Under pressure: Rethinking Crisis Management at Automotive Suppliers

Price negotiations between OEMs and their suppliers have been no fun since the days of Ignacio Lopez. That is why, some suppliers felt like they were living in a dream when they were able to push through price increases with their customers, in recent years. But the dream now seems to be over. The German OEMs themselves are under great pressure and it is rumoured that they are arming themselves to reclaim price adjustments once granted by their suppliers. German automotive suppliers stand at a crossroads, facing a choice between continuing with outdated cost management and negotiation practices or embracing a strategic overhaul that fosters resilience and growth. By prioritizing effective negotiations, internal workforce strength, and alignment with future trends, suppliers can transform their approach to crisis management and secure a competitive edge in the evolving automotive landscape.

It is imperative for industry leaders and stakeholders to reassess their strategies comprehensively. Forming a task force dedicated to implementing necessary changes can facilitate a swift and effective transformation, ensuring that German suppliers not only meet current challenges but also position themselves as leaders in the future automotive industry, again.

The Cost of Cost Cutting

German automotive suppliers frequently resort to workforce reductions during financial downturns as a quick fix to reduce operational costs. This approach is rooted in a short-term financial perspective that prioritizes immediate cost savings over the benefits of maintaining a skilled and experienced workforce. The underlying reason for this preference is often a risk-averse corporate culture that fears the immediate impacts of financial instability more than the long-term consequences of skill and innovation loss.

How to Resolve This:

Automotive suppliers need to shift their focus from cost-cutting to value creation. This involves investing in employee retention and development as central strategies for maintaining competitiveness. By fostering a workforce that is adaptable and skilled in emerging technologies, suppliers can enhance their operational efficiency and innovation capacity. Financial restructuring should focus on optimizing operations and investing in areas that yield long-term returns, such as automation and digitalization, rather than reducing headcount.

Underutilized Bargaining Power

Despite possessing significant technical expertise and valuable intellectual property, German automotive suppliers frequently fail to assert these strengths in negotiations with Original Equipment Manufacturers (OEMs). The prevailing management culture—cautious and conforming—leads to negotiations that do not favor suppliers, often settling for lower margins to maintain business relationships. To rectify this, suppliers should adopt a more assertive negotiation strategy, advocating for terms that reflect the true value of their contributions to the automotive industry.

How to Resolve This:

Suppliers should conduct thorough market analysis and gain a clear understanding of the competitive landscape. Training in negotiation tactics and the development of a strategic negotiation team can empower suppliers to approach discussions with OEMs more assertively. Emphasizing the unique value of their proprietary technologies and expertise in these negotiations can help secure better terms. Additionally, forming alliances with other suppliers to create a stronger bargaining position could be beneficial.

Shifting Paradigms in Management

Many suppliers are hindered by a conservative mindset that resists new ideas and clings to the mantra, "We've always done it this way." This resistance to change is detrimental in a sector increasingly driven by software innovations, electrification, and new mobility solutions. Suppliers must embrace a more dynamic approach, fostering a culture that encourages risk-taking and supports continuous learning and adaptation. The conservative and hierarchical nature of management within many German automotive suppliers stifles innovation and flexibility. This resistance to change is often due to fear of failure and a lack of exposure to more progressive management styles and success models from other industries.

How to Resolve This:

Implementing a cultural transformation program that promotes openness to change and innovation is crucial. Leadership development programs that emphasize adaptive leadership and risk management can help alter conservative mindsets. Encouraging cross-industry learning and partnerships can also provide fresh perspectives and innovative solutions.

Aligning with Industry Trends

The automotive sector is moving swiftly towards electrification, autonomous driving, and sustainable practices, but some German suppliers are lagging in aligning their strategies with these trends. This misalignment could render them obsolete. Suppliers need to proactively invest in relevant technologies and processes, ensuring they remain competitive and capable of meeting future demands. Strategic foresight and alignment with industry trends are crucial for thriving in the next generation of automotive manufacturing.

How to Resolve This:

Strategic investments in R&D and partnerships with tech companies can accelerate the adoption of new technologies. Suppliers should also consider diversifying their product portfolios to include solutions for electric and autonomous vehicles. Engaging in collaborative projects with OEMs and technology firms can help suppliers stay abreast of industry trends and adapt their strategies accordingly.

Investing in Human Capital

Current crisis management often involves drastic measures like layoffs, which are short-sighted and detrimental to company culture. A more beneficial strategy would be to invest in employee development, enhancing their skills and flexibility. This not only prepares the workforce to handle diverse challenges but also fosters a loyal, innovative, and versatile team. Viewing employees as vital assets for development rather than variable costs will strengthen the suppliers’ position in a competitive market. The focus on immediate financial outcomes often leads to underinvestment in human capital. The perceived cost of training and retaining employees can deter investment in human resources, especially during economic downturns.

How to Resolve This:

Automotive suppliers should view their workforce as a key driver of innovation and competitive advantage. Implementing continuous professional development and reskilling programs can enhance employee engagement and productivity. Furthermore, adopting more flexible workforce strategies, such as job rotation, telecommuting, and project-based teams, can improve job satisfaction and adaptability.

Business Case

It is always easier to visualize the potential based on specific use cases. For this reason, some of the recommendations for action derived from a specific project are of course anonymized below for reasons of secrecy and confidentiality.

This case is a transformation project at an automotive supplier. In contrast to a turnaround, the management decided to start the project largely on its own initiative. As is usually the case with Excelliance, it involves a holistic approach consisting of strategic repositioning, performance and financial sustainability.

Revenue Growth and Market Expansion

• Sales Growth: Comparing 2022 vs. 2023, our customer achieved an increase in sales of 3%. The revenue growth contributes directly to profitability, especially in light of the fact that this sales increase was achieved in accordance with the new higher-margin policy.
• Market Diversification: Our customer achieved an organic growth of 8%, succeeding in a better penetration in high-margin areas. Such as systems and components for electric vehicles and autonomous driving.

Strategic Pricing Adjustments:

• Pricing Strategies: There was an active management of pricing strategies, including adjustments to selling prices to counter inflationary pressures and higher input costs. By passing increased costs onto customers through higher pricing, our customer has maintained or even improved its profit margins despite rising costs. The price adjustment negotiations have been planned and prepared in very much detail alongside the individual calculation methods of the OEMs.

Smart Operational Efficiencies:

• Productivity and Efficiency Improvements: By the method “Performance Engineering” (see edition 2024/06 of Turned Around! The Newsletter) and enhancing a production system, our customer has expanded measures to increase productivity at their sites and in purchasing operations. Such improvements helped in reducing waste, sickness rate and enhancing output efficiency, thereby contributing to better profitability.
• Investment in Technology: Investments in new technologies and digital transformation improve operational efficiencies and reduce long-term costs, contributing to profitability even if initial investments are high.

Exchange Rate Management:

• Currency Fluctuations: Our customer is confronted with significant exchange rate effects. They effectively managed these through natural hedging and other financial instruments, and have mitigated potential losses or even capitalized on favorable currency movements.

Portfolio Optimization:

• Focus on High-Margin Products: The shift towards products for electric vehicles and advanced systems, which are likely to carry higher margins, is a strategic move to enhance profitability. The focus on electric technologies and hydrogen solutions indicates an alignment with high-growth, high-margin sectors.

Cost Recovery and Risk Management:

• Price Escalation Clauses: The implementation of price escalation clauses in contracts allows our customer to adjust prices in response to increased input costs, ensuring that profitability is not eroded by external economic factors.

Overall, while cost management is undoubtedly a factor in the improved profitability, the strategic initiatives around pricing, market expansion, performance engineering (operational efficiency, and product focus) appear to have played significant roles. These efforts indicate a comprehensive approach to managing both the top line (revenue) and bottom line (costs and profits) effectively, resulting in the significant increase of 400% in profitability for our customer in 2023 vs. 2022.