How does the effect of external financing on profitability differ across tiers? Evidence from the automotive supply chain

Abstract

Due to the importance of automotive industry for the Czech Republic (in a broader sense for European countries) and due to the unprecedented development of both national and European economies caused by the COVID-19 outbreak, also having implications on the financial sector, we aim to explore the main determinants of operating performance within the automotive supply chain. This study is based on the data sample composed of complete individual financial statements (audited if available) of firms conducting their business in the Czech Republic from 2011 to 2018 and belonging to the automotive supply chain. This supply chain is defined as (sub) deliveries of the Czech automotive industry represented mainly by companies classified under NACE 22, 27, 25, 24. The hypothesis claiming that the investment and leverage-based variables are the important drivers of operating profitability was only partly confirmed (valid predominantly for Tier 3), which shows that the supply chain organization also plays a crucial role as well as (valid for Tier 1). Also, we have shown (illustrated) that the assumption of different capital structures among tiers is valid. The average overall indebtedness of Tier 3 is higher by approximately 50% (altogether, the short-and long-term leverage are higher by 40% and 62% respectively) than Tier 1 firms. The need for relatively high capital expenditures (applicable to Tier 1) and working capital investments (applicable to Tier 3) is partly facilitated by external funds reflected in the indebtedness, which is associated with the costs reducing overall low profits from these investments. The leverage-profitability relationship seems to be nonlinear for long-term debts contrary to short-term debts where the linear relationship prevails.