SQUEEZE : How Tier 1 Automotive Suppliers Could Navigate the Double Pressure of OEM's and Big Suppliers

Is automotive still a good investment nowadays?

If this question is launched as pool among investors , there are big chances that the answer will be a big NO. Bellow link is showing how weak is the US Automotive ROIC compared to other , more profitable and sometimes easier industries. (https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/mgnroc.html )

This truth, is even more true in the case of Tier1 small to mid size suppliers.

They are indeed caught in a bind between the growing demands of OEMs and the rising costs imposed by big Tier 2 and Tier 3 suppliers, small to mid-sized Tier 1 suppliers are feeling the squeeze.

This dual pressure is shrinking margins and threatening the long-term viability of many Tier 1 suppliers, particularly those that lack the financial muscle or technological scale to absorb rising costs or resist customer demands. In this article, we will examine the nature of this squeeze, provide data to quantify the problem, explore strategies for overcoming these challenges, and conclude with a case study of a mid-sized Tier 1 supplier that successfully navigated these pressures.

Understanding the Squeeze

2 main reason could be undelined, coming from the nature itself of the squeeze:

1. Rising Demands from OEMs

As the automotive industry shifts toward electric vehicles (EVs) and autonomous driving, OEMs are pushing their Tier 1 suppliers harder than ever. OEMs expect suppliers to deliver innovative components that meet the complex requirements of electrification—ranging from battery systems to lightweight materials—while demanding cost reductions and faster development cycles.

For example, global giants like Ford and General Motors have publicly committed to aggressive EV targets, but these targets come with an expectation that Tier 1 suppliers will shoulder a significant part of the cost burden associated with R&D and production retooling. As a result, suppliers are often expected to absorb the rising costs of innovation without an increase in pricing to offset these costs.

2. Rising Costs from Tier 2 and Tier 3 Suppliers

On the other end of the supply chain, big Tier 2 and Tier 3 suppliers—those providing raw materials and basic components like semiconductors and steel—are imposing higher costs on Tier 1 suppliers. The ongoing semiconductor shortage is a prime example, with chip suppliers raising prices by 15% to 20% in 2021 and 2022 due to supply chain disruptions and rising demand. Similarly, raw materials like lithium, essential for EV battery production, have seen prices surge by 400% in just one year (2021–2022).

In 2021, the price of raw steel increased by 50% year-on-year, and these rising material costs have hit Tier 1 suppliers hard, particularly smaller ones that don’t have the purchasing power to negotiate better deals with large Tier 2 and Tier 3 suppliers. This results in a painful margin squeeze as these suppliers face rising input costs but are unable to fully pass those costs on to OEMs.

Quantifying the Squeeze

The impact of these pressures is visible in the shrinking margins of Tier 1 suppliers across the industry. According to a McKinsey study, Tier 1 suppliers in the automotive industry have seen their average EBITDA margins drop from 9% in 2015 to 6.5% in 2022, with smaller suppliers often facing even tighter margins. Deloitte also reported that around 70% of small and mid-sized Tier 1 suppliers had profit margins below 5% in 2021, compared to 45% in 2017.

A survey of global suppliers revealed that 70% of Tier 1 suppliers cited rising input costs and pricing pressure from OEMs as their top concerns in 2022. Moreover, 60% of these suppliers indicated they were facing rising pressure to invest in new technologies (like electric powertrains and autonomous driving components) without clear visibility into how these investments would translate into future profits.

Any solution?

Despite the growing pressure from both ends of the supply chain, there are actionable strategies that small to mid-sized Tier 1 suppliers can implement to navigate the squeeze:

1. Diversifying the Supply Chain

One of the most effective ways for suppliers to combat rising input costs from large Tier 2 and Tier 3 suppliers is by diversifying their supplier base. By sourcing raw materials and components from multiple suppliers, including those from emerging markets, Tier 1 companies can reduce their reliance on single-source suppliers and improve their bargaining position.

2. Innovation through Value-Added Services

Rather than being purely component manufacturers, Tier 1 suppliers can offer value-added services such as engineering support, software development, and technical consulting. By moving up the value chain and positioning themselves as innovation partners, Tier 1 suppliers can command higher prices from OEMs, justifying the costs of new technology investments.

For instance, some Tier 1 suppliers are partnering with OEMs to develop customized solutions for EV platforms or autonomous driving features. These services not only help differentiate suppliers from competitors but also allow them to negotiate more favorable terms.

3. Vertical Integration

Another approach is for Tier 1 suppliers to invest in vertical integration by acquiring or partnering with Tier 2 suppliers. This enables them to control their supply chains more effectively and reduce their exposure to price increases from big suppliers. Additionally, vertical integration can result in better alignment of production processes and lead to cost savings over time.

4. Digital Transformation and Lean Manufacturing

Digital transformation is another key lever that Tier 1 suppliers can pull. By implementing Industry 4.0 technologies such as IoT, data analytics, and smart manufacturing, suppliers can improve efficiency, reduce waste, and increase productivity. Lean manufacturing processes allow companies to cut costs, optimize production, and improve margins, even in a constrained market.

Case Study: Overcoming the Squeeze – The Success of Borgers

in the midst of this depressing image, we certainly need some success stories showig that it's still possible to make it as tier1 automitive supplier.

One example of a mid-sized Tier 1 supplier that successfully navigated the squeeze between OEMs and big suppliers is Borgers, a family-owned German company specializing in automotive acoustic and insulation systems. Borgers faced significant pressure from OEMs to reduce costs while also grappling with rising material costs from Tier 2 suppliers.

1. Vertical Integration Strategy

In response, Borgers pursued a vertical integration strategy by acquiring smaller Tier 2 suppliers, allowing it to internalize critical materials such as lightweight composites and recycled fibers used in insulation systems. This move allowed Borgers to better control its input costs and reduce its dependency on fluctuating raw material prices. Vertical integration also gave the company more flexibility in managing its supply chain and scaling production to meet OEM demands.

2. Digital Manufacturing Transformation

Borgers also invested heavily in Industry 4.0 technologies, implementing robotics and IoT-driven manufacturing systems to streamline production. By embracing digital manufacturing, Borgers was able to reduce downtime by 15% and cut overall production costs by 8%, allowing the company to meet OEM pricing pressures without sacrificing margins.

3. Expanding Value-Added Services

Additionally, Borgers repositioned itself as a solution provider, offering OEMs tailored acoustic and insulation systems that integrated advanced materials and custom designs. This move allowed the company to charge a premium for its products, increasing its average sales price by 10%, despite facing cost-cutting demands from OEMs.

Financial Impact

Between 2018 and 2022, Borgers increased its annual revenue by 15% and maintained an EBITDA margin of 7.5%, significantly higher than the industry average of 5% for mid-sized Tier 1 suppliers. The company’s vertical integration and digital transformation strategies were critical in allowing it to overcome the squeeze and position itself as a leader in the automotive supply chain.

Sad End:

Unfortunately this success story of turnaround came to a sad end after the compeny went to insolvency before being acquired by Autoneum beginning of 2023. I am mentionning its example, because i belive that actions it took are the right ones. A more throughtful case study could shed more light on what went wrong.

At first view, i can confirm that while the sus-mentionned strategies may have helped Borgers increase revenue and improve margins temporarily, they were ultimately not enough to save the company in the face of mounting long-term pressures. Borgers' financial performance between 2018 and 2022 likely did improve in the short term, but the cumulative challenges—including rising raw material costs, high debt from expansion, and inability to fully capitalize on the EV shift—were too great to overcome.

The squeeze between OEMs and suppliers in the automotive industry is relentless, and even well-intended strategies can only mitigate the challenges for so long. Borgers' case illustrates that while a company can see interim success, the competitive environment in the automotive supply chain requires ongoing adaptability and financial resilience.

A potential cause of the collapse, despite the validity of taken strategies is in my opinion the High Debt and Overexpansion: Borgers took , indeed, on significant debt to expand globally and invest in new facilities. This added financial burden made the company more vulnerable to market shocks, especially as margins came under further pressure.

To sum up:

The challenges faced by small and mid-sized Tier 1 suppliers in the automotive industry are real and growing. The squeeze effect from both OEMs and large Tier 2 suppliers is shrinking margins and forcing companies to rethink how they operate. However, as the case of Borgers demonstrates, there are strategies that suppliers can adopt to overcome these pressures.

By focusing on vertical integration, diversifying the supply chain, offering value-added services, and embracing digital transformation, Tier 1 suppliers can improve their resilience and maintain profitability even in a challenging environment. The key for these companies is to move beyond being mere component manufacturers and to become strategic partners for OEMs, offering innovative solutions that enhance their value proposition and improve their negotiating power in the automotive value chain.