC Automotive. January 2020. Available on this link.

(ii) Examples of automotive suppliers cutting costs to fund investment in future technologies, and anticipating a downturn:

Financial Times. “Volkswagen chief warns ‘sacred cows’ need slaughtering.” 16 January 2020. Available on this link.

Automotive News. “GM sounds the alarm, in advance.” November 2018. Available on this link.

(iii) Bloomberg. “Economists Are Losing Hope in a ‘V-Shaped’ Post-Virus Recovery.” 31 March 2020. Available on this link.

(iv) Examples of production shutdowns and volume impacts of the pandemic:

Automotive News. “Ford Indefinitely Delays Reopening N.A. Plants; Fourth Worker Death Reported.” 31 March 2020. Available on this link.

IHS Markit. “Coronavirus Impact on Global Auto Demand.” 25 March 2020. Available on this link.

(v) Financial data and calculations are from S&P Capital IQ, accessed April 2020. Analysis covers 56 large automotive suppliers.

Operating profit refers to Earnings Before Interest and Taxes (EBIT), compared over the past two fiscal years.

Days of cash to cover financial obligations refers to the Basic Defense Interval [ = (Total Cash and Short Term Investments + Total Receivables) / (Total Operating Expenses + Interest Expense + Income Tax Expense) * Days]

Credit ratings are from S&P.

Statistical measure of bankruptcy risk refers to the Altman Z-Score. An Altman Z-Score below 1.8 indicate elevated bankruptcy risk.


This document is intended for general informational purposes only and does not take into account the reader’s specific circumstances, and may not reflect the most current developments. Accenture disclaims, to the fullest extent permitted by applicable law, any and all liability for the accuracy and completeness of the information in this presentation and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit, or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professionals.

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