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Price pressure in autmotive supply chain will continue, study says

July 28, 2010 | Christoph Hammerschmidt | 222900984
For automotive suppliers, price pressure is a known phenomenon. And they already suspected that it won't go away anytime soon. A study from consulting company Oliver Wyman says who is hit hardest. No surprise: electronics equipment.

According to the study, suppliers contribute more than 50 percent of the value creation in the automotive value chain. Nevertheless, the tier ones and tier twos are more under pressure than the OEMs.

Based on the results of a poll among CEOs and board members in the first half of the current year, the consulting company comes to the conclusion that the price pressure will rather increase than decrease in the foreseeable future. The only factor containing a chance to achieve sustainable growth and profitability is volume growth. Growth, however, can be achieved almost exclusively in emerging markets such as China and India. “Only companies that implement an international presence and significantly reduce their prices can be successful in the highly competitive automotive supply market,” the study says.

The price erosion affects all price categories, from low-cost to premium. This leads to the conclusion that the German high-end manufacturers will sooner or later be hit as well, despite their hitherto successful strategy to serve less price-sensitive markets. In the premium markets, OEMs will try to enforce price reductions from their suppliers in the same percentage range as they already use to do in the volume vehicle segment, the study says. Functional innovation and increased add-ons won't compensate the price declines enforced by the OEMs.

Cost per vehicle will decline by 2 percent annually over the next couple of years. During this time frame however the study predicts increased sales by 6 percent annually. In order to escape the price pressure, suppliers should intensify cost-cutting programs and optimize production. Innovative designs, materials and technologies could also help to reduce product costs.

The study details which automotive suppliers will be most affected by the price pressure: Electronic systems. The OEMs will try to reduce their cost prices for electric and electronic equipment by 6.2 percent in 2010. At the other end of the price pressure scale, one can find engine and ancillaries (3.8 percent) and powertrain (3.2 percent).

However, experience shows that the OEMs demand for price reductions is not entirely successful. In reality, OEMs could achieved price reductions for engines as well as percent and for powertrain components. But electronic systems again led the rankings: Prices for ECUs, cables, and other electronic components declined by 3.6 percent, more than any other segment.

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