Autoliv feels the pinch of higher raw material costs

Autoliv, the world's largest producer of airbags and seat belts, expects its 2022 operating margin to take a 3 percentage-point hit from rising raw materials costs. Raw materials are yet another challenge that automotive manufacturers are coping with worldwide, on top of shortages of semiconductors and other supply chain-related production disruptions.

Higher material costs dented Autoliv's fourth-quarter operating margin by nearly 3 percentage points. And in the last quarter of 2020, cost volatility — particularly for magnesium and aluminum — was a key reason the supplier's operating margin dipped to 8.2 percent from 12.2 percent.

Despite the headwinds, Autoliv expects to boost revenue by 20 percent this year and to have an adjusted operating margin of about 9.5 percent. In an interview with Automotive News Europe Managing Editor Douglas A. Bolduc, Autoliv CFO Fredrik Westin outlined how the supplier aims to achieve its objectives. Here are edited excerpts.

Q: A number of suppliers are struggling to get magnesium and aluminum. Which raw materials are causing Autoliv the most headaches?

A: It is those two, even though our exposure is much larger to steel and textiles. So while they play a smaller part in our overall portfolio of raw materials, they are the two that are causing us the most headaches, both in terms of securing supply and price development.

Typically, we have longer-term contracts with our suppliers. But as supply dried up, we had to go out and buy more on the spot market. In those cases, we are not able to buy in at the same prices that we had agreed on. That has been driving up our cost base in the short term.

Is there any relief in sight?

It's difficult to say. Magnesium is mostly sourced out of China. We will have to see how things such as the Winter Olympics [in Beijing], COVID shutdowns and electricity shortages impact the suppliers. That's something we are watching very closely because it has an impact on their ability to supply to us.

That's what's causing the major problems on magnesium. So I don't think it will improve significantly in the short term. However, we should see an improvement throughout the year.

How much will this affect your bottom line in 2022?

For raw materials overall, we are indicating a hit of roughly 3 percentage points for the year, so it is quite significant. That is in contrast to 1.3 percentage points in 2021.

Do you expect you will be able to pass along any of those extra costs to your customers?

Of course, our ambition is to be made whole over time on this. We expect that we will see some recoveries in 2022, but it will be more toward the second half of the year as these negotiations are ongoing. They will not be able to fully offset the hit that we are expecting from raw materials.

Automakers benefited from the semiconductor shortage because their limited inventories allowed them to sell higher-margin vehicles with fewer discounts. Suppliers didn't get the same benefit. Is there a way to balance this discrepancy?

It was a pretty unique year for them as they have never had such a pricing position as they had. We don't have the same levers. Our prices are locked in. We cannot just look at supply and demand and say, "OK, we will make things a bit more expensive."

Then the whole raw material picture is adding to the complexity. That's where we are.

We are in discussions with the automakers because they are the only ones that can pass on inflationary pressure throughout the whole supply chain to the end consumer. Automakers need to make sure that their supply base is sustainable.

China continues to be a positive for Autoliv but it's more volume-based and not a lot of high-end content like you sell to your customers in Europe and North America. How will you balance this?

Especially in the fourth quarter, we saw the Chinese domestic automakers have significantly better market performance than the higher-end brands, especially the premium Western automakers. We are much more exposed toward the upper end of the market, so that mix had a significant impact on us of minus 3 percentage points.

But we are increasing our market share in China across the board. We are well positioned overall in that market. We don't expect what we saw in the fourth quarter to be representative of the future.

When we look at this year, we expect a strong rebound for Europe and the Americas, which should have a positive mix effect for us because that's where we have a much higher content per vehicle.

Is the move to electric and autonomous vehicles potentially beneficial or detrimental for Autoliv?

On average, the battery-electric vehicles that have been introduced so far have been slightly higher positioned in the market. We have a slightly better content per vehicle on higher-end cars in general and have a slightly higher market share on battery-electric versus our average portfolio. So in that sense, electric vehicles are a positive for us.

On the autonomous side, as long as it's not Level 5 [in which there is potentially no steering wheel], we don't see any impact. But we believe Level 5 is probably a few decades away, if it ever comes.

In the short term, Level 2-plus to Level 3 is positive for us because it means more driver monitoring and smarter interiors, which we believe also drives content on our products.

Has Autoliv been impacted by the chip crisis?

We are not a big consumer of semiconductors and are impacted more indirectly through our suppliers and customers. We supply the airbag module and not the control units.

On seat belts and steering wheels, we have semiconductor content, but that's mostly in electronic components and not pure semiconductors sourcing for us.