It's already shaping up to be another bumpy year for auto parts suppliers as they get the financial squeeze from inflation and rising interest rates while navigating uncertainty in the economy and the new-vehicle market.
"The squeeze is really being applied to suppliers right now because of the drop in sales volumes, as well as the rising raw material and labor costs that continue," said Paul Carrannanto, a principal in the industrial manufacturing and automotive sector for consulting group PwC.
The number of suppliers in financial distress spiked in 2022 as those issues cut into margins and sent companies scrambling for price relief from their customers.
According to a PwC analysis, 42 percent of suppliers reported some level of financial distress in the first half of 2022, up from 27 percent in 2021. That figure nearly matches the 45 percent of suppliers who reported financial distress in 2020 when the first wave of the COVID-19 pandemic shut down auto manufacturing.
A convergence of factors made 2022 a difficult year for parts companies, even as their automaker customers reported sizable profits. The microchip shortage continued into its second year, shaving millions of vehicles off production schedules and cutting supplier volumes.
Unstable commodity pricing and rising interest rates raised business costs for suppliers, some of whom sought pricing relief and changes to their contracts with customers. And a host of regional challenges, most notably the war in Ukraine, created further supply chain uncertainty.
Inflation and the microchip shortage have shown signs of easing in the opening weeks of 2023, but those situations are expected to continue well into the year, said Michael Robinet, executive director of automotive advisory services at S&P Global Mobility.
"Instead of an on-off switch, it's a dimmer switch," he said. "The chip situation has gotten somewhat better and that will probably continue. But to think we're completely out of the woods is a bit Pollyannaish."