This year could prove to be a bit brighter for auto suppliers than the past five as vehicle production levels stabilize, interest rate hikes stop and parts makers get more pricing relief from automakers.
But significant challenges remain for suppliers, whose profit levels have generally remained well below what they were before the COVID-19 pandemic and subsequent supply chain challenges and parts shortages.
Dan Hearsch, Americas co-leader of the automotive and industrial practice at AlixPartners, said 2024 is looking to be a "bit better" for suppliers, saying companies are "optimistic but fragile" at the moment.
Forecasters expect steadier vehicle assembly volumes this year, he said, although debt levels at the world's 300 largest suppliers remain elevated compared with pre-COVID levels.
"Net debt is still really high in the supply base, so you'll have companies that have restructured that will have to continue restructuring," he said. "But credit ratings have been improving. And suppliers have been getting some financial relief from OEMs.
"It's been a more collaborative space."
Quarterly earnings reported by suppliers in the coming weeks will provide a glimpse into how some of the world's largest parts makers are faring, especially coming off of last year's UAW strike, which brought vehicle assembly at many Detroit 3 plants and the supplier factories that supply them to a halt.
Suppliers that reported quarterly earnings in late January generally appeared to have higher profits than a year earlier, a good sign for a supply base that feared worst-case scenarios heading into the UAW strike.
Autoliv said fourth-quarter adjusted operating profit rose 43 percent from a year earlier to $334 million, a boost driven in part by higher production levels and by automakers covering some of the supplier's higher energy and freight costs, Automotive News Europe reported.
Meanwhile, fourth-quarter net income at tech supplier Aptiv soared nearly fourfold to $905 million due to strong demand, offsetting the impacts of the UAW strike and other headwinds on the quarter.
"Our global reach and ability to execute highly complex programs perfectly positioned Aptiv to win new business and gives us a [forecast of] $35 billion of business awards in 2024," Aptiv CEO Kevin Clark said on a call Wednesday with investors.
Major suppliers to report quarterly earnings in the coming days include Lear on Feb. 6, Adient on Feb. 7, BorgWarner on Feb. 8 and Magna International on Feb. 9.
Hearsch said the expectation of interest rates falling over the course of the year will be good news for suppliers. According to AlixPartners data, net debt at the world's 300 largest suppliers surged 27 percent from 2021 to 2022 and remained elevated in the first half of 2023, whereas debt levels fell among automakers during that time.
Meanwhile, as debt rose for suppliers, profit margins remained depressed compared with the previous decade.
According to a Bain analysis, suppliers averaged profit margins of around 4.7 percent in the third quarter of 2023, compared with 8.1 percent five years earlier.
Those figures could improve in 2024 if vehicle production volume remains steady, Hearsch said.
"If volumes fall off, even for a period, that creates a cash crunch," he said. "So you'll still have companies failing. We've seen some of the OEMs are taking additional steps to get ready to shore up their troubled supplier capacity."