Trust Or Bust

How to secure the financing needed to emerge from the COVID-19 crisis

The COVID-19 pandemic has hit the global automotive industry hard. But the worst may be still to come. As car manufacturers are trying to ramp-up their production again, suppliers will need additional liquidity to build up working capital.

So, the challenge to ensure financial stability is not off the table yet. Companies will need to convince their financiers about the viability of their business — which is increasingly difficult in an industry that sees disruptive changes.

The COVID-19 pandemic is affecting the global automotive industry on different levels. Car sales have dropped as a result of store closures, and production had to be stopped in response to lockdown measures. Based on current COVID-19 global spread and retainment measures, the impact is expected to be severe, with new car sales dropping up to -70 percent and no regional hedging possible. Depending on the length of the lockdowns and the effectiveness of countermeasures from states and car manufacturers, our models predict that this will lead to a decline of production between 17 percent and 35 percent in 2020. The remaining production volume can, however, in size and shape look significantly different from before the crisis, due to shifts in the geography and product mix and changing consumer demands. Therefore, the impact on an individual suppliers’ business portfolio and revenue can be much higher.

We wanted to understand how this downturn may affect the suppliers’ financials. So, we took a sample of 411 suppliers from all global regions and analyzed their cost structure, typical levels of investments, and working capital needs. Then we simulated a revenue decline based on the demand scenarios mentioned above and assumed that the suppliers would react by applying typical cost reduction measures — of course, taking into account that cost cannot be flexed completely. The results were shocking: in our pessimistic scenario, the average EBITDA of the global supplier industry would nose-dive from currently 8-9 percent of revenues down to 15-20 percent and even with cost reduction measures, 94 percent of all suppliers would turn loss-making on EBITDA-level. (See the Exhibit below). As the need for capital expenditures will remain and working capital will be needed when ramping up the business again, this would also lead to negative free cash flows. As a result, the indebtedness of the companies will increase. Our simulation shows that up to 41 percent of all suppliers will reach a leverage ratio (Net Financial Debt/EBITDA) of higher than three, which is commonly seen as a maximum debt capacity for automotive suppliers. In other words: Suppliers will require significant funds to sustain the crisis — but many of them may find it challenging to get financing due to their already high debt load.


The automotive supplier industry was already under pressure prior to the COVID-19 pandemic. Suppliers face an onslaught of disruptive technologies. Trends in connectivity, autonomous vehicles, shared mobility, and electrification are stretching supplier R&D capabilities, busting budgets, and posing risks due to unknown success factors. Automakers themselves are taking different directions as they struggle to form clear, risk-balanced strategies in response to these trends. Thus, their suppliers get a double dose of insecurity since many automakers expect them to share part of the Connected, Autonomous, Shared, Electric (CASE) investment burden.

Suppliers need to serve fewer but larger global platforms as they seek higher volumes. This mandate, including the task to effectively manage multi-tiered supply chains, can stretch medium-size companies. The demands of end-customers continue to evolve, as markets continue to shift away from sedans toward sport utility vehicles (SUVs), creating unanticipated production imbalances. Uncertainty also surrounds the future of diesel engine technology, feasibility and timing of plug-in hybrid offerings, market development in China, and incentives for e-mobility that drive take rates of electric vehicles.

Suppliers also face regulatory and tariff challenges as well as talent shortages and often resource misallocations concerning e-mobility technologies. Consequently, financial markets often do not recognize a supplier’s “real” performance or the value of its innovations, choosing instead to back new technology players.

41 percent of all suppliers may face difficulties to get new funding due to lack of free debt capacity.

Oliver Wyman’s research suggests that today’s winning suppliers achieve superior product costs and better margins by pursuing several key goals. For example, they develop a clear, robust technology strategy backed by a strong business case and model, all of which support the sustainability of their future vision. Most importantly, they lay out a clear path and timeline for getting there. To avoid commoditization, they create premium, high quality, modular product portfolios or deeply cost-effective quality parts and components combined with supply chain excellence, that align with automaker needs, thus ensuring enhanced customer “stickiness.”

In particular, they take a balanced and focused approach when addressing CASE components and new business opportunities, making sure they assume the right levels of risk when selecting innovative technologies. They also work hard to continuously manage flexibility, both globally and in terms of ensuring operational excellence in quality, delivery, and launch processes, while challenging themselves to stay lean on the overhead.


Amidst all of the disruptions and challenges described above, companies with a need for fresh liquidity will face challenges. Suppliers without a convincing business design and a strong  pre-COVID-19 performance can no longer assume banks will bail them out, and evidence from recent insolvencies in the supplier industry suggests automakers are becoming much more selective when lending support to suppliers in distress. Furthermore, while alternative financing such as private debt or distressed equity funding is available, it requires a sound business plan that lays out the upside potential for investors, in a time when the public feels again uneasy about the validity of the business model of the auto industry.

We are experiencing times of high uncertainty — due to the aftermath of the COVID-19 pandemic and resulting recessionary environments in many markets, but also because of the fundamental and disruptive changes in the automotive industry. In such times, suppliers need a clear vision about their role in the future automotive world, a concrete action plan on how to get there, and a prudent estimate on the level of financing that is required. This plan should be shared with their financiers timely and proactively. Being transparent and convincing will create trust — and avoid going bust!

Trust Or Bust