Automotive Suppliers in Crisis – Pricing Is Key to Recovery

Profit warnings, job cuts, and plant closures: The slowdown in the automotive industry has suppliers spinning out. Measures to reduce costs have been exhausted, and sales can usually only be increased through ruinous, cut-throat tactics. Pricing remains the most effective lever for automotive suppliers. Founder of Simon-Kucher & Partners Hermann Simon and Simon-Kucher industry expert Andreas Hudelmaier explain which three measures are most important for suppliers in today’s market. 

Production in the automotive industry fell by five percent in the first six months of 2019 compared to the previous year. Suppliers are also feeling the effects, with a reduction in working hours at Schaeffler, job cuts at Bosch, and profit warnings and imminent factory closures at Continental. “In situations like this, typical strategies involve reducing costs and increasing sales volumes, but that won’t be enough to protect countless suppliers from worse times ahead,” said Andreas Hudelmaier. Costs are often already extremely low due to automakers’ relentless purchasing policies. In addition, the supplier industry is based on derived demand. “Cars only need two side-view mirrors – no more, no less,” explained Hermann Simon. “The demand for side mirrors is essentially a result of how many cars are ordered. If this number goes down, there’s little that mirror manufacturers can about it in the short term. They could try to win new customers or increase their supply share, but these measures won’t take effect quickly. The impact of sales is therefore extremely limited,” added the business expert.

Pricing is the most important lever against the crisis

“Pricing, the most neglected variable in the profit function, has the biggest chance of turning things around for suppliers,” said Hudelmaier. The automotive supplier expert recommends three immediate measures:

1. Secure profitability of existing business

“Too many suppliers believe that car manufacturers have all the bargaining power. In Simon-Kucher’s 2017 Global Pricing Study, 96 percent of suppliers surveyed said that price pressure had increased over the last two years. This figure is the second highest of all the 35 industries surveyed. Automakers have been very successful at implementing annual price reductions that exceed contractual agreements. In many cases, however, these measures can be minimized or completely avoided if suppliers successfully present the right arguments. 
After selecting a supplier, car manufacturers usually make a number of changes to their projects, which suppliers can use in a systematic way to increase the profitability of existing business.

2. Ensure future profitability through the right innovations 

In terms of products, the auto industry is currently reinventing itself. Innovation is at the top of the agenda and an important lever for long-term success. Unfortunately, suppliers don’t have a great track record when it comes to this topic. Surveyed suppliers said that 75 percent of their innovations failed to reach profit targets. A major problem is that they don’t understand (end) customers’ needs well enough. As a result, cost structures don’t match up with willingness to pay. For innovations to be successful, customer value must be clearly quantified during the development stage and incorporated into product design and pricing. 

3. Strengthen leadership for negotiations

It’s not enough to set the right prices; they also have to be implemented. Suppliers should continue investing in sales during times of crisis. Negotiation training is important, but processes and tools also need to be optimized. A smart incentive system that ensures sales representatives benefit from the success of price negotiations is the final piece of the puzzle to improve supplier sales. 
Reducing costs doesn’t have to be the only way to make it through the slowdown. In combination with other measures, suppliers can turn to intelligent pricing to maintain profitability and make their companies crisis-proof.

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Simon-Kucher & Partners, Strategy & Marketing Consultants: Simon-Kucher & Partners is a global consulting firm specializing in TopLine Power®. We help our clients achieve growth and profit targets by applying practical, evidence-based strategies. Simon-Kucher & Partners is regarded as the world’s leading pricing advisor and thought leader. The firm has over 1,400 employees in 39 offices worldwide.

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