For global auto parts suppliers, 2023 will be a mixed bag. There were tailwinds during the year, such as growing global vehicle production, which eventually topped 90 million units, surpassing 2019 levels, driven by strong demand and gradual improvements in supply chains. There were also headwinds, including geopolitical uncertainty. , inflation, high interest rates and adverse exchange rate movements. What is worthy of recognition is that, against this background, most companies still achieved their annual financial targets, with revenue, operating profit and profit margins all increasing compared with 2022.
Revenue and profits are generally rising, and profit margins need to be improved
Data shows that in 2023, global automobile production will increase by 9% year-on-year, with North America increasing by 9%, Europe increasing by 13%, and China increasing by 9%. Thanks to the steady increase in output in the world's three major mainstream automobile markets, the performance of parts suppliers in 2023 has improved significantly compared with the past few years.
First of all, from the perspective of revenue, except for ON Semiconductor, which is roughly the same as in 2022, the sales of all other companies have increased to varying degrees compared with 2022, and more than half of them have achieved double-digit increases. Bosch has achieved a leading position with revenue of more than 100 billion US dollars, and its products have strong demand in both traditional and emerging business fields.
In terms of operating profit, with the exception of Sensata (which was affected by expenses related to the restructuring plan in the third quarter and expenses related to the exit of the Spear Marine business), most companies also achieved double-digit year-on-year increases, among which Continental And Dana's year-on-year increase was even as high as three digits.
In terms of profit margins, most companies have also increased compared with 2022, but it is worth noting that suppliers' profit margins are still very low compared with a few years ago. The average profit margin of 20 parts companies counted by Gasgoo Auto is 7.5% in 2023, while the average profit margin of suppliers five years ago was 8.1%. In fact, currently more than 60% of parts companies still have profit margins of 5% and below, including parts giants such as Bosch, Continental, ZF, and Magna.
A research report by Roland Berger pointed out that the transformation of traditional parts suppliers to electric and intelligent requires large initial investments, but at present, electric vehicles are still in the transition period and market popularization stage, and they rarely bring benefits to parts manufacturers. Enough revenue to balance expenses. In addition, the electrification business of most vehicle companies is still at a loss. Coupled with the price war in the auto market, the pressure to reduce costs is transmitted to parts companies, putting further pressure on suppliers' profit margins.
Bosch has delayed its 7% profit margin target by one to two years as it predicts a tough economic environment this year. "2024 will be more difficult than expected, and the coming years will place higher demands on all our businesses..."
Electrification and intelligence have become important drivers for business growth
Compared with traditional parts giants, some suppliers that benefit from emerging automotive businesses such as electrification and intelligence have more outstanding financial performance.
For example, ON Semiconductor, which produces sensors and chips for car companies such as the Volkswagen Group, achieved a net profit of US$2.184 billion and an operating profit margin of 30.8% on the basis of revenue of US$8.25 billion in 2023, thanks to its growing Silicon carbide business, last year, the revenue of this part of the business increased more than 4 times year-on-year. ON Semiconductor expects growth in silicon carbide chips and other areas to help its revenue grow at a compound annual growth rate of 10% to 12%, expanding its sales to $13.9 billion and free cash flow to $3.5 billion by 2027 to US$4 billion, by which time it will occupy 40% of the silicon carbide automotive chip market.
Vitesco Technology can be said to be reborn due to electrification. In 2023, Vitesco Technology recorded new orders totaling more than 12 billion euros, of which approximately 8.3 billion euros came from electrification-related products. As of 2023, Vitesco Technology's backlog of orders exceeds 50 billion euros, more than half of which are related to electrification. The tens of billions of euros of existing orders for the electrification business have laid a solid foundation for Vitesco Technology's future development.
Sensata is also benefiting from a boom in electrification. The company has secured more than $1.3 billion in electrification opportunities over the past three years, most of which are long-cycle businesses. Among them, the company's electrification business sales will increase by nearly 50% in 2023, reaching approximately US$700 million, accounting for more than 17% of its total sales.
Automotive software and electronic components supplier Aptiv achieved record highs in revenue, profit and cash flow in 2023, reflecting the strong growth of its related product portfolio. Amid the trend toward software-defined cars, the company achieved record new business bookings for the third consecutive year, with bookings exceeding $34 billion.
Automotive electronics supplier Visteon has also seized on the growth of new products and business brought about by industry digital and electrification trends. Visteon said new business in 2023 increased 20% year-on-year to $7.2 billion, covering all of its core product lines. In addition, Visteon also launched 129 new products in 2023, an increase of nearly 200% from 45 in 2022.
With the booming global smart electric vehicle market, the landscape of auto parts suppliers is changing rapidly. Competition is intensifying as both new players and traditional suppliers compete for the fast-growing electric vehicle market. As new forces seize the opportunity and move to the forefront of the electric vehicle supply chain, traditional parts companies must also invest in new technologies in a timely manner to avoid falling behind.
Labor costs rise, 2024 will still be a difficult year
"In 2024, the global production growth rate of passenger cars and light commercial vehicles is expected to be between -1% and 1%, and the auto market still faces major challenges." This is Continental's outlook for the auto market in 2024. Specifically within the group, Continental specifically pointed out that the rising labor compensation costs this year are expected to be approximately 500 million euros, which will have a significant impact on its profitability in 2024.
In fact, in addition to Continental, many parts suppliers have mentioned the pressure caused by rising labor costs in their performance outlook for 2024. "We expect net input costs to rise further this year," in part due to "increased labor prices," Magna International CEO Swamy Kotagiri said on a conference call with analysts on February 9.
Lear executives also cited wage inflation in the workforce as one of the major issues facing the company. Lear's chief financial officer, Jason Cardew, revealed that the company's wages were increasing at twice the rate of the typical 3%-4% annual increase, which had a material impact on profits.
Suppliers will also feel higher labor costs as they, too, need to remain competitive in recruiting and retaining workers, especially after the UAW and Detroit's Big Three automakers agreed to record wage increases last year. . But for smaller suppliers, it may be difficult to increase wages while remaining competitive.
In addition to rising labor costs, inflation and geopolitical conflicts will continue to cause a weak economic environment. According to Bosch's estimates, the global economy will not start to accelerate growth until 2025, and 2024 will also be a difficult year.
