Supply Chain: Industries & Sectors: Automotive

1. The Characteristics of the Automotive Supply Chain

1.1 OEMs in the automotive industry have complex supply chains, sourcing components from around the globe.  An OEM may source electrical components from the Far East, gearboxes from Europe and locally source sub-frames. Success of the global manufacturing brands is based on combining a global production footprint with a global sourcing network, while remaining flexible in order to accommodate changing consumer demands, regulatory developments and technological advances.

1.2 To manage such a network the tendency is to operate regional manufacturing hubs, usually where there is a strong domestic market for their brand and with proximity to the hub's suppliers. There is a complex network of tiered suppliers supplying major components, parts for major components and other parts either to tier 1 or tier 2 suppliers or directly to the manufacturing plant with typically 3 to 5 levels of supplier. Distribution of vehicles is through country operating companies who supply (and provide sales support) based on a selective distribution model to a network of, usually independent, dealership chains.

2. Global Trends

2.1 The Automotive supply chain model is subject to an increasing number of challenges:

(a) Manufacturing Arrangements

The industry has seen the consolidation, reinvention and disappearance of a number of well-known brands following the global financial crisis.  Increasingly a handful of dominant OEMs are manufacturing not only for their own vehicles but also are becoming the manufacturers for rival brands as well. This has been achieved by the use of module systems, which involves component sharing between different cars, for example a global alliance between Renault and Nissan has produced the Micra and the Pulse, which are the same car, built to the same specifications, but with a different exterior look.

Common platforms allow OEMs to produce vehicles of different length, width and wheelbase at the same factory. The standardising of vehicle component parameters means a wider range and higher volumes of cars can be manufactured at a lower cost.    

In developed markets such as USA, Western Europe and Australia there is an on-going rationalisation of manufacturing capacity with continuing migration of manufacturing sites towards cheaper labour markets. Often such moves are being encouraged by the prospect of favourable labour laws and tax incentives.

(b) New Technologies

Constantly developing technologies means big OEMs are having to focus on specific development areas in their R&D, while dropping others.  This R&D gap has opened up opportunities for new suppliers developing specific technology to enter the market.  Many OEMs are looking to partner up with suppliers who are developing technology they believe will be the future.  The challenge for suppliers will be in aligning themselves with OEMs.  

Technological developments for the European and US markets are being driven by high fuel prices and the need to reduce CO2 emissions and improve air quality, which has resulted in the development of more efficient engines, hybrid and electric cars and the use of light-weight materials in order to improve fuel efficiency. Globally, there are also consumer driven developments in infotainment and MaaS (Mobility-as-a-Service). OEMs have the challenge of working out how to monetise this developing technology.  

OEMs are known to licence out innovative technology to other OEMs. This was seen originally as a channel to increase income if not market share and recently it has been used as a means of entering developing markets, such as PSA Peugeot Citroen licensing some of its technologies to China's Dongfeng Motor Group. OEMs have also reciprocated licencing of complimentary specialisms in order to combine technology and enhance development, for example Toyota Motor Corp has licensed its fuel-cell vehicle technology to Germany's BMW, through which Toyota is able to achieve greater scale production and lower cost while BMW saves on R&D cost and is able to lead other rivals in getting to market with the benefit of this new fuel-cell technology. 

OEMs have also invested in R&D companies, with the hope of licensing out their technology in the future, such as General Motors' investment in Envia Systems for their battery start up technology. 

(c) Downstream Demand

The success of OEMs is driven by their ability to efficiently manufacture vehicles to meet the volume and nature of consumer demand. To compete in growing markets, OEMs must adapt their supply chain to accommodate the differing global consumer profiles, such as the demand for smaller cars in India, SUVs in China and fuel-efficient vehicles in Europe. Modular assembly assists OEMs, e.g. allowing them to assemble models with different features all in the same factory.  

In new emerging markets (such as the BRIC countries, especially China) due to regulation and local market entry requirements, OEMs are needing to produce using local supply bases and local supply chains (often in a local joint venture) in order to compete with emerging local players.

Consumers are increasingly using digital sources to inform their purchasing decisions. As a result, dealers are challenged with adjusting their dealer networks and marketing channels. New entrants to the market are able to utilise digital marketing channels to reduce the cost and difficulty in establishing and managing a dealer network. 

Profitably for automotive manufacturers and dealers is driven increasingly through the cross selling of ancillary products such as financing, extended manufacturers' warranties, insurance products and the lucrative after-sales services and parts market. The focus is also turning to how connective technology, that is starting to feature in modern vehicles, can be utilised to generate further revenue channels.

3. Key Automotive Supply Chain Issues

Product Liability: In the case of the automotive industry, a failure in the product runs a real risk of resulting in significant injury to people and damage to property. Safety and reliability are therefore a constant key focus for manufacturers. There is therefore a need to ensure traceability throughout all stages of the supply chain. Key concerns include:

(a) ensuring adequate flows of liability to the source of the issue, particularly distinguishing between assembly issues and component issues or whether there may been some intervening factors such as the ability for dealers to customise vehicles for customers;

(b)  the management of product recalls across numerous jurisdictions, which tends to rely heavily on accurate data collection at the point of sale, wide reaching advertising campaigns and the dealer network interacting with consumers and coordinating the recovery and repair of vehicles; and

(c) how to ensure the use of common parts and processes drives cost efficiencies while ensuring that they meet the safety standards in different regimes across the globe. This particularly has seen a push for European and US regulators to develop common safety standards.

3.2 Privacy: Added value developments intended to enhance the driving experience are focusing on new "stay connected" technology and consequentially the relationships between motor vehicles, new technologies and the people who drive and the application of data protection and privacy laws are highly relevant. As communication and telematics (location-based computer systems) improve, consumers are becoming increasingly concerned by privacy issues. Many OEMs (and insurers) collect significant amounts of data, including location and speed. Consumers are told information is being collected, but the privacy policies and practises of some OEMs have not always been clear, and some consumers have not been given the ability to delete their information. OEMs should carefully consider their privacy policies and how they communicate these to the consumer.

3.3 Disruption risk: The automotive supply chain is inherently complex with over 20,000 parts used to assemble a vehicle. To drive economies of scale there is a focus on reducing the number of suppliers for specific components and moving towards "just-in-time" production to ensure flexibility to scale up and down production capacity to reflect economic cycles and fluctuation in demand. This has a number of implications:

(a) it can mean manufacturers maintain less than a few days volume of parts at its manufacturing facilities meaning that in the event of disruptions at suppliers there is only a small window to find alternative suppliers;

(b)  with new technology being the focus, the use of "rare" components or new materials presents its own challenges as it can be difficult to establish and maintain a secure supply of the parts; and

(c)  the supply between different manufacturers means that the risk in one manufacturer's supply chain can have adverse slow-down consequences for other brands who will have limited control or visibility over such risk. 

The automotive supply chain can therefore have a number of touch points that if disrupted (ie. through natural disasters, political events, accidents or bankruptcy) can result in a sudden and dramatic curtailment on production. OEMs must therefore constantly review and revise their risk mitigation strategies to ensure the continuous supply of essential components and avoid significant disruptions to their supply chains. 

3.4 Regulation driving innovation: The current trend in regulation focuses on emission and pollution concerns with a consequential move towards use of light-weight materials, more efficient engines and alternatives such as hybrid and electric engines. Whilst innovation will drive an increase in sales, OEMs must continue to focus on ensuring strict compliance with regulatory and safety requirements as a failure to do so could have a catastrophic effect on the brand.

3.5 Flexibility: As technology develops, the supply chain becomes more complex and involves a greater number of tiers. To move into growth markets, such as China, India, Brazil and Africa, OEMs must attend to the differing consumer demands of each region, as well as accommodating greater numbers of technology, developing new designs and concepts, utilising MaaS and developing connectivity.

3.6 Competition: Competition/antitrust issues in the automotive supply chain have had a high profile in recent years. Competition authorities across the world have conducted coordinated investigations into alleged cartels for various auto parts. Multiple investigations are ongoing and more continue to be launched; taken together these are thought to constitute the largest cartel investigation ever. Typically parts are sold on global markets by a small number of specialist manufacturers. Allegations are typically that there was coordination amongst such manufacturers of prices or other rigging of procurement processes. Fines have already been imposed by competition authorities, with further fines, as well as extraditions and jail sentences for executives, expected to follow. Subsequent civil damages actions are likely to pit OEMs (which consider that they have overpaid as the result of a cartel) against their suppliers for years to come.

3.7 Aside from these cartel issues, business-as-usual competition issues continue to arise with the automotive supply chain and to be investigated by a number of national competition authorities. OEMs, keen to capture profit within the supply chain, need to continue to be wary in imposing vertical restrictions on their distribution network. There has been a general liberalisation of such rules applying to the sector, but in some cases this has led to uncertainty about what may interest competition authorities. Cases have focused more on parts than vehicles, with a particular emphasis on captive parts, where the customer has no alternative source but the OEM.