Supply base cuts spending as it rebounds

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The COVID-19 pandemic has taken a toll on auto industry operations and plans. But it also has erased huge amounts of spending on advanced technologies, Dietmar Ostermann, U.S. automotive advisory leader for PwC, estimated in a Zoom presentation during the Center for Automotive Research Management Briefing Seminars.

Ostermann, who tracks industry financial activity globally, said auto companies were on track in 2019 to spend an estimated $350 billion on new technology programs over the coming three years.

Many programs have been canceled, at least for now, he said.

“There’s no way that will happen now,” Ostermann said.

“Some technology investments will be pruned,” and some of the programs “will likely be [lower priority] investments because the payback is either not there or way too long,” he added.

The industry has emerged from the trough of the pandemic shutdown, but the global supply chain still faces challenges in getting fully up to speed, he said.

Full recovery likely will take the industry several years, he predicted

“In the developed markets like North America or in Europe, we are barely getting back to the production levels in 2019,” Ostermann said. “We don’t know yet the real lack of demand.”

Other challenges are complicating the recovery. Supplier bankruptcies will increase over the next 12 months, he predicted. And many suppliers lack adequate visibility into their own supply chains when it comes to long-term sourcing strategies.

Ostermann estimated that more than 30 suppliers in North America are in the financial “danger zone,” or distressed. In Europe, the number is greater than 40, while in Asia, it tops 150. The most distressed of the group are companies engaged in body and chassis systems.

Speaking in the same Web presentation, Armando Tamez, CEO of engine components supplier Nemak, agreed.

“We see that the global auto industry will take at least four years to recover to previous levels of what we saw in 2019,” Tamez said. “We’re seeing already some of our suppliers struggling financially.”

“We need to watch them. We need to see how we can navigate these rough waters,” he added.

Ostermann said that parts companies were much more prepared heading into the pandemic crisis than they were for the 2008-2009 economic crisis.

But he added that business conditions have deteriorated significantly over the past six months.

While at least $9 billion was granted to the U.S. supplier industry this year through Small Business Administration Paycheck Protection Program loans, $20 billion in liquidity is still needed to stave off larger issues, Ostermann estimated.

Against this backdrop of financial trouble and curtailed spending programs, global supplier M&A activity likely will see a record year in 2021, he said. PwC forecasts that more than 200 auto supplier M&A deals will take place this year, and more than 250 in 2021.

“Yes, there are some world-class suppliers out there that have a complete visibility and do a fantastic job at managing their Tier 2s both financially and operationally,” Ostermann said, “but there is 40 percent that either have an insufficient process or no process at all, and that needs to change in today’s 2020, 2021 supply chain.”

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Saurabh Shukla

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