Over 40% of China's Auto Suppliers Face Liquidity Issues
More than 40% of China’s auto suppliers face severe liquidity issues in 2009, according to a survey by AlixPartners, and research of the overall industry by the global business advisory firm shows that several of China’s suppliers may fail in the next 12 to 18 months, unless they implement aggressive cash-conservation measures.
The 2009 AlixPartners China Auto-Suppliers Outlook study analysed data gathered from interviews with 40 senior executives from both foreign and domestic players in China’s auto-supply sector and coupled that with research of the industry in China.
According to the research, China’s auto suppliers were both unprepared for, and slow to react to, the dramatic automotive slowdown both domestically and globally last year. In a similar survey by AlixPartners in 2008, 55% of China’s suppliers expected to see more than 20% revenue growth in the 2008-2010 timeframe, along with healthy profit margins, compared with the 40% now saying they face severe liquidity problems due to the downturn.
By the same token, more than 20% in this year’s survey said they endured net losses in 2008 and, for 2009, more than 50% said they expect to see net profit margins of below 5% – while last year, none of the respondents expected net profits to be below 5% this year.
“With external financing difficult to come by, and 2009 likely to be another year of margin compression and slower growth rates, China’s auto suppliers need to radically improve their cash management to generate sufficient liquidity,” said Ivo Naumann, a managing director of AlixPartners and head of the firm’s Shanghai office. “The days of both easy credit and relatively easy cash-flow generation are long gone in the Chinese auto-supply market. Going forward, the winners in this market will be those who maximise all areas of cash management, starting with working capital and operational improvement.”
The survey revealed that China’s suppliers now have working capital requirements more than double the level of their global peers due to inefficiencies both in their supply chains and their business operations. Average working capital requirements for Chinese suppliers in the fourth quarter of 2008 were 74 days (in terms of average sales revenue), compared with 37 days for EU and US suppliers. The research also showed that, in terms of profitability, Chinese suppliers are performing significantly worse than most of their global counterparts, with only US suppliers enduring lower average profit margins.