Shift Happens: Suppliers Outpace Automaker Profits in Q4 Shakeup

For the first time since Q1 2021, automaker profits are faring more poorly than suppliers. As of Q4 2024, suppliers have outperformed OEMs, with an average EBIT (earnings before interest and taxes) margin of 5.84%, compared to OEMs' 5.18%. The turnaround was due to OEMs’ margins falling linearly from 7.29% in Q2 2024.

Quarterly earnings reports from OEMs over the period have laid falling profits variously at the door of moribund markets, slowing electrification, mounting mainland China competition, affordability and geopolitical uncertainty.

That suppliers have managed to outperform OEM profitability in Q4 2024 is all the more remarkable, especially considering the stagnation in average supplier revenue experienced since the onset of the pandemic. This is particularly noteworthy when juxtaposed with the OEMs’ relatively smooth and steady revenue recovery during the same period. 

Over the past five years, OEMs have consistently experienced an average quarterly revenue growth rate of 2.5%, reflecting their ability to adapt to changing market conditions and consumer demands.

In stark contrast, suppliers have lagged behind significantly, achieving only a modest quarterly growth rate of 1.7% in the last five years. This disparity highlights not only the resilience of suppliers in a challenging economic environment but also raises questions about the sustainability of automaker profit margins amidst fluctuating revenue trends.

Not all areas of the automotive supply chain base can be viewed equally. Some areas of the industry present greater growth opportunities than others and this is reflected in financial performance. Over the years we have seen numerous suppliers split their portfolios, bundle their most attractive assets and spin off new companies as a way of realizing more shareholder value and raising capital.

Growth areas for suppliers are generally seen to be around batteries and ADAS features. We categorized the  62 suppliers by principal product area. It is apparent from the data that battery suppliers have invested heavily over the past five years. Their average capital expenditure (CapEx) to revenue ratio is nearly four times that of the cohort. While this expenditure has brought a concomitant increase in revenue over the period, the average EBIT margin of the sector is firmly in the middle of the pack. 

The performance divergence within the supply chain is only part of the broader transformation unfolding across the industry. A parallel and arguably more disruptive shift is the rapid rise of mainland Chinese OEMs. These companies have quickly gained ground in both technology and market share, catching traditional automakers in the United States, Europe, and Japan off guard.

Between 2020 and 2023, Chinese OEMs spent an average of 6% of their revenues on capital expenditure. However, in 2024, OEMs headquartered in the Triad countries increased their expenditure by an average of 0.5%, pushing the capital expenditure ratio to surpass 7% for the first time since the peak of the pandemic.

 Mainland Chinese OEMs pressed the accelerator on their development plans in the post-pandemic landscape, embarking on a substantial spending spree focused on infrastructure, technology, and product development that is now yielding significant rewards in the market.  The upward trend in investment underscores the urgency for established manufacturers to bolster their competitive positions.

While mainland China’s lower cost of capital is frequently cited as one of the key reasons behind the rapid improvement and innovation demonstrated by its automotive industry, it is certainly not the only factor driving its remarkable progress.

A coherent and well-integrated government policy framework plays a pivotal role in this success, particularly as epitomized by the government’s 14th five-year plan for the 2021-2025 period. This comprehensive plan emphasizes the development of electric and intelligent vehicles, the establishment of extensive electric vehicle charging and swapping networks, and numerous other initiatives aimed at fostering industry growth.