Comprehensive analysis of pressure to transform and existential fears: How the automotive supply industry is being put to the test

A threatening situation for numerous companies

The crisis in the automotive supplier industry has become increasingly clear in recent years and has developed into a threatening situation for numerous companies. Many companies face existential challenges, which are often due to a combination of global, technological and political influences. In times of supply chain interruptions, rising energy prices and a fundamental transformation towards electromobility, many suppliers are finding it difficult to survive in the market. At the same time, they often find themselves caught between the millstones of automakers and end-customer demand, placing significant strain on their profit margins and economic stability. The following explanations not only shed light on the causes and the complex interaction of the various crisis factors, but also show approaches to how companies and politicians could work together to counteract it.

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Pressure for transformation through electromobility

“The automotive industry is currently undergoing profound change,” explained an industry expert. This change began a few years ago when it became clear that the internal combustion engine would be replaced or at least supplemented in the medium term by alternative drives and in particular by electric drives. An associated immense challenge for suppliers is to recognize this transformation in good time and to diversify and adapt their products, business models and production processes accordingly. Many companies that previously manufactured classic components for internal combustion engines are now faced with the question of how they can transform their portfolio so that it remains competitive in a world of popular electric vehicles.

Geopolitical tensions and global crises

At the same time, geopolitical tensions and global crises are increasing, which are putting a heavy burden on the industry. Due to trade conflicts, increased competition on the global market and general uncertainty in economically and politically unstable times, suppliers have to adapt to ever new challenges. For example, the COVID-19 pandemic led to massive supply chain disruptions and material shortages. Although the consequences appear delayed in some regions, they are still noticeable in many places. The war in Ukraine and other geopolitical conflicts have also led to increasing insecurity and shortages of energy and raw materials.

Challenges especially for German suppliers

In this context, the importance of the German automotive industry, which traditionally plays an important role in the national economy, is repeatedly pointed out. But German suppliers in particular are under increasing pressure because energy-intensive production in this country is often more expensive than in many other countries. While some large automobile manufacturers are able to pass on their costs or cushion them through global production networks, many suppliers are more dependent on individual markets. This means they get into trouble more quickly if sales markets shift or production start-ups are delayed.

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Impact on the entire value chain

“The supplier crisis is a challenge for the entire value chain,” is how a manager of a large automobile manufacturer summarized the situation. If suppliers go bankrupt, OEM production also comes to a halt. Ultimately, automobile manufacturers depend on punctual, smooth and high-quality deliveries. If financial difficulties lead to bottlenecks or even failures in the supply chain, entire production lines can come to a standstill. This can not only lead to significant costs, but also to a loss of image.

Examples of the current crisis situation

A typical example of the current crisis situation is the mbw group, which had to file for insolvency. According to statements from industry insiders, delayed series start-ups, planning uncertainties and increased costs for energy, materials and personnel led to massive financial difficulties. What is particularly striking is that many of these factors could not be influenced, or only to a limited extent, by the suppliers themselves. Another well-known case is the company WKW, where a failed investor deal ultimately led to bankruptcy. These cases make it clear that even supposedly well-established suppliers can get into trouble within a short period of time through no fault of their own.

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In order to examine the causes of this crisis in more detail, it helps to take a look at the various factors that work together:

High energy prices

Firstly, the high energy prices in Germany are particularly affecting those sectors that require a lot of electricity and heat for their production processes. Suppliers who, for example, process metals, treat surfaces or produce complex components are therefore particularly affected by the increased electricity and gas prices. For a long time it was common practice for price increases to be at least partially passed on to end customers. But in an increasingly competitive market, this is no longer possible without restrictions. Many suppliers are forced to bear a large part of the additional costs themselves.

Material shortages and price increases

Secondly, material shortages and price increases play a major role. During the pandemic, supply chains collapsed or were massively disrupted in many places, making it difficult to procure important intermediate products. Many companies struggled and are still struggling with delays. At the same time, prices for raw materials such as steel, aluminum, copper and rare earths have increased. This increases the cost pressure immensely. Suppliers have to plan their inventories better, adjust storage capacities and are often forced to resort to more expensive alternative products if certain materials are impossible or difficult to obtain.

Volatile markets

Third, the markets themselves have become more volatile, particularly when it comes to vehicle sales. Although electromobility is on the rise, it is not yet clear at what speed it will replace the internal combustion engine. “Consumers are currently more reluctant to buy new vehicles,” explained a market researcher. Uncertain economic prospects, higher inflation and increased costs of living reduce purchasing power and make large investments such as purchasing a vehicle less attractive. For suppliers, this has a direct impact on the planning and production processes. When manufacturers reduce or postpone their orders, factories are underutilized.

Reorientation for electromobility

Fourth, suppliers who previously specialized primarily in components for combustion engines must develop new skills and products as quickly as possible. The switch to electromobility often means that your existing products will be in less demand in the future or may even become completely obsolete. In the past, it was sometimes enough to accompany the evolution of combustion technology and adapt individual components. But now a revolution is underway in which fundamentally different components are required: battery systems, control and regulation technology for electric drives or lightweight materials to compensate for the higher weight of the batteries. Many suppliers therefore invest large sums in research and development, have to completely realign their production processes and need suitable, highly qualified personnel - a process that cannot be achieved overnight.

Challenges of just-in-time production

Fifth, just-in-time production, which has long been considered a prime example of efficient supply chains, has revealed its pitfalls in times of crisis. If disruptions or failures occur in a single link in the chain, this has an immediate impact on all downstream companies. For suppliers who rely on maximum planning and continuity, even a small delay in the delivery of raw parts can lead to serious production stoppages. Although this vulnerable structure is not new, it has been further exacerbated by global crises and increasing risks.

Restrictive capital allocation

Sixth, suppliers struggle with restrictive capital allocation and an often more difficult capital situation compared to large automobile manufacturers. Banks and investors have sometimes become more cautious when it comes to financing companies whose business model does not appear to be clearly future-proof in times of change. For suppliers, this means that they face additional hurdles when looking for fresh capital, for example for new projects or to modernize their production facilities. This in turn slows down the urgently needed transformation process, which further weakens competitiveness.

Internal factors

In addition to external factors, internal factors also play a role in many cases. Management errors, a corporate culture that is too static or a failure to adapt corporate structures to new market requirements can also contribute to a crisis arising or worsening. Some suppliers may have realized too late that they need to diversify more to avoid being dependent on a few large customers. “If a supplier only has two or three large clients and one of them drastically reduces its orders, this can immediately trigger an existential crisis,” explained a management consultant.

Human resources planning and development

Another aspect is personnel planning and development. Automotive suppliers increasingly need skilled workers who are familiar with electromobility, digitalization and new technologies. However, the shortage of skilled workers is a growing problem in Germany and other industrialized countries. “We are desperately looking for engineers who can advance our new projects,” reported a supplier who wants to get into battery production. If companies do not find these urgently needed talents in a timely manner, this in turn delays important innovation projects.

Global competition

In view of the global economic situation, German suppliers are also confronted with increasing competition from abroad. In markets like China, production costs are sometimes significantly lower, but at the same time companies there have further developed their manufacturing technologies in recent years and are constantly improving their quality standards. “Chinese competitors are entering the market at very attractive prices,” noted one market researcher. This puts additional pressure on German suppliers. Car manufacturers are increasingly relocating their production to countries where they can benefit from lower labor costs, lower energy costs and more favorable tax policies.

The situation is therefore highly complex and requires different solutions. Some measures are already being implemented or at least planned:

1. Flexibility and adaptability

Numerous suppliers are trying to diversify their product range, develop new technologies and participate in pioneering projects at an early stage. “We have learned that we can no longer rely solely on combustion engine components,” said a managing director who has now converted a significant part of his production capacity to components for electric vehicles. However, this requires not only technical know-how, but also the willingness to change processes and ways of thinking in the company.

2. Innovation and research

Many suppliers are investing in the development of new materials, lightweight construction concepts and intelligent systems in order to stand out from the competition. Software solutions and digital services related to cars are also becoming more important. There is also a trend towards connected vehicles and autonomous driving functions, which require additional skills in the areas of artificial intelligence and data analysis.

3. Diversify the customer base

A one-sided dependence on a few large OEMs is increasingly recognized as a risk factor. Some suppliers are orienting themselves towards other industries, such as aerospace or medical technology, in order to reduce their dependence on the automotive sector. Others are specifically looking for collaborations with foreign manufacturers in order to gain a foothold in new markets.

4. Greater collaboration and cooperation

In order to reduce costs and achieve synergies, some suppliers enter into collaborations with competitors. This new openness can come into play, for example, in joint research projects or in the shared use of production facilities. “In times of crisis, it helps to form alliances instead of fighting each other,” said an industry expert.

5. Political support

In some cases, government funding programs are set up to strengthen companies' innovative strength. Improved access to financing, targeted infrastructure measures and investments in education and research can relieve the burden on automotive suppliers. At the same time, there are debates about whether subsidies for certain technologies (for example for electric drives or hydrogen drives) make sense and how they can be used most effectively without creating distortions of competition.

6. Efficient restructuring

Companies that get into financial difficulties often need a structured insolvency or restructuring process in order to consolidate and continue business operations. It is important that the procedures are carried out quickly and effectively so that as many jobs as possible are retained and know-how is not lost. However, this process can take a long time if investors withdraw, the company's situation is unclear or high debts are pressing.

7. Strategic investments in personnel

In order to master the transition to the age of electromobility, new qualifications and specialist knowledge are necessary. Therefore, some suppliers rely on targeted further training, retraining and advanced training to prepare their own workforce for the requirements of the future. In addition, they try to attract highly qualified specialists by not only relying on attractive salaries, but also on flexible working models and modern corporate cultures.

Risks and opportunities for suppliers in the automotive industry

The examples of the mbw group and WKW show how quickly a company can get into dangerous difficulties. If an agreed investor deal falls through or if increased material and energy prices cannot be compensated for, just a few weeks are often enough to pull the rug out from under the company. In these cases, insolvency proceedings make headlines and cause uncertainty throughout the supplier industry. Anyone who cooperates with the affected companies must quickly find alternatives in order to avoid their own delivery failures. This dynamic can quickly come to a head if several links in the supply chain experience a crisis at the same time.

Dependency between OEMs and suppliers

“The supplier crisis is an indicator of how vulnerable the entire automotive ecosystem has become,” commented a management consultant who specializes in transformation processes in the industry. Relationships between OEMs and suppliers are traditionally close, but in many cases the dependencies appear to be greater than manufacturers would like. A failure at a specialist supplier that supplies a specific component that is not easily replaced can shut down entire production lines at an OEM. This makes it all the more important that there is close coordination and cooperation between manufacturers and suppliers in order to intercept crises at an early stage.

Opportunities through electromobility

On the one hand, electromobility is driving the crisis because it requires investments and a change in technology, but at the same time it also offers opportunities. Anyone who builds up the necessary skills early on and develops products that are needed in new vehicle concepts can stand out from the competition. Battery research, charging infrastructure, lightweight construction technologies or drive components for hybrid and electric vehicles are areas in which suppliers can distinguish themselves. New markets are emerging here, not only in the passenger car segment, but also for commercial vehicles, buses, two-wheelers and micro-mobility concepts such as e-scooters.

Political uncertainties and technology issues

However, there are still risks that will also be decided politically: Which type of drive will be promoted in the medium to long term and which technology will prevail in which markets? In some countries, battery-electric vehicles dominate, while others rely more heavily on fuel cell technology. A question that has not yet been clearly answered is: Will synthetic fuels, so-called e-fuels, be relevant for cars on a larger scale or only developed for use in aviation and shipping? Each scenario requires different technical components and creates new opportunities and risks for suppliers.

Strategic direction and risk management

In times when change is so strongly influenced by global influences, a clear strategic direction is essential for suppliers. “A company must be aware of where it wants to be in five or ten years,” emphasized a corporate strategy expert. It helps to develop scenarios and align yourself with several possible images of the future. Anyone who focuses all their resources solely on the topic of battery-electric driving could reach a dead end when making a technological leap towards hydrogen - or vice versa. Diversifying your own skills is therefore a type of risk management.

Digitalization as the key to success

In order to survive in the market in the long term, the digitalization of processes within companies is essential. Many suppliers are not only faced with the question of how to make their physical products future-proof, but also how to become more efficient and faster using data, automation and connected production processes. Modern manufacturing concepts, such as Industry 4.0, enable close communication between machines, predictive maintenance and flexible adaptation to fluctuating production numbers. However, this requires significant investments and requires well-trained staff in areas such as IT, mechatronics and robotics.

Sustainability as a competitive factor

In addition to digitalization, sustainability is a rapidly growing topic. Environmental regulations and social expectations make it necessary for suppliers to optimize their production not only in terms of costs and quality, but also in terms of ecological standards. Energy efficiency, recycling concepts and reducing the CO₂ footprint are becoming increasingly important. Many car manufacturers now evaluate their suppliers based on clear sustainability criteria and prefer those that meet strict environmental management requirements. For some companies, this can be an opportunity to position themselves as a pioneer and create an important unique selling point.

Transformation and employee development

Despite all the difficulties and uncertainties, the transformation of the automotive industry also offers opportunities for redesign and securing the future. Numerous traditional suppliers have successfully proven that they can make the leap from conventional components to highly complex electronic components or software. “We see our future in intelligent and networked systems for vehicles,” said a medium-sized managing director. This optimism is important, but should not obscure the fact that the transformation process remains a balancing act for many companies.

Shortage of skilled workers and training

Training and further education as well as employee recruitment represent a decisive factor. Personnel with technical expertise are needed to such an extent that there is now a real bottleneck. At the same time, the requirements have become higher because technologies are developing rapidly and employees often need the latest knowledge in areas such as electrical engineering, software development and data analysis. The introduction or expansion of dual study programs, cooperation with universities and targeted vocational training programs could be solutions to attract sufficiently qualified personnel. The goal is to make the workforce fit for change and to show them perspectives so that they don't leave.

The importance of the middle class

Small and medium-sized businesses, which are traditionally considered the backbone of the economy and innovation in Germany, are particularly important. Many medium-sized suppliers have specialized in certain niches and have successfully built up a high level of expertise in their field over decades. However, they often lack the resources and financial cushion to make big leaps in transformation. You can't work with huge development budgets or convert entire production lines into new technologies without taking significant risks. Strategic alliances or mergers with other companies would make sense here in order to achieve economies of scale and share development costs.

The challenge of networking

“We need to network more closely and no longer just look at our own, often limited budget,” emphasized a spokesman for a medium-sized supplier association. At the same time, the cultural differences between companies should not be underestimated. Successful cooperation requires trust and a certain willingness to compromise. Nevertheless, the pressure is so great that many companies have now become more open to such collaborations.

Political responsibility and framework conditions

Another aspect that is often addressed is political responsibility. Politics can create framework conditions that make the transition easier for suppliers. Tax incentives for investments in research and development, modernization of infrastructure, the expansion of renewable energies to provide affordable and clean energy in the long term, or funding programs for regional innovation clusters are just a few examples. The rapid expansion of the charging network for electric vehicles also has an indirect positive effect on those suppliers who supply components for e-mobility, as this increases the demand for e-vehicles.

Criticism of government programs

Criticism sometimes comes from business, which complains that government programs are often too bureaucratic or too narrow. “We need targeted help so that it really reaches the companies that need it,” said a business representative. A constant dialogue would have to take place here in order to adapt the funding instruments to the real needs of the companies. At the same time, it must be taken into account that state aid can never solve all problems if there are fundamental entrepreneurial decisions or a lack of willingness to adapt.

A look into the future

A look into the future shows that there will probably be no quick and easy solution that will abruptly end the supplier crisis. Rather, we will experience a structural change that may last a decade or two. The automotive industry is one of the largest and most innovative sectors in the world, but it is undergoing unprecedented upheaval. A changed mobility landscape is emerging that, in addition to electric drives, also includes autonomous vehicles, car sharing models and other mobility concepts. New players, for example from the tech industry, are entering the market and increasing competition.

Adaptation and survival

“If you want to survive in this game, you have to reshuffle your cards,” said an economics professor. For suppliers, this means maintaining old strengths, such as high quality standards and precise production, but at the same time being open to new ideas, collaborations and technologies. Companies are required to make their processes leaner, react more quickly to changes and actively acquire knowledge that goes beyond traditional mechanics.

Opportunities for the European automotive industry

If this succeeds, automotive suppliers could become a decisive factor for the competitiveness of the European automotive industry. They have valuable experience, well-established networks and a deep understanding of vehicle construction. With the right strategy, they could not only maintain their position in the global market, but also take on pioneering roles in certain segments, for example in the area of ​​highly specialized e-components, sustainable materials or digital vehicle-related services.

Lessons learned from the crisis

Ultimately, the supplier crisis reveals weaknesses that have built up over years, but it also offers the opportunity for a necessary new beginning. Many companies have already recognized that they have to abandon old paths in order to emerge stronger from the upheavals. They invest in new business areas, expand their know-how, look for partners, rely on digitalization and sustainability and reposition themselves in a global, rapidly changing market. This process is painful, but if implemented consistently, it can lead to a more resilient, competitive and innovative supplier landscape.

The role of suppliers

“In the end it will become clear who is willing to take the risk of change,” said a veteran industry insider. Car manufacturers need a robust supply chain and innovative partners who will help them shape the mobility of the future. The suppliers are therefore not a marginal figure, but are at the center of these developments. If they succeed in establishing themselves in new technological fields, their influence on the industry will remain unbroken. However, if they fail to keep up, there is a risk of bankruptcies and the loss of highly qualified jobs.

Structural change in the automotive industry

Overall, the crisis facing automotive suppliers is not just a short-term phenomenon, but rather an expression of a comprehensive structural change that affects almost all areas of the industry and many parts of society. Companies must adapt their strategies, politicians must create supportive framework conditions and the workforce must actively shape the change. Only by pooling forces and a common understanding of goals and measures can we pave the way to a successful future. Traditional strengths such as quality, precision and reliability can be combined with new innovations in fields such as digitalization, electromobility and sustainable production. This could ultimately result in a robust and competitive supply chain that endures even in turbulent times and does its part to maintain the automotive industry as one of the central sectors of the economy.

This analysis thus achieves a central insight

The supplier crisis is not the end of a success story, but rather the beginning of a new chapter in which adaptability, cooperation and technological leadership are more important than ever before. Anyone who tackles this development resolutely and consistently looks forward has the best chance of taking a leading role in the new world of mobility. However, anyone who hesitates and relies on old recipes for too long risks being overtaken by international competition. For Germany as a location, but also for other industrialized countries, it will become clear how well politics, business and society work together to shape this transformation and lay the foundations for a sustainable and future-proof automotive supplier industry.

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