Value Column von Hans Peter Schupp

17. AUGUST 2023

The right moment for auto suppliers

They are producing less and less, but earning more and more. We are talking about the carmakers. And especially Mercedes, BMW and Audi. Particularly the expensive luxury cars are boosting the business. In the first half of the year, Mercedes-Benz increased its net profit to 7.7 billion euros. This represents an increase of 13 percent compared to the previous year. Sales increased by six percent to almost 76 billion euros. And this was despite higher material costs and negative currency effects.

Mercedes models have become 43 percent more expensive in just four years

But while Mercedes shareholders are happy, others are sorry: automotive suppliers are feeling the effects of Mercedes & Co. building fewer and fewer cars. While the Stuttgart-based company still produced 2.46 million cars in 2020, the figure fell to 2.04 million units last year. And this year, it won’t be much more. With profits continuing to rise. How does that fit together? Well, the good star on all roads has become much more exclusive in recent years. The average price of a Mercedes reached about 72,900 euros last year – an increase of 43 percent over the 2019 level. That’s where the cash register rings! The so-called „Top End Vehicle“ (TEV) Group is paying off.

Suppliers suffer from low volumes

But: The fewer cars are built, the more the suppliers suffer. Whether Mercedes, BMW, Audi or Porsche – all had concentrated on the top models with high margins and earned royally in the process. In contrast to the suppliers, who depend more on volume than on class.

We have experienced many years of low volumes. First it was Corona. This prevented production because no one was allowed to enter the factory halls. Then it was disrupted supply chains – with the same justification. Finally, a shortage of semiconductors. Semiconductor producers preferred to supply Apple & Co. rather than the auto industry. Here, it’s the mass market beating the carmakers.

It was extremely difficult to get these products as an automaker. Nevertheless, they made enormous profits during this period precisely because they concentrated on high-class models. And, not to forget, they didn’t have to give discounts.

Automakers need to rethink

But at some point, the market for the S-Class and BMW 7 Series will be saturated. Now they have to think about the A- and B-Class and the BMW 3 Series again. And then, if possible, offer them as electric cars as well. These will then be volume models again, and the hour of the suppliers should also strike. They are enormously dependent on economies of scale. If little is built, it is difficult for them. But when higher volumes are again in demand, they benefit from the economies of scale.

In the past, the suppliers‘ margins were always higher at higher volumes than those of the automakers themselves. With lower volumes, it was the other way around. And it is precisely such a reversal that we are facing today.

Falling sales in China are a factor for automakers that should not be neglected. But in Germany, we had an overall increase in registrations of 12.8 percent in the first half of the year. For e-cars, it was 31 percent. However, the growth of e-cars overall is only 16 percent. That’s a lot, but it also means that the number of gasoline and diesel cars is still very high and not everything depends on e-cars.

This is the moment for suppliers

We are benefiting from this with some of the portfolio stocks in our Fidecum Contrarian Value Euroland fund. These include Valeo, Plastic Omnium and Sogefi. Valeo specializes primarily in the development of innovative solutions for intelligent mobility, with a particular focus on intuitive driving and the reduction of CO2 emissions. The French supplier Plastic Omnium produces, among other things, plastic exterior body parts and fuel tanks for all leading automakers. In addition, the company, which recently presented really good quarterly figures, has entered the business of vehicle lights, which are integrated into bumpers. Plastic Omnium is thus becoming a component manufacturer and strengthening its market position. And last but not least, the Sogefi Group. The Italians design, develop and produce filter systems and flexible chassis components as well as air intake and engine cooling systems. All these three stocks are favorably valued with a P/E ratio of between 3.4 and 7.8. If volumes pick up again, we should be able to enjoy the investment in all three companies for a long time to come.

Translation for convenience only!

The author: Hans Peter Schupp is a board member of FIDECUM AG and portfolio manager of the Contrarian Value Euroland fund.