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European auto parts suppliers: credit outlook worsens with supply-chain, digital, ESG challenges

Credit risks are rising medium term for Europe-based auto parts suppliers, with a decade-long trend of rising leverage and declining profitability set to continue this year amid the twin challenges of digitalisation and sustainability, says Scope Hamburg.

“The automotive industry is facing a historic reorganisation. In the dramatic transition to digital and more sustainable manufacturing, much of the burden of strategic and organisational change is falling on automotive parts suppliers,” says Jörg Walbaum, analyst at Scope.

Car manufacturers have so far come through the coronavirus crisis relatively well despite stagnating if not declining sales, but the picture on the supplier side is different. In the wake of the semiconductor shortage and rising material and energy costs, profitability has weakened considerably. At the same time, suppliers are under intense pressure to adapt to changes in the automotive value chain as the industry shifts to electrified vehicles, greater digitalisation, and focus on sustainable transport.

The median net debt of European supplier companies Scope follows has increased significantly over the past 10 years. At the same time, the profitability level has recently dropped to an all-time low. Smaller suppliers have been hit particularly hard, as they were less able to absorb rising raw materials prices than more diversified rivals.

“Added to this are the challenges currently posed by production outages related to the chip shortage and the sharp rise in energy and logistics costs, so we do not expect any easing of pressure on profit margins in the supplier industry in the short term,” says Walbaum.

The sector is also grappling with the transformation toward „green automotive tech“. Manufacturers and suppliers organised in the German Association of the Automotive Industry (VDA) want to invest around EUR 150bn in electromobility, new drives and digitalisation alone to maintain their future competitiveness.
“Most parts companies have reacted late to the structural shift in the industry away from the internal combustion engine to other fuels and have so far only shown a weak to moderate level of digitalisation, thereby missing out on its full potential,” says Walbaum.

In this context, qualitative credit assessments play an increasing role in the overall determination of the relative credit risk of companies in the automotive parts sector. “Too rigid a quantitative analysis can lead to misinterpretation of traditional metrics, especially in the case of digital laggards and defensive digital followers,” says Walbaum.

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