OEMs are suspending operations forcing some suppliers to shut down business. The impact of the global pandemic has been different for large companies and Tier 1 suppliers than for Tier 2 or Tier 3 companies at the lowest levels of the automotive supply chain. As interdependency is high in the automotive sector, OEMs should play a more active role on protecting small suppliers from bankruptcy, says Tom Linton and Bindiya Vakil at Harvard Business Review.
"We are very worried about supplier’s' liquidity," Frank Witter, Volkswagen's chief financial officer, told the Financial Times. Automotive supply chains are among the most complex. The final product, a car, is made of 30,000 individual components. Direct suppliers to OEMs are usually companies with a global footprint, often public and most of them are able to endure the harsh conditions the industry is experiencing. "The most important thing is, how can we as an industry coordinate and minimize the start-stops [of operations]" said Magna President, Swamy Kotagiri to Reuters.
We are very worried about supplier’s' liquidity."
Frank Witter, CFO of Volkswagen.
For the smaller players within the supply chain, this unprecedented situation has left them vulnerable. "We expect there will be an acceleration in small-and medium-sized suppliers filing for Chapter 11 bankruptcy to continue operating and keep plants open," say the National Law Review about suppliers in the US. In Europe, the situation is quite similar. Even though governments are setting historical financial relief plans, tax incentives and low-cost credits, smaller players "cannot afford to take on large amounts of debt," says the Financial Times. Moreover, in countries with large automotive manufacturing such as Mexico and Turkey, the situation is worsened due to the lack of relief policies that help companies survive the economic downturn.
In Mexico, the automotive industry is still not considered essential despite all the efforts made by industry associations, as well as COPARMEX, CCE and local governments. The Mexican government has just announced a single MXN$25,000 (US$1,040) credit for SMEs which seems ludicrous to support the operations of automotive suppliers in the country.
We know that we are as weak as the weakest link in our supply chain.”
Jacques Aschenbroich, CEO of Valeo.
"We know that we are as weak as the weakest link in our supply chain,” said Jacques Aschenbroich, CEO of Valeo to the Financial Times. This is relevant given that replacing a supplier is not a step that can be easily made. Tier 2 or Tier 3 suppliers undergo a long process to certificate its staff and operations for just being considered as an option. Supplier development for Tier 1s or OEMs are large investments that are expected to last for the long-run.
Supporting the lowest levels of the supply chain
OEMs and Tier 1 companies should look up to ensure their partners remain operating based on how critical they are. According to Tom Linton and Bindiya Vakil, there is a strategy to follow depending on the priority the supplier has for the OEM. "To prioritize which suppliers to aid, an OEM should focus on how their loss or disappearance would affect its revenues and the effort that would be needed to replace that supplier," they say. OEMs should also asses not only Tier 1, but Tier 2 or Tier 3 companies as well.
Depending on the priority, there are three scenarios in which OEMs can work on. First, to support the suppliers that account for a large amount of expenditures, OEMs should place orders as soon as possible for meeting future demand. To support the suppliers that account for a medium amount of expenditures, payments should be accelerated and new orders could help. Finally, for those suppliers accounting for a low amount of expenditures, a loan, money or even raw materials donations are reasonable, as well as upfront payments.
To prioritize which suppliers to aid, an OEM should focus on how their loss or disappearance would affect its revenues and the effort that would be needed to replace that supplier,"
Tom Linton, Bindiya Vakil. Harvard Business Review.
Experts agree this will be a moment for mergers, acquisitions and a consolidation of the industry. "The coronavirus crisis and attendant fallout are likely to stoke even greater and more accelerated consolidation, creating opportunity for some suppliers to purchase businesses at a discount and risk for other suppliers of being forced to sell their businesses at a discount," says the National Law Review. As for Mexico, for family-owned companies to survive, there is a likelihood for them to either be sold or to transform their operations to accept a greater participation of Tier 1 companies or even OEMs. "Suppliers in financial peril should not wait to be contacted; they should reach out to their biggest customers for a helping hand," say Vakil and Linton.