Elevated supplier debt levels and inflationary pressures could soon lead to more bankruptcies and accelerate consolidation in the supply base, according to a recent analysis of supplier financials by Deloitte.
Compared with their automaker customers, suppliers have taken the brunt of the financial hit from the production challenges of the past few years. Many parts companies took on more debt in order to stay afloat as material costs rose, and also to pay for new investments in vehicle programs related to electrification and advanced driver assistance systems.
But now that interest rates have climbed and credit is tighter, that has left many suppliers, especially smaller ones, burdened with higher costs. And that is putting even more pressure on the supply base, Deloitte warns.
The risk of supplier bankruptcies "may be increasing over time," Deloitte concluded in its 2023 Automotive Supplier Study, which analyzed financial data from about 300 suppliers.
"With inflation pressure and debt covenants coming due and suppliers having to renegotiate at much higher interest rates, that financial squeeze is going to be harder," said Jason Coffman, Deloitte's head of U.S. automotive consulting. "We've seen a little bit of weakness with a few bankruptcies to kick off this year, even if sales so far has been a little bit stronger than the conservative expectations going into this year."