12 golden rules of top performing automotive suppliers.

While some suppliers have suffered due to changes in the auto industry, many of them have been able to boost their return on investment, a recent study by Roland Berger Strategy Consultants and the investment bank Rothschild shows. We examined more than 350 suppliers which gained an 11.7% average return on capital in 2005. European suppliers had even higher results, with 12.6%. These figures represent an almost three percentage point increase when compared to 2001.

Top performers know what spells "success."

Individual companies experienced the generally positive development within the industry to differing extents. In the period studied, the top performers grew roughly three times as fast as the low performers, with annual sales growth of 10.3% and 3.0%, respectively. Successful companies were also three times as profitable on average, with average return on capital employed (ROCE) of 16.3% vs. 5.7%. The gap between top and low performers has continued to widen over the past five years.

The differences between the two groups come down to a question of strategy, as evidenced in our study. There are twelve levers that top performers have exhibited in achieving their success:

1. Focused product portfolio. Top performers derive 86% of their revenues from their top three product segments, compared to 77% for low performers

2. Broad customer base. Top performers exhibit a lower share of revenue generated from top customers alone

3. Relatively low share of "Big 3" revenues.

4. Globally diversified revenue split. Top performers rely less heavily on home markets

5. Geographic sourcing. Heavy use of low cost locations in production and engineering

6. Selective R & D spending. Level depends on product offerings

7. High value-added per employee. Top performers enjoy EUR 15 k/year advantage per employee in this measure

8. Above-average investment activities. Top performers invest 146% of depreciation in capex (capital expenditures), compared to 109% for low performers

9. Excellence in working capital management

10. Financial flexibility through reduced gearing. Top performers have interest coverage (EBIT/net interest) of 6.1, compared to 1.7 for low performers (this means that top performers have more cash available to invest)

11. Stable corporate management

12. Lean and customer-focused organizational structures.

Vehicle production is likely to increase further in key markets over the next few years. In the future, automakers will be prepared to pay more for products that help them differentiate themselves from other brands. There is still more room for suppliers to maneuver in terms of cutting costs and boosting profitability. By working to emulate the 12 golden rules, suppliers can succeed in this rewarding, if challenging, industry.

By Erkut Uludag, Partner, Roland Berger Strategy Consultants, Detroit Office, [e-mail] and Marcus Berret, Partner, Roland Berger Strategy Consultants, Stuttgart Office, [e-mail]