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      European small and mid-sized auto suppliers: massive expansion of capital expenditures and R&D
      MONDAY, 20/07/2015 - Scope Ratings GmbH
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      European small and mid-sized auto suppliers: massive expansion of capital expenditures and R&D

      In 2014 mid-sized auto suppliers outpaced larger automotive suppliers in investment in capital expenditures (“capex”) as well as research and development (“R&D”).

      In 2014 mid-sized European auto suppliers invested on average more than 10% of revenues as capex (7.5%) and R&D-related expenditures (3.0%), an increase of almost 3% compared to the previous 2013; the first time in a four-year period mid-sized suppliers outpaced their larger competitors in investments.

      While these increased investment efforts are obviously burdening Free Cash Flows (FCF) and leverage in the short term, Scope believes recent capacity and/or product ramp-ups will result in increased cash flow generation leading to an improved financial risk profile in the medium term. Scope also expects recent investments to trigger a period of growth, clawing back lost market share and recovering margins in the medium term.

      Background
      Over the last five years automotive suppliers have witnessed an unprecedented recovery. Larger auto suppliers in particular successfully expanded and refocused their operations, backed by a period of strong growth in light vehicles (“LV”) in the key markets Europe, USA and China. While mid-sized suppliers struggled and hesitated to invest in growth, larger suppliers undertook heavy upfront investments in capex and R&D with stable investment ratios of 9% between 2011 and 2014 to master ongoing technological shifts, global expansion and relocation requirements and changing customer behaviour.

      Conclusion & Outlook
      Scope expects the European automotive industry to maintain momentum into the second half of 2015 and 2016. We believe mid-sized European auto suppliers are likely to look stronger by 2016, backed by expected strong light vehicles production in key markets Europe, North America and China. This is driven mainly by an improving financial risk profile with better credit metrics in the medium term, despite a burdened leverage and FCF generation in the short term.
       

      Download report: European Auto Suppliers: Are Mid-Sized Corporates Closing the Gap?

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