Supply chains in the automotive industry need to be repositioned globally
By Heinz Hilger
CEO, Standard Chartered Bank AG
The pandemic is just one of many challenges
The race for Internet of Things (IoT) connectivity, the sharing economy, electrification and autonomous driving, along with global efforts to combat climate change, are driving the automotive industry to transform and embed sustainability into their supply chains. Coupled with the impacts of a global pandemic, companies have seen massive pressure on demand and supply chains.
As part of a global study, Standard Chartered asked a number of companies about their priorities in setting up their supply chains to find out how they were dealing with the challenges. 106 treasury, finance and supply chain professionals from the automotive sector took part in the survey.
Specialisation in automotive supply chains is risky
“As automotive companies look for longer-term solutions, Standard Chartered is helping them tap into and better understand the regulatory environment as well as environmental, social and governance (ESG) practices in new and potential sourcing and manufacturing markets – not least in our footprint markets of Asia, Africa and the Middle East. For example, our TradeCo business, the bank’s non-financial arm, is playing a greater role in purchasing and financing semiconductors on behalf of customers.”
For many years, the automotive sector has relied on “just-in-time” production with highly resilient, efficient supply chains designed to flexibly meet customers’ precise needs and adapt to fluctuations in a timely manner. But automotive supply chains came under massive pressure in the early stages of the pandemic. For example, when COVID-19 hit Italy, a major supplier stopped production, which had far-reaching consequences for the entire industry and highlighted the automotive sector’s dependence on individual suppliers for specific components. These are often small companies that are most vulnerable to demand and liquidity shocks.
In fact, 94% of the automotive sector respondents we interviewed for the study said it was essential for their company to be able to respond quickly to fluctuations in demand. Yet only 48% said they felt well-positioned to do so. 87% pointed out the importance of having an early warning system to identify emerging supply chain disruptions, but only 39% said they were confident that their early warning system was working well.
As we have seen with the supply of semiconductors, the automotive and technology sectors are highly dependent on individual markets as well as key suppliers, most notably Taiwan. This poses significant, but in many cases unavoidable, risks in short to medium term, even if alternative solutions are sought. 94% of our respondents pointed out that they need to be able to compensate suppliers in new markets in a timely manner. However, only 40% said they could do this easily. In addition, building a new production capacity takes time. This means that geographic diversification may not be an immediate solution.
As automotive companies look for longer-term solutions, Standard Chartered is helping them tap into and better understand the regulatory environment as well as environmental, social and governance (ESG) practices in new and potential sourcing and manufacturing markets – not least in our footprint markets of Asia, Africa and the Middle East. For example, our TradeCo business, the bank’s non-financial arm, is playing a greater role in purchasing and financing semiconductors on behalf of customers.
Threats to automotive supply chain resilience
Automotive manufacturers are regularly threatened by market and supply shocks. The 2011 earthquake and tsunami in Japan, which knocked out production of electronic components for cars, affected the entire sector. The blockade of the Suez Canal caused by the accident of a freighter in April 2021 also put even more strain on companies’ already strained supply chains. And the outbreak of war in Ukraine has also posed problems for German automakers.
The pandemic strained existing risk models in more ways than one. For example, it brought home the importance of indirect or Tier 2 suppliers, who are the most vulnerable to liquidity shocks and the least able to finance liquidity shortfalls at a competitive interest rate. Over half of our respondents recognised the importance of extending liquidity support to suppliers. Yet, not even a quarter of respondents managed to do so successfully.
In addition, the weaknesses of global organisational structures became apparent. China recovered faster than Europe, but since many automotive companies are structured as joint ventures in China, and the recovery in Europe was slower, companies found it difficult to cope with the situation.
Using digital technology and data for transparency and innovation
To become fit and robust for the future, automotive supply chains must use digital and data-driven processes and have a lower environmental impact. Automotive companies must compete to be at the forefront of electric and autonomous vehicles while reducing carbon emissions to meet the demands of regulators, shareholders and customers.
Automotive companies cannot achieve their innovation and sustainability goals alone, but must engage their supply chains, including the raw materials and components they use. To achieve this, data collection is necessary to gain an overview of supply chains and potential vulnerabilities. For example, 58% of respondents said they would need to have their direct suppliers audited by external bodies to ensure that all sustainability requirements are met. 50% of respondents said this procedure would also need to be extended to indirect suppliers. Yet only 31% and 29% respectively said they currently practised this.
With better supply chain insights, automotive companies can deploy financing solutions, including automated financing and digital onboarding, to help suppliers invest in sustainability. Digital tools also help address the problem of supplier and market concentration. For example, cobalt is an important component of lithium-ion batteries. The largest market for cobalt production is in the Democratic Republic of Congo, which continues to face massive problems in complying with all ESG criteria. This also affects the ESG record of automotive manufacturers and suppliers adversely.
Companies are finding innovative ways to overcome such risks. In 2019, for example, Volvo announced a partnership with Swedish research institutes to use blockchain to trace the origin of cobalt in its electric cars. In May 2021, Mercedes invested in a green CO2-free steel project to reduce carbon emissions.
Striving for net-zero carbon emissions
Another challenge for automotive companies in adapting and developing new supply chains is access to low-carbon energy, especially in regions like Asia-Pacific where there are not enough renewable energy sources to meet high demand. In addition to working with automotive and energy companies to invest in clean energy, a well-functioning voluntary carbon market will be critical to achieving net-zero and negative carbon targets. Through these markets, companies can buy offsets from verified suppliers to offset their emissions.
Well prepared for the future
“Automotive companies must take advantage of interconnected supply chains and global data flows to manage risks that can destabilise entire ecosystems. Standard Chartered plays a critical role in this through expertise in emerging markets – particularly in Africa, Asia, and the Middle East – financing expertise, and commitment to sustainable and responsible business practices.”
COVID-19 will not be the last shock that automotive value chains will have to weather. The Russian military attack on Ukraine shows how quickly and how close to the EU’s borders political conflicts can occur with massive economic repercussions. The magnitude and frequency of macroeconomic shifts are increasing. A McKinsey study identified 40 weather disasters in 2019 alone, each of which caused more than $1 billion in economic damage. At the same time, economic protectionism and the frequency of trade disputes are on the rise, not least between the United States and China.
The same McKinsey study highlights the automotive sector’s particular vulnerability to pandemics, large-scale cyberattacks and trade disputes. Automotive companies must take advantage of interconnected supply chains and global data flows to manage risks that can destabilise entire ecosystems. Standard Chartered plays a critical role in this through expertise in emerging markets – particularly in Africa, Asia, and the Middle East – financing expertise, and commitment to sustainable and responsible business practices.