1. Introduction

The development of the German automotive supplier industry is being shaped by thorough-going changes. The sector is undergoing a phase of unprecedented transformation, driven by the shift to electromobility, digitalisation and sustainability. At the same time, external factors are putting strain on companies, such as rising financing costs, a lack of domestic political predictability for planning, global supply chain problems and geopolitical tensions and conflicts. The need to drive technological innovation forward and at the same time ensure economic stability in a difficult market en-vironment is posing great challenges to the sector as a whole.

This article outlines the current challenges the automotive supplier industry is facing and examines the question to what extent M&A can contribute to ensuring the sector’s long-term competitiveness.

2. Status quo – an initial revival of M&A activities

The change that has been taking place in the automotive in-dustry for several years as well as the cooling down of the global economy and increasing geopolitical uncertainties have led to a significant decrease in companies’ financial sta-bility. For example, the median EBIT margin of German au-tomotive suppliers sank from 5.5% in 2016 to 2.9% in 20231. Furthermore, many suppliers are viewing the future with scepticism regarding the transformation to electromobility, since investments have to be made that are hardly manage-able to fulfil the requirements of the EU and the German gov-ernment. Matching the pessimistic mood, in the period from January 2022 to February 2024 and related to the top 20 Ger-man suppliers, an average of three facilities closed for every one that opened. Going along with the shrinking willingness to invest in the automotive supplier sector, the number of in-solvencies of suppliers in Germany has increased. In the first half of 2024, a total of 20 German suppliers applied for insolvency, which equates to a year-on-year increase of 67%. This includes the larger cases of Eissmann Automotive Gruppe, Auto-Kabel and Franken Guss.

The difficult market environment is also reflected in the M&A activities that could be observed in the past years in the automotive sector. The transaction volume, at EUR 53 billion in 2022 and EUR 60 billion in 2023, was at a com-paratively low level, after the figure of EUR 109 billion was recorded for 2021. Regarding the number of transactions, however, it is noticeable that there was a significant increase in deals announced, up at 399, after 241 in 2022. However, this increase was mainly determined by e-mobility, techno-logically innovative components and components that are not related to combustion engine technology 2. The M&A ac-tivities related to suppliers focusing on combustion engine technology, on the other hand, continue to be at a very low level. What makes the challenges of this transformation even more difficult is the current financial market environ-ment, which makes it almost impossible for financial in-vestors to conclude transaction financing at suitable conditions.

3. Challenges to the automotive supplier industry

The automotive supplier industry is confronting sector-spe-cific upheaval and considerable external influences that issue in the following major challenges.

3.1 Transformation towards electromobility

One central challenge is posed by the need for the automo-tive industry to transform to electromobility. Going along with this are investments in research and development (e.g. electric propulsion, battery re/upcycling), production infra-structure (e.g. conversion of production lines, automation, digitalisation) and the qualification of staff as well as em-ploying new skilled workers. This development thus ties up considerable financial and human resources and will put strain on companies for some years to come. Suppliers will mostly have to develop these competences alongside their ongoing business while at the same time having a long-term commitment to producing products for the existing com-bustion engine technology.

Due to increasing uncertainty in planning and despite the EU’s ban on registering new combustion engine vehicles from 2035 onwards, the sector is facing a decline in demand for electric cars. The reasons for this include the discon-tinuing of the environment bonus in the German govern-ment’s climate and transformation fund, decided in November last year, and the generally higher pricing of the products compared to other offerings on the market. Fur-thermore, the as-yet inadequately developed charging in-frastructure is a continuous restriction to potential buyers, which continues to put them off buying an electric car.

3.2 Stagnating vehicle production and the move to Asia

In the long-term, it is expected that personal vehicle produc-tion will tend to stagnate, both in Germany and worldwide. The sales figures in the last years have also been subject to significant fluctuations, primarily owing to external factors like the COVID-19 pandemic, the war in Ukraine, crises in the supply chains, particularly those related to semi-con-ductors and high inflation and the uncertainties associated with this. Related to passenger car production in Germany, a significant decline could already be reported in past years. According to figures from the VDA, in 2023 4.1 million cars rolled off the production lines in Germany, meaning pro-duction was 13% below the pre-crisis level of 4.7 million cars in 2019 and even 20% below the production volume of 5.1 million cars in 2018.

It is also expected that the pressure on the domestic supplier industry will increase in the future owing to the continuing move of vehicle production to Asia, which applies to Euro-pean manufacturers but is also to be explained by the growth of Chinese manufacturers.

3.3 ESG requirements

As one of the key causes of global emissions, particular re-quirements are placed on the automotive industry on the way to transforming towards sustainability. Besides sector-specific regulations, such as the previously mentioned EU-wide ban on combustion engines, overarching requirements are also causing strain on the automotive industry in par-ticular, especially the Supply Chain Due Diligence Act (LkSG), in force since 2023, and the Corporate Sustainability Reporting Directive (CSRD), introduced in 2024. Fulfilling the sustainability criteria that go along with ESG (environ-mental, social, and governance) is becoming indispensable in order to minimise operating and reputation risks, to en-sure access to capital and to address customers’ require-ments – i.e. to avoid long-term disadvantages in competition.

3.4 Difficult financial environment

The considerable rises in interest rates, imposed since the start of 2022 to fight the steep rise of inflation, and the restriction in banks’ financial portfolios on sectors with high levels of CO2 are already putting strain on industrial enter-prises across sectors. Financing for automotive suppliers is also aggravated by historically low margins as well as a sig-nificant increase in debt since the start of the COVID-19 pan-demic and the accompanying deterioration in credit ratings.

3.5 Resilience of supply chains

In times when value chains and supply chains are dis-rupted, when raw and other materials are in short supply, and trading regulations and customs are becoming ever more complex, the automotive sector is required to increase the capacity of its supply chains to withstand and recover. A basic precondition for this is comprehensive and con-tinual transparency across the entire supply chain with re-porting that is assisted by technology. Furthermore, diversifying suppliers and distribution channels, e.g. by in-vesting in the company’s own production of key compo-nents, and improved collaboration along the supply chain help to increase the resilience of supply chains.

3.6 Shortage of skilled workers

As in other industries, automotive suppliers also struggle with an acute shortage of skilled workers. Especially in order to be well prepared for the future, more qualified staff are needed who know and understand these technologies and who can develop them. Businesses must also get used to the changing world of work and digitalisation.

4. M&A to ensure competitiveness

Particularly in the current challenging market environment, M&A offers the automotive supplier industry various ways to develop or implement possibilities to change and adapt that are necessary for long-term competitiveness. Regarding the challenges already outlined, the following approaches/strategies can be recommended:

► M&A to master transformation: Investments in estab-lished or growing companies can serve to tap into new areas of business or develop new technologies. Precisely in view of the dynamic market environment and the prevailing shortage of skilled workers, M&A offers the benefit of avoiding your own high outlay in terms of time and re-sources which are so hard to calculate when carrying out your own development.

► Resilience through horizontal and vertical integration: While horizontal integration is a business strategy in which a company expands its presence by taking over or merging with competitors on the same level of the value chain, ver-tical integration aims to expand business activities across different stages of the value chain. Both types of integration offer suppliers a way to increase their market power – par-ticularly in relation to the manufacturers, and to reduce dependencies and generate economies of scale and increases in efficiency by consolidating or optimising processes. Com-panies still operating in the field of combustion engine tech-nology will continue to focus on economies of scale and in this way will contribute to further consolidation of the mar-ket. On the other hand, this offers companies desiring to strategically exit this segment the opportunity to spin off and sell these business activities.

► M&A for capital acquisition: The current difficult ac-cess to traditional sources of financing – which is particu-larly difficult for suppliers in combustion engine technology, means companies must evaluate alternative forms of fi-nancing including those beyond the traditional banking landscape. Alongside alternative debt or debt-like instru-ments, such as bonds, private debt or mezzanine capital, taking on more equity providers is seen as an increasingly relevant building block for funding.

5. Conclusion

It is the German automotive supplier industry that is at the centre of disruptive forces. Whether it’s the move to electro-mobility, digitalisation or sustainability, or external factors such as rising financing costs, a lack of domestic political predictability for planning, global supply chain problems or geopolitical tensions and conflicts – companies must de-velop thorough-going abilities to change and adapt in order to remain competitive in the long-term.

This is where M&A offers the automotive supplier industry various opportunities to develop and implement the poten-tial to change and adapt for long-term competitiveness.

While transactions to tap into new business areas or develop new technologies have increased, particularly in the past one to two years, it should also be expected that companies continuing to do business in combustion engine technology will increasingly consolidate through takeovers and mergers to develop economies of scale and increase efficiency. The current interest rate conditions could also bring about a re-vival of these M&A activities, which are also causing the transaction market to expect financing costs to sink.

1 Oliver Wyman Supplier Financial Benchmarking 2023: Results of the Evaluation of the Annual Financial statements of 55 Automotive Suppliers in Germany

2 Clearwater Automotive-Newsletter 2021–2024