DETROIT, Mich. and NEW YORK, N.Y. -- More than 40 percent of China's auto suppliers surveyed by global advisory firm AlixPartners are facing severe liquidity issues in 2009, and research of the overall industry shows that several of China's suppliers may fail in the next 12 to 18 months, unless they implement aggressive cash-conservation measures.
The annual study, the 2009 AlixPartners China Auto-Suppliers Outlook, analyzed data gathered from in-depth interviews with 40 senior executives from both foreign and domestic players in China's auto-supply sector and coupled that with extensive research of the industry in China.
According to the firm’s research, China's auto suppliers were both unprepared for, and slow to react to, the dramatic automotive slowdown both domestically and globally last year. In a similar survey in China by AlixPartners one year ago, 55 percent of suppliers expected to see more than 20 percent revenue growth in the 2008-2010 timeframe, along with healthy profit margins, compared with the 40 percent now saying they face severe liquidity (the cash needed to sustain normal business activities) problems due to the downturn. By the same token, more than 20 percent in this year's survey said they endured net losses in 2008 and, for 2009, more than 50 percent said they expect to see net profit margins of below 5 percent -- while in AlixPartners' 2008 survey, none of the respondents expected net profits to be below 5 percent this year.
"With external financing difficult to come by, and 2009 likely to be another year of margin compression and slower growth rates, China's auto suppliers need to radically improve their cash management to generate sufficient liquidity," said Ivo Naumann, a managing director of AlixPartners and head of the firm's Shanghai office. "The days of both easy credit and relatively easy cash-flow generation are long gone in the Chinese auto-supply market. Going forward, the winners in this market will be those that maximize all areas of cash management, starting with working-capital and operational improvement."
Research from the AlixPartners study revealed that China's suppliers now have working-capital requirements more than double the level of their global peers due to inefficiencies both in their supply chains and their business operations. Average working-capital requirements for Chinese suppliers in the fourth quarter of 2008 were 74 days (in terms of average sales revenue), compared with 37 days for EU and U.S. suppliers. The research also showed that in terms of profitability, Chinese suppliers today are performing significantly worse than most of their global counterparts, with only U.S. suppliers enduring lower average profit margins.
Total revenue for China's auto-supplier sector was RMB928 billion in 2008, with 23 percent of that coming from exports. Historically, a quarter of total export revenue came from the U.S., but in 2008 that amount declined 10 percent -- and 60 percent of respondents in the AlixPartners survey said they see decreasing export demand as the key challenge going forward as well, and that they are likely to look more to their domestic market for potential growth.
The study also found that M&A activity, both domestic and international, in the supply sector in the past year has also been slower than many anticipated, and that only a few overseas deals have been completed. Surveyed executives' comments indicate that this is in part due to the near-collapse of many key overseas markets and uncertainties around the viability of potential acquisition targets, coupled with the difficulties in managing distressed assets overseas.
Nevertheless, M&A opportunities remain high on the agenda of supplier executives. Forty percent of suppliers interviewed said they are right now looking at domestic deals, and 25 percent said they are looking globally.
