Suppliers re-prioritize shareholder returns over growth as EVs fall short of expectations

Gone are the days of suppliers touting major new factory investments for electric vehicle parts and their potential for growth in new markets and segments. Now suppliers are more likely to brag about cost-reduction efforts, improvements in profit margins and their ability to repurchase shares.

Major publicly traded suppliers, grappling with lower-than-expected EV production and sales outlooks, plan to boost free cash flow and return capital to shareholders instead of chasing growth.

It's a meaningful change for many suppliers driven by evolving market dynamics—and Wall Street expectations.

"The market used to give the highest valuations to suppliers with the best growth prospects," said Emmanuel Rosner, managing director of equity research at Wolfe Research. "Now it's about free cash flow conversion, which supports this idea of focus on cost reduction, margin improvement and right-sizing capital that's invested."

Magna International Inc., North America's largest supplier, is an example. Magna touted investments in its EV battery enclosure assembly business and other electrification technologies in previous quarters.

The company returned about 15 percent of its capital to shareholders through share repurchases and dividends in 2023, down from 44 to 52 percent in the previous 10 years. The supplier's significant share repurchases will restart beginning this quarter and continue into next year.

"We stopped because we needed to have the discipline to get the balance sheet to where it needs to be," Magna CEO Swamy Kotagiri told Automotive News, a sister publication of Rubber News.

Magna will double down on its profit-driven growth strategy as it restores previous levels of shareholder returns, Kotagiri said. The company will make significant investments "based on returns," not to pursue growth for growth's sake.

"We always say we want profitable growth," Kotagiri said. "We don't chase."

BorgWarner, meanwhile, expects to generate between $475 million and $575 million in free cash flow in 2024, about $400 million of which the supplier has already spent on share repurchases.

The cash flow demonstrates "the underlying strength of the company and the importance of maintaining a strong balance sheet that allows us to invest in our long-term profitable growth and follow a balanced capital allocation approach that rewards shareholders," BorgWarner CFO Craig Aaron said on an Oct. 31 call with analysts.

Lear Corp. also accelerated its share repurchasing pace, buying back $209 million of stock in the quarter ended Sept. 30. At the same time, the supplier is restructuring its manufacturing footprint and looking for ways to improve its operating performance, including through greater use of automation, CEO Ray Scott said.

"The investments we are making in advanced manufacturing and capacity optimization are improving our cost structure and allow us to be the most competitive supplier in our key products," Scott said on an Oct. 24 call with analysts.

There is a strong correlation between free cash flow and supplier valuations on Wall Street as investors account for fewer growth opportunities, Wolfe Research's Rosner said. That dynamic is likely to shape supplier strategy for the foreseeable future.

"Companies' focus could be more aggressive on cost reduction and adjusting for lower demand," Rosner said. "The targets could be much more about margin and free cash flow generation rather than growth."