OEMs are used to having strength in the customer-supplier relationships but, equally, have largely stayed away from directing their tier 1 suppliers who are responsible for managing relationships below them.
We think this needs to change. A recent Automotive News survey stated 81% of OEMs have Above Average or Average visibility of their tier 1s, but this drops to 49% for their tier 2s.
Full supply chain visibility has long been the utopia for OEMs but is incredibly difficult to achieve with the current supply chain structure and typical customer-supplier relationships with the tier 1s. It will be interesting to see if the OEMs look to try to change this to create earlier warning signs of future problems arising.
Just in Time (“JIT”) manufacturing is also under question. For all its benefits in terms of minimising working capital throughout the supply chain, this crisis has exposed its flaws and weaknesses.
The supply chain is highly fragmented with Jean-Marc Chery, the CEO of chip maker STMicroelectronics, stating recently that it is essential for the automotive industry to provide better forecasts to align car production and component production levels in order to avoid excessive stock building and placing additional and unnecessary production demands on the chip makers.
Another change could see car companies taking more direct control for certain key commodities, such as semiconductors, rather than relying on their tier 1s.
Again, this may help with forecast demand planning, and may also drive different customer-supplier relationships – moving them more towards long term take-off agreements.
Could an OEM go as far as investing in its own chip manufacturing capabilities? Vertical integration has not been an OEM strategy for many years, but this crisis may change that thinking. For example, we have seen Robert Bosch, the largest tier 1 supplier, announce it will build its own semiconductor manufacturing facility.
The problems that semiconductors have created and exposed in the OEMs’ supply chains today have highlighted a similar risk for them with batteries and their need to electrify their product ranges.
Thierry Bollore, CEO of Jaguar Land Rover, stated in a recent interview in the Financial Times (23 June) that it “intends to take more direct control of mission critical parts such as microprocessors and electric batteries”.
As technology advances and converges across sectors it seems the automotive industry has realised its once dominant position in the supply chain is now ever more challenged by other global tech heavyweights and changes need to be made to ensure continued and uninterrupted supplies in the future.
Will we see auto OEMs looking to buy mines that produce lithium and cobalt for example? Or will we see them forge global alliances with the large mining companies?
Winners and losers
Within the automotive OEMs - and to some extent the largest tier 1 suppliers - there are certain facets that will dictate how they emerge from the current crisis:
Winners
Losers
While we expect the current chip shortages to ease in the remaining months of 2021, it is not expected to be fully resolved until the first half of next year. The impact on suppliers has been limited to date and has potentially been masked by government support programmes. It is also impacting the used car market where demand and residual value prices are in unprecedented territory.
The shortages have made the OEMs sit up and think about their procurement processes and strategies, and also about the visibility they have through the supply chains. We anticipate OEMs to take a greater degree of control over key commodities and components in the future and build in additional levels of safety stocks to cushion against future supply chain disruption.
