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03/31/2011

Stripped

The crisis is over; the battle continues. German automotive vendors are again in the OEMs stranglehold. During the economic crisis, the industry's power structure shifted at the expense of vendors once and for all.

By Christian Schlumpberger

"I can smell money!" That's how the purchase manager of a major German car manufacturer had received the shocked representatives of numerous vendors a few months ago. His message was clear: The time for concessions is over, vendors can be taken to the cleaners again. "Actually, at that point, all of us should have left the room together", the managing director of a medium-sized supplier is still upset about it. But not even one of those 200 present got up at the time. The vendors' powerlessness versus OEMs is legend.

Already in 2005, Alexander Ziems, managing director of Valeo Deutschland, had described the rock-hard conditions in the industry: "Today, you won't get any contract from any manufacturer if you don't promise annual price reductions by five percent"." At that time already, Continental's former boss Manfred Wennemer had also demanded, in public, more fairness towards vendors.

Actually, many had hoped for improvements after the economic crisis. After all, in 2008 and 2009, the OEMs had supported their suppliers through price concessions, modified payment terms or material help. Yet, despite all that, the industry suffered its worst crisis in history: worldwide sales caved in by € 200 billion, 350 vendors worldwide had to file insolvency.

The time for niceties is over now. The industry's old pecking order is back again – worse than ever before. Many experts are really surprised: "We all had expected the crisis would bring about a partnership approach in the industry", says Siegfried Frick, Partner Automotive at Deloitte. "But that hope was thwarted."

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All that is aggravated by the alarming moral decline in the industry. A study recently conducted by Lazard and Roland Berger came to the conclusion that OEMs bring their power to bear upon suppliers more and more directly. "The tactics by car manufacturers violate rules ever more frequently", explains the author of the study Marcus Berret, Partner at Roland Berger Strategy Consultants. Orders placed and contracts awarded would be withdrawn again, according to him, or they would turn into financial burdens due to subsequent rebate demands.

The return to degenerating morals and rough manners of the pre-crisis period is primarily the result of continuing overcapacities. According to Lazard and Roland Berger, worldwide capacities exceeded production by a hefty 71 percent in 2009, the second year of the economic crisis. Even for 2016, the study still expects overcapacities of 33 percent – and that in a scenario of further increasing sales. The highly fragmented supplier sector can put up little resistance to the mighty OEMs, deplores Prof. Bernd Gottschalk, former Mercedes board member and now managing shareholder of Autovalue GmbH as well as senior advisor for the consultancy Kerkhoff Consulting: "There has been no true consolidation in Germany."

In some sections, the problem is particularly serious: "The commodity area, e.g. with small die casting and plastics parts, still has structural overcapacities everywhere – that might not be any problem at the moment, but tomorrow already, it could become virulent. Investors and lenders critically watch these areas. It's accordingly difficult to forge larger units through specific strategies and thus clear up the industrial sector", says Ervin Schellenberg, Partner at the financial advisor Equitygate.

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Having just gotten out of their worst crisis in history, many vendors are doomed again. In addition to OEMs playing hardball, vendors also have tough times now due to rising raw material prices. Steel, aluminum, plastics, energy – everything has become more expensive. Costs they can't pass on because of massive pressures; stipulated prices are mostly fixed. "If this continues, our prospects will be really bad", explains the head manager of a supplier, already nearly resigned. Soon, some vendors will ask their major customers for help again – or crash into insolvency.