The first automobile was arguably Nicolas-Joseph Cugnot’s self-propelled steam powered tricycle, built in 1769. Or perhaps it was Karl Benz’s petrol-powered automobile in 1886. But there is no doubt that it was Henry Ford who brought cars to the masses with Tin Lizzie, the Ford Model T in 1908. Since then the rise of vehicle ownership has hardly abated.
Despite the more recent pain of global recession, vehicle purchases in North America in 2015 have jumped to their highest level in more than a decade and surveys are suggesting that annualised volumes are set to climb further – above 17 million units – the highest level since 2001. Similar activity can be observed in most global markets with sales trending higher. Only double digit fall-offs in Russia and Brazil mid-2015 have slowed an otherwise buoyant global sector.
Whether this is set to last or not is debatable – Citi Research estimates that the global automotive market may only experience something like 4% compound annual growth to 2020 – but analysts agree that some of the industry’s most important new applications and products, such as advanced driving assistance systems or lightweight carbon fibre materials could grow at upwards of 20% a year (see Plasan case study on page 11).
Automotive was one of the first truly global industries, so those in the supply chain are accustomed to following manufacturers as they continue to grow global footprints. Suppliers also have to ensure compliance with new and increasingly demanding standards and regulations while at the same time meeting demand from manufacturers and their customers for cheaper, more efficient components and modules.
In Europe alone, around five million people are directly and indirectly employed in the automotive supply chain, and suppliers are playing a leading role in motor industry research and innovation. Paul Schockmel, CEO of the European Association of Automotive Suppliers, says, “Some EUR 38 billion are invested in the European automotive industry each year, of which more than half comes from suppliers, and this trend is increasing.”
COST AND CONSOLIDATION
But despite its strategic, commercial and logistical importance, the supply chain is under pressure. “A number of cost-cutting programmes have been initiated by OEMs (original equipment manufacturers) and as a result, the supply chain is under constant cost pressure,” says Paul Schockmel. “At the same time, advances in technology such as hybrid vehicles – powered by a combination
of electric and internal combustion engines – and autonomous or self-driving vehicles, are creating opportunities and challenges of their own.” The drive from consumers for better, cleaner, cheaper vehicles is pushing cost pressure throughout the supply chain.
As a result, the automotive supply chain is restructuring to adapt to these changes and the consolidation evident in the sector now is expected to continue and even accelerate. Larger suppliers are better placed to face increasingly complex technology requirements – the level of investment required is extremely demanding for smaller suppliers. Vehicle manufacturer business volumes are increasingly concentrated within the top 100 Tier 1 suppliers.
A striking example of this is VDL Nedcar, who independently manufacture Minis on behalf of BMW. Paul Mencke is liaison partner at Govers Accountants/ Consultants, UHY’s member firm in the Netherlands, and participates in UHY’s Automotive special interest group. Paul says, “The automotive industry is known for its early adoption of new approaches, in technology as well as in logistics and costs. Cooperation is complex, the stakes and standards are high and commitments cover long periods of time.”
Strategic partnerships are becoming increasingly important, particularly in specialist areas such as vehicle connectivity where the technology evolves so rapidly. OEMs direct their supply chain through value sourcing programmes that focus on key performance indicators like quality, logistics, technology and costs.
LOCATION, LOCATION, LOCATION
As manufacturing intensity increases, fuelled by innovation, technology and consumer demand, vehicle manufacturers want more than ever to see their Tier 1 suppliers operating locally. Ideally, automobile companies want their suppliers to operate in every jurisdiction in which they have a manufacturing presence. For suppliers the decision to move closer is not so straightforward, despite there often being government or local agency incentives to do so, such as tax breaks or financial support for R&D activity.
Suppliers must carefully evaluate the business case for each location and all that it might entail – financing, workforce relocation or recruitment, the rules and regulations of a new jurisdiction, maintaining client production output quotas and quality, optimising production lines during transition, closing down one facility and ramping up the other, and so on. Not least, this will have an impact downstream too, on the supplier’s supply chain.
Paul Schockmel says, “Effective financial planning is essential for suppliers establishing operations in new locations. However, they cannot be expected to have a complete understanding of the business environment in every jurisdiction, which is where accounting and consulting firms have an important role to play.”
Thomas Alongi is a partner at UHY LLP in the US, and head of the global automotive special interest group at UHY. “The extent to which OEMs are directing their suppliers to ‘build where we sell’ is one of the key issues facing automotive equipment suppliers,” he says. ”This drive to be a global supplier creates a considerable amount of pressure and has contributed to significant consolidation of the supply base. OEMs will continue to shrink their key supply base to mitigate risk into the forseeable future.”
But manufacturing around the world is difficult for smaller suppliers who do not have the capital to expand into global markets, so selling to larger strategic suppliers or private equity is a growing option. Tom says, “Strategic buyers are continuing to expand their global presence through acquisition. UHY LLP’s corporate finance team is currently working with a number of clients who are in a sale process with larger strategic and private equity buyers. A full service firm can not only maximise the sale price, but also make sure that the shareholders obtain the highest after tax proceeds, which really matters the most to them.”
In a strategic advisory capacity, Tom undertakes assessments of the automotive supply base to determine how businesses can adapt to industry changes like these. Some viable options may include:
- Securing finance to fund expansion
- Helping to devise innovative joint venture agreements
- Execute a sale mandate to accelerate growth
- Implementing operational improvement accountability systems
- Understanding what the true costs of a programme are, as well as the return on investment.
A consolidated supply chain with decreasing diversity comes at a cost. According to the 2015 Allianz Risk Barometer, insurers are beginning to see the potential for sizeable claims in the automotive sector, with the supply chain identified as the top business risk. These fears are fuelled by recent events such as the defect in airbag inflators manufactured by Takata Corporation which has affected around 34 million vehicles – the largest recall in automotive history.
“These are the high costs companies have to pay if there are supply chain failures,” says Tom. “The complexity of a global chain poses huge risks, as this recall clearly shows. Procurement teams must trace all the affected products and address quality control.” Similar problems are likely to repeat if manufacturers continue to use long and complex supply chains and short development cycles. But it is not just a quality control issue.
A survey published in the UK in March 2015 by business standards company BSI and the Business Continuity Institute found that 53% of automotive supply chains were exposed to elevated, high or severe risk of natural disaster. Indeed, the sector suffered heavily from the 2011 Japanese tsunami because of a global reliance on a single manufacturer of a particular pigment essential for metallic paint finishes. As a result of the disruption, production in the factory was halted for three months before normal operations resumed, causing long lasting effects across the automotive marketplace.
Another area of concern for supply chain management is the availability of skilled labour. With the average age of those employed in the automotive supply industry worldwide at around 50 years old, at a time when new technologies and new processes are driving manufacturing and product development, keeping skills current and attracting new talent into the sector is a challenge.
Thomas Alongi says, ”Shifts in technology have implications for suppliers. The trend for fewer vehicle components and more technology has been ongoing for a number of years. We are also seeing an increased use of lightweight materials such as carbon fibre and aluminium which have had an effect on the production process and the skills needed to produce components. All this puts pressure on the need for an increasing qualified technical workforce.”
”What we are seeing with some of the major OEMs is reducing the product cycle, so whereas each model might previously have been on the market for between five and seven years, there might now be a major redesign every three to four years,” says Tom. Keeping supply chain clients informed of developments like these that affect their business is part of his remit. “It’s essential that they can determine how to react to changes in vehicle volumes and product lifecycles,” he says.
The industry has come a long way since Henry Ford made the automobile affordable, but it was one of the first truly global industries and continues to be so today. Competition between countries to design and manufacture better, cleaner, cheaper vehicles to serve existing and emerging markets is as fierce as ever, while technological advances are now propelling the industry into new domains of product and production. Supply chains are keeping pace with the change, albeit with significant challenges along the way, and the future looks set to be a bumpy ride for some time to come.
Tom is also head of UHY’s global automotive special interest group. Contact: Tom Alongi, UHY LLP Sterling Heights, Michigan, US firstname.lastname@example.org
For more information about UHY’s automotive sector capabilities email the UHY executive office email@example.com or visit www.uhy.com/services
Dominique Maeremans, business development/marketing manager
Tel: +44 20 7767 2621