Summary of Key Points
In 2025, the A-share automotive parts industry will experience increased revenue but not higher profits: overall sales will grow, yet gross profit margins will continue to decline (by 0.5 percentage points compared to 2024 and by 3 percentage points compared to the fuel vehicle era). Leading companies will maintain their profitability, while those at the bottom of the market will see a worsening situation, leading to increased differentiation within the industry. The next five years will be a critical period for reshaping the industry. Companies cannot expect to return to past levels of profit and must accept the reality of reduced margins as the norm. They need to understand their position in the market and adjust their strategies to survive and thrive.
Detailed Analysis
1. Why is it becoming harder for companies to make a profit? Four structural challenges that are difficult to overcome in the short term
The main reasons behind the declining profits of parts manufacturers include:
- Intense price pressure from automakers: The slow growth of the overall vehicle market and increasing homogenization of car models have led to price wars among automakers, who demand lower prices from parts suppliers, with some categories seeing even more significant price reductions each year.
- Rising costs: Regular increases in raw material and energy prices, as well as expenses for labor, compliance (such as environmental regulations), and digital transformation, significantly erode profits.
- Required investment in research and development (R&D): To secure orders for next-generation vehicle models, companies must invest heavily in R&D, even if it means minimal returns. Additionally, the time required to bring products to market is getting shorter, further reducing profit margins.
- The impact of the RMB appreciation: Many parts manufacturers generate 30% of their revenue overseas; the appreciation of the RMB reduces the amount of dollars they earn when converting profits back into local currency.
To make matters worse, leading automakers are becoming more powerful, increasing their bargaining power, and it is unlikely for parts suppliers to see a recovery in profits without taking proactive measures.
2. Not all parts sectors are equally affected: Some are still profitable, while others are struggling
Although overall industry profits are declining, different parts categories face varying outcomes:
- High-profit segments: These parts are either unique (e.g., lidar, high-end automotive lenses, software) or have concentrated supply (e.g., automotive glass with additional premium features like panoramic sunroofs and tinted windows), or require specialized customer certifications (e.g., seat headrests). Their gross profit margins can remain above 25%-30%.
- Moderately profitable sectors: Parts such as high-performance batteries, domain controllers, and vehicle lights have margins of around 18%-25%. While they face price pressure, large production volumes and cost-effective supply chains help mitigate the impact. However, fluctuations in raw material prices or reduced orders can still affect profits.
- Struggling sectors: Parts for interior and exterior trim (with little differentiation and intense price pressure from automakers) and assembly of vehicle camera modules (low technical complexity) have margins as low as 10%-15%. Some second- and third-tier battery manufacturers are already experiencing negative margins.
- Declining demand segments: The transition to electric vehicles is reducing the demand for traditional engine parts, and the consolidation of electronic systems is leading to lower usage of components like low-voltage wiring harnesses. These sectors face both reduced volumes and lower profits, narrowing their viability.
3. Identifying your part category’s profit model
Roland Berger has identified four types of profit models:
1. High-margin, diverse markets: Products with high technical barriers and significant differences (e.g., lidar) allow companies to charge higher prices due to customer demand for better performance. However, excessive R&D investment can erode profits.
2. High-margin, winner-takes-all markets: Large-scale operations and substantial R&D investments (e.g., high-performance batteries) create a competitive advantage, with only a few companies earning significant profits. Leading players must be prepared for changes in technology or potential competition from new entrants.
3. Low-margin, highly competitive markets: Average industry margins are low, but leading companies can maximize profits through efficient management and scale (e.g., certain interior and exterior trim suppliers). The key is to operate more efficiently.
4. Low-margin, highly fragmented markets: Products with little differentiation and concentrated customer bases leave parts manufacturers with limited bargaining power and high equipment costs. Short-term survival relies on cash flow; long-term options include diversification or exit from the market.
4. Strategies for survival and growth
Based on your part category’s profit model, consider these strategies:
- Categories with both volume and profit challenges: Act quickly to transform by leveraging existing precision manufacturing and supply chain capabilities into growing markets (e.g., smart components).
- Categories with increasing volume but low margins: Improve efficiency through automation and control of raw material costs; establish nearby factories to reduce logistics expenses. Well-managed companies can also consider acquisitions to increase profits.
- High-margin categories: Protect your competitive advantage by quickly monetizing technology and adopting diversified business models (e.g., combining hardware, software, and services).
General guidelines for success:
- Cash flow is more important than profit: Spend wisely and allocate funds to value-creating activities, ensuring sufficient cash for one year of operations.
- Globalization is essential: Expand overseas to gain higher prices and diversify risks, though international operations are more complex.
- Consider potential cross-industry opportunities: While there may be synergies (e.g., robotics and automotive parts), assess whether they are viable and avoid becoming a money-consuming venture.
- Seize mergers and acquisitions: Low-margin, slow-growing companies can expand their scale and bargaining power through acquisitions.
The next five years will see the elimination of some companies, but new players will emerge. Parts manufacturers must first understand their position in the market and take decisive action to adapt to the new normal and survive.