Automotive inSIGHTS 1/2007 - Roland Berger

AUTOMOTIVE
Automotive Competence Center customer magazine No. 01_2007
> Low cost cars: Who will make the most of the growing market?
> Suppliers: On average more profitable than OEMs
China‘s market for
low cost cars is booming

Editorial
Contents
"INSIGHTS":
Automotive Insights,
model year 2007
Dear Reader,
New model year, new features. What is
good for the automotive industry is good
for Automotive Insights as well: We have
relaunched our magazine to make room
for more true insights into the latest
trends and developments in our industry.
From now on we will start every issue
with a look around the world: Roland
Berger Consultants will report on the
newest topics in their markets. This time
we take a look at Russia, the US and
Japan. News and interesting publications,
a story on a famous car and two factpacked
reports on new studies follow.
In this issue we offer insights into the
development of the markets for low cost
cars and research why suppliers on average
work more profi tably than the OEMs.
We hope you will enjoy reading our new
Automotive Insights.
Sincerely,
Ralf Kalmbach
2 News
2 „Insights“: A look
around the world
2 USA North American
suppliers: the good, the
bad and the ugly
3 Russia Dilemma for
western suppliers
3 Japan Never walk alone:
Entering the Japanese
market
4 Teaming up to exploit
potential OEMs and
dealers can achieve
more working together
4 Famous cars
The Aston Martin DB 5
4 Books & Studies
5 Studies
5 Low cost cars
A Roland Berger study
shows: Production
will grow by 4 million
units by 2012
8 Automotive suppliers
drive away with the
profit A survey of
Roland Berger Strategy
Consultants and investment
bank Rothschild
Published by: Roland Berger
Strategy Consultants GmbH,
Mies-van-der-Rohe-Straße 6,
80307 München
Responsible: Ralf Kalmbach
and Ralf Landmann
Editors: Susanne Tebartz,
Dr. Heidi Sylvester
Photographs: Renault, VW, GM,
Chery, Picture Alliance, Magna
Steyr AG, Roland Berger, Rothschild
GmbH
Layout: Jens Kaiser
Printed by: Girodruck, Hamburg
Circulation: 3,500. Published
three times a year, no reprints
without prior permission of the
publisher
USA
Growing pains in Russia,
new rules in the US,
chances for European
suppliers in Japan – a
look around the world
North American Suppliers:
the good, the bad and the ugly
The performance of the North American
automotive supplier industry is becoming
increas ingly polarized. True, the industry
as a whole has suffered, as median
Return on Assets (ROA) among 33 large,
public suppliers has fallen from 5 percent
in 2000 to 1 percent in 2005.
However, many suppliers are performing
well. In 2005, more than half of these
suppliers enjoyed Return on Equity (ROE)
above 10 percent, while the bottom
quartile showed negative ROE. The top
quartile had ROA of 8 and EBITDA margins
of 18 percent, compared to the
bottom quartile‘s -14 percent ROA and
EBITDA margins of -2 percent. The
volume reductions at GM, Ford, and
Chrysler, increasing price pressure, and
rising raw material prices create a perfect
storm in the industry. Bankruptcies
became common among US suppliers.
In this challenging environment, there is
strong interest from private equity fi rms
and hedge funds to invest in suppliers.
They will bring in capital and turn around
skills, and will drive industry consolidation.
Mega-suppliers are on the horizon,
as weaker players either consolidate or
drop out of the business. Indeed, some
mega-suppliers may move further up the
value chain and begin assembling their
own complete vehicles.

News | Automotive Insights | 3
What's going on around the globe
RUSSIA
Dilemma for western suppliers
The Russian car market grew by 20
percent in 2006. Profi teering from the
growth are mostly foreign carmakers.
To secure their share in the booming
market many foreign car companies are
investing in production sites in Russia.
But since they regard it as a high risk
investment, most OEMs are building only
relatively small factories with a capacity
of 50,000 to 70,000 vehicles per year.
Suppliers have to follow the OEMs
Since local Russian suppliers are still
trying to catch up with technological
developments, OEMs have asked their
sup pliers from home to follow them into
Russia and build up capacities as well.
But these suppliers face a di lemma by
entering Russia: The capacity of the OEMs
Russian factories is so low that they can't
keep the suppliers production plant busy,
and they don't reach the critical mass.
Joint ventures with local suppliers
Since OEMs expect them to follow into
Model of new Volkswagen plant in Kaluga: Siemens is coming, too
Russia, many western suppliers are exploring
the opportunities for joint ventures
with local companies. Westerners would
deliver the technology and manage the
joint project, the local supplier the capacity
and manpower.
There is a downside
Siemens has set up such a joint venture
with local Auto electronica in Kaluga,
where Volkswagen is building its Russian
factory. Many other western suppliers
are expected to follow the example of
Siemens. The joint ventures have, however,
a downside: With the injection of
state-of-the-art technology and modern
management techniques the western
suppliers are teaching their Russian
counterparts. It may not take too long
until joint venture partners will become
competitors.
JAPAN
Never walk alone: Entering the
Japanese market
Local production by Japanese OEMs has
nearly doubled since 1999. But European
suppliers trying to participate in the booming
market meet diffi culties. There are several
ways to Japan: First of all, they have to meet
the expectations of Japanese OEMs. Functionality
of product, high quality standards,
local contact for customers, price competitiveness
and a manufacturing location in
Japan are required. To meet these demands
most foreign suppliers form a business alliance
with a local supplier as a fi rst step.
Edscha from Germany for example teamed
up with Oi Seisakujo, a major Japanese
supplier in door hinges for Nissan, in 2001.
Edscha established a joint venture with Oi
Seisakujo in 2003, transferring its Japanese
business to the new company.
Mahle, world market leader in fi lter systems,
took a different path into the market. In
2001, it acquired Tenex, Nissan‘s major
supplier in fi lters. By now Mahle supplies
fi lters to several Japanese OEMs.
Bosch's journey into the Japanese market
has been long. It entered in the 1970s by
supplying licenses to local companies. In
the following years, Bosch founded joint
ventures and acquired shares in local companies.
Step by step it obtained control
of production, development and sales in
Japan. Since 2002, Bosch has integrated
three acquired companies to expand the
brand image, and to increase awareness
among Japanese OEMs.
The reasons why successful suppliers don't
enter the Japanese market alone:
Insider status – the ties between OEMs
and their preferred suppliers are very tight.
Difficulty understanding specifications –
OEMs will only give specifi cations with low
detail level. Without assistance, western
suppliers will fi nd it tricky.
Geographical barriers – time difference
and logistics hinder effective business.

4 | Automotive Insights | News
Teaming up to exploit potential
Automotive OEMs and dealers can achieve more if they work together
Carmakers are dissatisfi ed with the performance
of their sales organizations, dealers
complain of dwindling sales and pressure on
margins. So how can the two sides collaborate
to deliver sales numbers that are acceptable
to both? Roland Berger Strategy Consultants
has identifi ed three potent strategies.
1. Lay a firm foundation for success
To do so, both sides must be prepared to give
each other insight into how things work "on
the inside". Successful OEMs make top sales
executives spend several days a year experiencing
everyday working life at one of their
dealers. Conversely, the managers of car dealers
should also gain hands-on experience of
manufacturers' sales planning and network
development activities.
The second step toward superior collaboration
is to establish a sales planning process
based on partnership. For OEMs, this means
planning annual sales for individual market
areas in line with realistic potential, and working
with dealers to clarify how targets are
to be met. Together they implement binding
development plans.
2. Live brand messages
While automakers manufacture vehicles, customers
buy brands. The actual vehicle and its
fi ttings and features is merely one way of injecting
life into the brand, of making the brand
tangible. Advertising and communication are
another way to achieve the same goal. The
most important thing, however, is that all staff
who interface with customers must live out
the defi ned brand values day in, day out.
3. Improve processes at the point of sale
In eight out of ten cases, poor performance
by dealers is what prevents cars from being
sold. Professional dealer behavior is therefore
the key lever to signifi cantly boost sales –
apart from launching new models and expensive
marketing campaigns. OEMs should there -
fore help their dealers to concentrate on the
most important processes. Sales promotion
campaigns, for example, can be made more
effective merely by planning, communicating
and implementing them jointly. A new study
("Automotive Sales Champions", see right)
will identify the levers for more successful
cooperation between dealers and OEMs.
Books & Studies
Mastering Automotive
Challenges
The automotive
industry
is currently
experiencing
a period of
wide-spread
changes: the
disappearance
of traditional markets and
customers, intensifying competition,
increasing innovation and
product complexity, and structural
changes in the automotive
value chain – to name just a few.
Mastering Automotive Challenges
provides comprehensive and
practical guidance for managers,
showing them how to tackle
necessary action, benefi cial
for day to day management.
The key issues facing managers
are laid out, followed by case
studies which show how these
challenges can be successfully
overcome. Mastering Automotive
Challenges is a must-read for
any manager within the industry.
Automotive Sales
Champions
Famous cars: 007‘s Aston Martin DB 5
They were sold by millions: The Aston Martin
DB 5, gunmetal gray, fi tted with machine
guns and ejection seat was a big success in
Corgi Toys 1965 range of model cars. The
driver made all the difference: Q gave the
original car to 007 to help in his fi ght with
"Goldfi nger". Since then, boys around the
world think of the Astons as the ultimate in
cool. In recent years Aston Martin launched
an astonishing offensive of new models. The
V8 Vantage, the V12 Vanquish S and the DB
9, heir of Sean Connery‘s car. This spring
the fans of the British brand are eagerly
expecting the new Vantage roadster. And
again Aston Martin became the company
car at MI 6 – the latest 007 is driving Aston
Martin DBS, a thoroughbred sportscar, in
"Casino Royale".
Ultimately cool: 007 with DB5
The Automo tive Compe tence
Center of Roland Berger Strategy
Consultants together with IBM
is conducting a study on excellence
in sales. Questions looked
at: How to improve operating
effi ciency, how to exceed the
expectations of customers and
dealers, how to turn excellence
into market share gains. Results
are due out in May 2007.
Interested in the book?
Mail to dana_rehfuss@
de.rolandberger.com

Low Cost Cars | Automotive Insights | 5
Low cost cars: The early
bird catches the worm
A market study by Roland Berger Strategy
Consultants found that production of entry-level
cars will grow by four million units by 2012.
Yes, you can do it! Renault's Dacia Logan was the fi rst
model to show Western Europeans that it really is
possible for them to build cars at a profi t in the low cost
car segment. It defi nitely makes economic sense to take
a closer look at this segment. A recent market study by
Roland Berger Strategy Consultants found that annual
production of entry level cars (A/B segments) will grow
by four million units between now and 2012. Fresh
demand is springing up not only in emerging markets
such as China and India, but also in the richer western
nations, where the cost of buying and running a car has
signifi cantly outstripped income growth. Carmakers that
res pond swiftly to this trend can look forward to signifi -
cant market opportunities. Low cost cars are defi ned as
automobiles that sell for under EUR 10,000 (or under USD
10,000 in the USA).
The auto industry is currently witnessing developments
that have already been experienced by the aviation, hotel
and textile sectors. With the mid-range price segment
shrinking, companies can only earn money on ex pensive
premium offerings or in the low cost segment.
Incumbent OEMs can rise to the challenge at the low
end of the market by basing their strategies on three key
strengths that we refer to as car, care and core.
Car: Vehicles themselves must, of course, be adapted to
market conditions. They must be based on shared global
platforms and modules used in other models, must also
have low cost features and be built at low cost locations.
Care: Finance, insurance, repairs and maintenance,
warranty fulfi llment and mobility guarantees – these and
other services that are especially important for low cost
vehicles allow established manufacturers to score over
their rivals from emerging markets.
Core: This term refers to the brands that OEMs have cultivated
over decades – the core values that encompass the
product itself (car) and the related services (care). Another
advantage is the broad customer base that reinforces the
brands of traditional OEMs, whereas automakers that
originate from emerging markets are only now beginning
to develop their brands and nurture customer loyalty.
Making an acceptable profi t with vehicles in the low cost
car segment requires a new and different approach and
mindset for most incumbent OEMs. Our research shows
six paradigms to make this strategy work:
> Ensure independence from complex and costly
corporate structures
> Limit dependency on brands
> Stick to basic functionality and don‘t overdo the
features: "value for money" is the key
> Operate a global low cost strategy in development,
sourcing and production
> Target markets such as China, India, Russia and Brazil,
where market conditions and the "rules of the game" vary
> Establish potential partnerships to cover all the core
competencies required for a low cost car strategy,
including leveraging shared (low cost) components
and infrastructure. This is vital to keep a cap on costs
Selecting the right target market and gaining an in-depth
understanding of changing consumer behaviors and pre-
Car costs vs. real wage index in Germany
(%, base year 1999 = 100)
125
120
115
110
105
100
95
Car costs
Note: Price index based on operating/purchase costs of passenger cars
Source: German offi ce of statistics; Global Insight
Wages
1999 2000 2001 2002 2003 2004 2005
Dacia Logan:
Proves that
European
OEMs can
build low cost
cars, too

6 | Automotive Insights | Low Cost Cars
ferences are two of the most important success factors.
Market selection involves evaluating the regulatory environment,
economic situation and consumer behaviors,
as well as the activities of other OEMs. Further success
factors include adapting vehicles for local markets,
operating platform strategies, extensively standardizing
components and production processes, choosing low cost
locations. To determine which country presents the highest
potential and is most favorable for low cost car production,
it is important to examine each individual market.
In the US, the low cost car segment is expected to grow
to 0.7 million vehicles by 2012
The fi rst low cost car ever made in the USA was Henry
Ford‘s Model T. In its last year of production, the Model T
costed USD 380 – the equivalent of USD 4,200 at today‘s
prices. But cars have become less afford able over time.
Between 1980 and 2003, the average vehicle selling
price rose by 2.2 percent per annum, growing faster than
all but the top 5 percent of US family incomes. At the
same time, high fuel prices are driving down demand for
large SUVs while boosting sales of small cars.
Through 2012, the entry level car segment in Western
Europe will grow by only 0.3 million vehicles
Despite Western Europe‘s prosperity, car prices have outgrown
the wages. As a result, many consumers are becoming
more and more willing to compromise on comfort,
basing car purchase decisions mainly on price instead.
One vivid illustration of this phenomenon is the unexpected
success of Renault‘s Dacia Logan. New models in the
low cost, entry-level segment have considerable potential
if they are fuel-effi cient and inexpensive to run.
Domestic entry-level sales in the Japanese automotive
market are expected to grow from 2.5 million vehicles
in 2006 to 2.6 million vehicles in 2012
Entry-level vehicles in Japan fall into two categories:
Compact cars with engine displacement between 1,000
cc and 1,300 cc and "Kei" or sub-compact cars with
engine displacement of less than 660 cc. The entry-level
vehicle segment, including sub-compact cars, accounted
for 43 percent of the passenger car market in 2005, a
slight increase from the 41 percent market share in 2001.
Japan presents an interesting contrast to other vehicle
markets in that the trend seems to be moving from larger
to smaller vehicles. Foreign OEMs who aim to take advantage
of this trend are nevertheless likely to face numerous
challenges, given the strength of domestic OEMs.
We expect China to be the strongest growth market, with
a volume of 2.6 million entry-level cars by 2012
Currently, the cheapest cars in the world are produced
and sold in China, with MSRPs for many models starting
below EUR 3,000. In China, the upper starting price limit
for A segment cars is around EUR 4,000.
> China‘s entry-level segment is growing rapidly and
represents one third of the market
> The quality of Chinese production is improving and
the market still has plenty excess capacity
> Local Chinese OEMs are gearing up for exports to
developed markets
Global sales forecast of A/B-segment vehicles ('000 units)
4.2%
455 582
Mexico
2006
8,7%
428 705
USA
3.9%
1,204 1,513
Brazil
0,8%
5,471 5,756
Western Europe
4.1%
17,685
13,935
7.8%
726 1,138
Eastern Europe
8.7%
226 441
Russia 1)
7.6%
980 1,519
India
13.4% 133 216
1,243 2,640
China
16.3%
42 104
Thailand
8.4%
South Korea
6.4%
265 385
Malaysia
0.6%
2,508 2,599
Japan
2012
A/B Worldwide
1) For Russia comparison of 2006 vs. 2014 CAGR 2006-2012 Source: J.D. Power; Roland Berger market model

Low Cost Cars | Automotive Insights | 7
India‘s entry-level car segment will grow to 1.5 million
units by 2012
Market analysts set starting prices at EUR 3,900 for the
Indian A segment and at EUR 6,100 for the B segment.
India‘s passenger car market, with a sales volume of
1.1 million units in 2005, is expected to grow by 9.0
percent per annum through 2009. After that, growth
is projected to accelerate to 13.2 percent per annum
through 2012. As consumer purchasing power continues
to increase, we estimate that, every year through 2012,
as many as 1.6 million motorcycle owners will become
fi rst-time car buyers, mainly entering the A or B segments.
The Brazilian entry-level segment will increase from
1.2 million to 1.5 million vehicles by 2012
The entry-level segment represents more than 80 percent
of the Brazilian car market. In many ways, Brazil can be
considered a classic low cost car market. However, the
cars in this segment are hardly comparable to those in
India or China. As European OEMs dominate the market,
there are very few cars that sell for less than EUR 8,000.
In Central and Eastern Europe, sales of entry-level
cars will grow from 0.7 to 1.1 million in 2012
The CEE car market has a large proportion of low cost
cars, some of which are also acceptable to developed
markets. CEE costs trail those in Western Europe and
car ownership is low, positioning the region both as a
target market and a production base for European
automotive operations. Generally, even though consumer
prices and labor costs are increasing relatively quickly,
total costs are still extremely low in absolute terms
compared to Western Europe.
The Russian entry-level segment will grow from 0.2
million units in 2006 to 0.4 million units in 2014
More than 1.6 million units have been sold in 2006 on
the Russian passenger car market, which is expec ted to
expand at an annual rate of 3.8 percent over the next
years. Global OEMs are increasing production and sales in
Russia. C segment cars at low prices dominate the market.
THE TAKE-AWAY
> Annual production of entry-level cars will grow by
4 million units until 2012
> With the mid-range price segment shrinking,
companies can only earn money on premium
offerings or in the low cost segment
> Car, care and core are three key strengths carmakers
need to focus on to compete in the low cost segment
Erkut Uludag
Partner at Roland Berger
Strategy Consultants, Detroit
erkut_uludag@us.rolandberger.com
Low cost car cost structure and price range (USD)
5,400 100
90
4,000
900
630
500
250
516
416
600
450
921
628
1,000
0
300
200
10,237
6,664
614
400
10,851
7,064
Base price
of Chinese
produced
car 1)
Import
tariffs 2)
(2.5%)
Logistics
costs
Litigation
costs
Conversion
costs
Warranty
costs
Marketing/
promotional
cost 3)
Manufacturer
profi t
Dealership
profi t
Expected
MSRP
price
6%
sales
tax
Total
cost
Lower end price point Higher end price point
1) Subtracting profi t 2) For countries with NTR – Normal Trade Relation status 3) 2004 measured US new vehicle and spending per vehicle
Source: Global Auto Insider, Autobuyology.com, FMVSS, Internationalecon.com, China Daily, Business Week, TNS Media Intelligence, Automotive News Data Center, Roland Berger

8 | Automotive Insights | Suppliers
Automotive suppliers drive
away with the profits
Automotive suppliers have increased their profi ts – and in many
cases they have outperformed OEMs: A survey by Roland Berger
Strategy Consultants and investment bank Rothschild
Over the past years, automotive suppliers have faced
signifi cant competitive challenges. They were put under
pressure from two angles: On their own supply side,
prices of raw materials have risen sharply. For steel,
aluminum or resin, for example, suppliers currently have
to pay 40 to 60 percent more than in the beginning of
2003. At the same time, automotive manufacturers have
become ever more demanding. In an attempt to further
reduce their sourcing costs, carmakers are pushing
suppliers for even larger price reductions, while volumes
have become in creasingly volatile.
Not all suppliers have been able to respond appropriately
to this increase in pressure. The automotive supplier industry
is thus being assessed increasingly pessimistically
by the fi nancial markets. In Moody‘s automotive supplier
global public rating, the number of companies outside
the investment grades has risen from below 60 percent
to almost 70 percent since 2004. This assessment is
shared by many supplier executives. In an adjacent survey
of Roland Berger with SupplierBusiness.com, 70 percent
of the interviewed CEOs and CFOs of leading suppliers
expect supplier bankruptcies to increase.
Automotive suppliers are performing much better than
expected
In spite of the diffi cult environment, automotive suppliers
have clearly improved their return on capital employed
(ROCE) over the past fi ve years, and even outperformed the
profi tability development of manufacturers. Suppliers'
ROCE rose from 8.6 percent in 2001 to 11.3 percent in
2005. Today, only three manu facturers – Porsche, Audi, and
Nissan – achieve a higher return on capital employed than
the supplier average.
However, overall supplier profi tability has developed very
differently depending on products, company size and
the regional focus of business. While Western European
suppliers achieved consistently high ROCE (12.6 percent
in 2005), their North American counterparts have been
struggling with constantly falling profi tability (9.3 per -
cent in 2005). There were major improvements among
Japanese and South Korean suppliers.
Looking at company size, mid-sized and large suppliers
(sales of EUR 500 million to EUR 10 billion) turned out
to be most profi table. In 2005, they achieved ROCE of
12.4 to 15.5 percent. Small suppliers (sales of less than
EUR 250 million) as well as very large ones (sales of over
EUR 10 billion) are less profi table; their ROCE hovers
between 8.2 and 10.1 percent. In terms of products,
suppliers focusing on infotainment, interiors, chassis
and tires did best, achieving ROCE of 11.4 to 13.0
percent in 2005.
Top performers have a clear recipe for success
Individual companies experienced the overall positive
de velopment within the industry to different extents. To
identify the top performing companies among the sup pliers
analyzed, we looked at three criteria: Revenue growth,
average return on capital employed over the period studied,
and ROCE level in 2005. Suppliers achieving above-average
results in all three criteria qualifi ed as top performers.
On average, suppliers outperformed OEMs
Profi tability of automotive suppliers vs. OEMs
2000-2005
ROCE [%]
10.1
8.4
9.3
8.6 8.9
10.6 10.4
9.1
11.6 11.3
8.6
2000 2001 2002 2003 2004 2005
Basis: Median of performance-rated suppliers; fi nancial performance of the
13 biggest OEMs
Suppliers
OEMs
7.9

Suppliers | Automotive Insights | 9
Heavy stamping of large body parts at Magna Steyr:
Outperforming OEMs
Accordingly, low performers showed below-average results
in all three criteria.
In the period studied, the top performers grew roughly
three times as fast as the low performers, with annual
revenue growth of 10.3 percent and 3.0 percent respectively.
The top performers were also three times as
profi table (with average ROCE of 16.3 percent versus
5.7 percent). The gap between top and low performers
has continued to widen over the past fi ve years.
Top performers include well-known companies from Europe
– for example Autoliv, Beru, Elring Klinger, Leoni – and
North America – BorgWarner, Harmann International,
Johnson Controls, Magna. Various Korean suppliers also
qualifi ed as top performers over the last years. Among
the low performers, we found several large-scale North
American automotive suppliers like Dana, Delphi, Federal-
Mogul, Metaldyne, and Visteon, but also many Japanese
companies and the European heavyweight Faurecia. The
differences between the two groups comes down to a
question of strategy. As evidenced in the study, 12
identifi ed levers made up the top performers‘ recipe for
success in the areas of revenue structure, operating
cost, balance sheet structure and management quality.
In terms of revenues, top performers possess a more
strongly focused product portfolio, as well as a broader
and more globally aligned customer base. In particular,
their share of revenues with the Big Three North American
manufacturers – General Motors, Ford and Chrysler – tends
to be lower than average.
Top performers are more consistent in offshoring pro duction
capacity to low-wage locations. They also make more
selective investments in research and development and
invest more in their plants and equipment. On the fi nancing
side, top performers differentiate themselves through
excellent working capital management and highly fl exible
fi nancing structures gained from an over-proportional
use of equity.
Finally, stable management structures and lean customerfocused
organizational structures, accompanied by effective
controlling and fi nancial reporting systems, support the
superior development of top performers.
Outlook: Automotive supply remains an attractive but
demanding industry segment
Over the next years, the automotive supplier business
will remain an attractive segment with very interesting
investment opportunities for both suppliers and external
investors, despite an undoubtedly challenging industry
environment.
Vehicle production is likely to increase further in key
markets, with extraordinary growth rates in emerging
Suppliers with a business focus on powertrain, chassis or infotainment reached above-average profitability
Profi tability of automotive suppliers by product segment, 2005 [ROCE %]
Powertrain
Chassis Exterior Interior Infotainmt. Electrics Tires
Change
’05 vs. ’00
-0.2 +2.7 -1.9 +2.7 +2.9 -2.9 +3.9
ø ® ø ® ¢ ø ¢
Average
11.3
11.7 12.0
9.4
12.8 13.0
9.8
11.4
Basis: Median of performance-rated suppliers

10 | Automotive Insights | Suppliers
Top perfomers grew more than 5 times faster than low performers and were more than 2 times more profitable
Financial performance by supplier 2000-2005
Revenue growth 1) [CAGR %]
ROCE Avg. 2000-2005 1) [%]
16.3
ROCE 2005 [%]
17.3
10.3
10.4
2.9x
11.3
3.1x
7.0
3.4x
3.0
5.7
5.5
Top
performer
Industry
Low
performer
Top
performer
Industry
Low
performer
Top
performer
Industry
Low
performer
1) If 2000 or 2005 fi gures are not available, 2001 and 2004 fi gures are used respectively Basis: Median of performance-rated suppliers
markets such as India and Russia. Carmakers will also
continue to pay premium prices for product features that
help them differentiate themselves from other brands.
In addition, many of the suppliers still have room to cut
costs and boost profi tability, by offshoring production
and engineering tasks to low-wage countries, optimizing
their general expenses and improving their balance sheet
structure.
To exploit the outlined potential, suppliers should bear
in mind the 12 levers that were identifi ed in the study.
The key success factor for supplier executives to achieve
or maintain the competitiveness of their companies will lie
in deriving specifi c conclusions on how to deploy those
levers. This could mean focusing more exactly on their
product portfolio, making the customer base more international,
or reengineering the fi nancing structure.
The study, "Strategies for profitable growth in the
global automotive supply industry", conducted by
Roland Berger Strategy Consultants and the investment
bank Rothschild draws on the analysis of
fi nancial and business fi gures from more than 350
globally operating automotive suppliers from the
years 2000 to 2005.
If you are interested
in receiving a
copy of the study,
please complete
the order form
you can fi nd on
the Roland Berger
website:
www.rolandberger.com/expertise/publications
For further information, please contact
Dana Rehfuß, tel. +49 69 29924 6301, or
dana_rehfuss@de.rolandberger.com
THE TAKE-AWAY
> Automotive suppliers have become more profi table
in the past fi ve years – the gap between top and low
performers is widening
> Profi tability varies greatly by region, company size,
and product segment
> Successful suppliers applied – on average – different
strategies than their low performing peers
Marcus Berret
Partner at Roland Berger
Strategy Consultants, Stuttgart
marcus_berret@de.rolandberger.com

Interview | Automotive Insights | 11
"Strong pressure to
reduce prices"
Interview: Thomas Kästele of investment bank Rothschild sees
challenges for automotive suppliers, private equity and IPOs
From the perspective of an investment
banker, what are the key challenges the
automotive supplier industry in Western
Europe is currently facing?
Obviously the continued strong pressure to
reduce prices together with weak production
volumes in Western Europe are the two most
important challenges. This is particularly
im portant for those suppliers that are signifi
cantly exposed to the North American
market, which has been really suffering. We
have also seen that many European suppliers
have been struggling to diversify their
customer base to wards successful Asian,
e.g. Ja pa nese and Korean, OEMs in order
to achieve risk diversi fi cation and open new,
profi table growth opportunities. The study,
which Rothschild and Roland Berger have
published recently, clearly shows that the
more successful players, we called them
top performers, had one of their advantages
in this area.
What recommendations would you give to
automotive suppliers in Western Europe,
and in particular in Germany, with regard
to their capital structure?
In our work as corporate fi nance advisors,
we have seen that balance sheet fl exibility
has become increasingly important, as
the fi nancial structure of a supplier must
be adaptable to an ever faster changing
market environment. Therefore we saw the
increasing use of fl exible fi nancing instruments,
for example asset-backed securities
and factoring, in the supplier industry in
Germany. Also sale-and-lease-back structures
have become increasingly important which
refl ects the capital intensive nature of the
sector. But it is not only the most suitable
instruments at the lowest possible costs
which are required, suppliers are also paying
more attention to the terms and conditions
of their fi nancing arrangements such as
covenants, bas kets and transferability of
loans. In particular with reference to the
last point, a careful selection of the banking
syndicate with a strong agency function is
key. In this area, Rothschild’s Debt Advisory
Team has been working with more and more
suppliers to optimize their capital structure
in a number of ways.
In light of an increasing number of companies
stumbling, do you expect that
private equity investors will maintain or
even further increase their activities in
the German supplier industry?
Some private equity investors have been
struggling with their investments in the automotive
supply industry, in particular in the
German market. This has raised the level of
concern within the private equity community
and the fi nancing banks, which have made
many of the deals in the past possible with
aggressively leveraged transactions. I would
expect that we will continue to see buy-outs
in the German supplier industry but that
investors will become more cautious in terms
of the value creation potential and the
question of how to exit again.
Bearing in mind the rather negative
public opinion regarding private equity
investors, what is the value-added that
those investors can bring to the table for
privately-held automotive suppliers?
Private equity investors typically take a broad
approach in looking at the whole value chain
Thomas Kästele
Director at Rothschild GmbH,
Frankfurt
thomas.kaestele@rothschild.de
of an automotive supplier. They try to implement
improvements in all aspects of a
company’s activities, but in our experience
with acquisitions most attention was paid
to areas such as clear profi table growth
strategy, capital expenditures and working
capital discipline and optimizing management
and customer-oriented organizational
structures. In addition, creating value
through buy and build strategies is also
being considered in an industry, where we
expect further consolidation on a global
scale in many segments.
How do you evaluate the IPO conditions
for medium-sized suppliers, given that the
last German public offering, Grammer AG,
was undertaken almost two years ago?
We believe that the equity market in general
has no aversion towards automotive suppliers
with a convincing equity story. The reasons
for their absence in our view were the availability
of cheaper funding from other sources
of capital, in particular from the debt markets,
and the concern of a potentially negative
impact of detailed fi nancial disclosure requirements
for those companies with attractive
profi tability. However, the currently favorable
equity market environment has convinced
some IPO candidates that are market leaders
in attractive niche areas such as infotainment,
powertrain or fuel effi ciency to
potentially consider a listing. We may see
some of them come to the market in 2007.

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