German auto parts suppliers file for bankruptcy more frequently, is the reason for slow electrification transition?

The automotive industry's transition to electrification has proven more arduous than expected, with actual performance falling short of expectations and disappointing returns on investment. What was once seen as an opportunity for transformation has now become an "investment trap" for many supply chain companies that are struggling to keep up.

According to consulting firm Falkensteg, 20 German automotive parts suppliers with annual revenues of more than 10 million euros filed for bankruptcy in the first half of 2024. This figure increased by more than 60% year-on-year, which is a shocking increase.

After all, in 2023, the component supplier bankruptcies fell by 2% due to subsidies, inflation compensation and manufacturers' successful price increases to cope with inflationary pressures, which is particularly worrying now.

The current crisis is similar to the peak of bankruptcies during the pandemic in 2020, when 28 companies exited the market. Although the situation for small and medium-sized suppliers has stabilized in recent years, it remains precarious. The second half of the year will be key to monitoring exit rates as automakers continue to cancel and postpone orders.

The bankruptcies of these companies reflect the huge challenges facing the German automotive industry in its transition to electrification.

According to the German Center for Automotive Research, about 10% of German auto parts suppliers face financial problems in 2024, and these companies are mainly concentrated in the internal combustion engine field.

The Matthew effect is obvious and is undergoing transformation

Among the top 100 suppliers in Europe in 2023, there are 22 German suppliers, 20 Japanese suppliers, 14 American suppliers, 13 Chinese suppliers, and 9 Korean suppliers. It can be seen that Germany is still the strongest king in the automotive supply chain.

As shown in the figure, the top German automotive suppliers will see revenue growth in 2023. Bosch remains the top automotive Tier 1, and Infineon is the top automotive electronics supplier.

However, despite the revenue growth, these German companies are also actively transforming and reforming in electrification, including but not limited to department restructuring, layoffs, and business integration.

Bosch's major restructuring began several years ago. Bosch established the Intelligent Driving and Control Systems Division to centralize domain control across various domains; centralized the new energy sector into a division; in addition, it combined steering and chassis globally to better control the movement of the entire vehicle across domains; and adjusted and reorganized the automotive and intelligent transportation technology business, which was officially named the "Intelligent Mobility Group."

For example, ZF has made a significant investment in Wolfspeed to support the plan to build the world's most advanced and largest 200mm silicon carbide device factory in Ensdorf, Germany. (Although this plan is currently on hold due to Wolfspeed), ZF has established a new partnership with Foxconn in passenger car chassis systems, with each party holding a 50% stake. "Through long-term strategic planning, the group is further restructuring its organizational structure and accelerating its development process to adapt to the new pace of industry change. The new organizational structure includes powerful passenger car, commercial vehicle, and industrial divisions, as well as an efficient aftermarket network. In the long run, all divisions will contribute to the group's development and profitability." Dr. Kohler, CEO of ZF Group, said at the Global Technology Day.

Continental has streamlined the organizational structure of its automotive sub-group and will reorganize its smart mobility business area. The five reorganized business areas are: car networking and architecture, autonomous driving and mobility, safety and dynamic control, software and central technology research and development center, and user experience. It recently announced that it has won regional controller orders from seven automakers in Europe and Asia. Among them, the first local regional controller will be installed in a leading domestic automaker and has entered the mass production stage.

Schaeffler acquired Vitesco Technologies, and the two companies cooperated to expand their influence in the electric vehicle supply chain. Vitesco Technologies is not only the company behind Xiaopeng's 800V technology, but also has received orders of more than 23.2 billion yuan from Hyundai and other automakers in the field of silicon carbide. It has also signed long-term supply agreements of more than 20 billion yuan with silicon carbide companies such as Rohm, Infineon, and ON Semiconductor.

Although Infineon is a semiconductor supplier, as the relationship between OEMs, Tier 1 and semiconductor companies changes, the company has also made deeper investments and cooperation in the automotive field. By focusing on digitalization and low carbonization, Infineon has innovated in power devices, MCUs, sensors, storage and other fields, promoting a series of trends with higher levels of vehicle electronic functions such as electric vehicles, driver assistance systems, and software-defined vehicle architectures. However, in the face of the pressure brought by the Tier 1 transformation, Infineon has launched a company-wide "Step Up" plan, hoping to bring the company another 500 million to 1 billion euros in profit growth each year through structural optimization and improvement.

In short, in today's hot automotive electrification and automation era, the pressure of increasing revenue without increasing profits is no less than that of OEMs.

Has China taken away the jobs of German companies?

Lower-than-expected demand for electric vehicles in Europe and the United States is the primary factor that has put parts suppliers in trouble. Many local suppliers hope to take advantage of the growth opportunities brought about by the transformation, but find themselves trapped in investment difficulties and facing huge pressure. Even large automakers are struggling to cope with the challenges, especially when facing the rapidly emerging and cost-competitive Chinese supply chain.

European lithium battery manufacturers have also suffered setbacks. Northvolt recently lost a $2 billion order from BMW due to insufficient process yield, and Volkswagen is reportedly re-evaluating its orders. ACC, a lithium battery factory jointly established by Stellantis and BMW, has even suspended construction.

In contrast, Chinese companies have been actively expanding their presence in Europe, leveraging their competitive advantages in manufacturing and cost. This has prompted European automakers to reconsider their partnerships, especially in the field of lithium iron phosphate batteries, where Chinese companies excel.

The implementation of V2X technology and software-defined hardware has also failed to meet the optimistic forecasts before 2020. European automakers that have invested heavily in these areas are now facing returns far below expectations and are turning to professional software suppliers for solutions.

Interestingly, Tesla and China's new car-making forces have achieved relatively good results and faster progress in software deployment because they directly entered the electrification era. On the other hand, mainstream car companies in Europe, the United States, Japan, and South Korea are burdened with many safety risks accumulated in the era of fuel vehicles, and their transformation pace is more cautious.

On July 22, Xpeng Motors issued an announcement on the Hong Kong Stock Exchange that following the signing of a strategic cooperation framework agreement on electronic and electrical architecture technology with Volkswagen Group on April 17, 2024, the company signed a strategic cooperation and joint development agreement on electronic and electrical architecture technology with Volkswagen. Both parties will devote their full efforts to developing industry-leading electronic and electrical architecture for Volkswagen's CMP and MEB platforms produced in China. The first model equipped with it is expected to be mass-produced in approximately 24 months.

Among them, the CMP platform is a local platform developed by Volkswagen "in China, for China" and built specifically for the Chinese market. It adopts a domestic supply chain system and serves the A-class pure electric entry-level models for the Chinese market. The first model will be launched in 2026; the MEB platform was born in 2018. It is Volkswagen’s first modular pure electric drive platform for the global market, covering a wider range of models.

On December 8, 2023, Horizon Robotics and CARIAD, a software company under the Volkswagen Group, officially announced the establishment of the joint venture CARIZON. As an important part of the official announcement of the cooperation between the two parties in 2022, the new joint venture will integrate Horizon Robotics's hardware and software technology capabilities and CARIAD's experience in intelligent body and software system integration to develop a full-stack advanced driver assistance system and autonomous driving solutions.

This also marks that Volkswagen has chosen Chinese partners for both electrification and automation.

Last words

The wave of bankruptcies faced by German auto parts suppliers not only reflects the challenges of the transformation process, but also reveals the complex reality of the global automotive industry on the road to electrification. Although Germany remains a strong player in the automotive supply chain, the pace and direction of the transformation face many uncertainties. In this process, Chinese companies have demonstrated their advantages in cost control and technological innovation, gradually eroding the market share of German companies.