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2 December 2020

Driving supply chain modernization

David East

Driving supply chain modernization

The Covid-19 pandemic has increased the stress on already fragile automotive supply chains with manufacturers facing potential supplier insolvency, a lack of visibility of distressed suppliers and a rise in financial crime and fraud.

“The automotive industry has a very complex supply chain with many interdependencies and sub-suppliers – more than 3,000 suppliers per manufacturer – across different continents,” Thomas Steinberger, PWC Partner, Business Recovery Services & Automobile Industry, told delegates at our recent Credit Risk virtual event. “With the industry’s ‘Just-in-Time’ supply-chain model there is simply no room for error or disruption.”

A Moody’s report in September 2020 highlighted how disruption has arrived at the same time as car manufacturers are contending with costly restructuring and modernization efforts. These only add risk for an industry with already narrow margins. Lower revenues are hampering companies as they invest in lower emission and electric vehicles, and consummate alliances or mergers to build more efficient operating structures.

The ‘rust belt’ of the US auto industry will also be watching closely to see how fallout from the recent presidential election affects the sector: President-elect Joe Biden said he would ‘re-evaluate’ tariffs on imports of Chinese-made parts and materials introduced by Donald Trump in an effort to stimulate US manufacturing jobs. During his election campaign, Biden focused on supporting the growth of electric vehicles as part of a new emphasis on environmental policies.

As carmakers seek to reimagine their business models – improving resilience and automating processes – the pandemic has illustrated starkly how risky these continuous, lean supply chains have become, with an over-reliance on one country – China – for sourcing materials.

Right now, manufacturers can benefit from greater supply chain risk awareness and assessments, as well as more robust mitigation capabilities. Looking to diversify their supply chains will mean a marked increase in regionalism and near-shoring of projects as businesses spread their base across Asia and look to near-shore locations such as Chile or Mexico.

The new equation for companies weighing up location decisions will be determined by finding a local optimum of capital expenditure (for building new regional plants), the operating expenditure of producing closer to their target markets, the need for more resilient supply chains (to avoid production stoppages or side-stepping trade wars), as well as flexibility and speed to market.

To support this more robust sourcing model, organizations can:

  • Distribute the supply chain across multiple suppliers
  • Improve inventory systems to mitigate against disruption
  • Increase visibility and monitoring of second and third-tier suppliers
  • Use real-time reporting dashboards to monitor suppliers and identify weak links

The automotive industry in the US is volatile, having bounced back from the bankruptcies of GM and Chrysler in 2009 to post record sales in 2016 before the pandemic struck. Any manufacturer is only as strong as the weakest link in its supply chain, but adaptability and resilience are hallmarks of this flagship sector of the US economy. Implementing smart platforms, to allow for more detailed monitoring and stress-testing of the supply chain, will help companies survive the current uncertainty and prosper again as the recovery begins.

David East

David East, Director of Product Strategy - FDI

An experienced cross-border investment professional, David East is currently Director of Product Strategy, Tax and Transfer Pricing, FDI and Economic Products at Bureau van Dijk, a Moody’s Analytics company.

An experienced cross-border investment professional, David East is currently Director of Product Strategy, Tax and Transfer Pricing, FDI and Economic Products at Bureau van Dijk, a Moody’s Analytics company.

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