The war in Ukraine and sanctions on Russia have added another element of uncertainty to the mix. While the conflict is primarily affecting global energy and food supply chains, it has also been particularly challenging for the automotive industry, which sources rare earth metals from Russia and Ukraine. Russia accounts for 45% of the global supply of palladium, for instance, which is increasingly used in catalytic converters to reduce vehicle emissions.
IHS Markit lowered its global automotive forecast by 2.6 million units for 2022-2023 due to the war. This is primarily because of less production in Russia, but other global supply challenges also play a role.
Along with the war and the pandemic, companies face inflationary pressures and labor challenges. Manufacturers are forced to rethink how they absorb prices or pass increased costs along to customers, and how they can best retain talent in a competitive labor market. Businesses have been adapting over the last two years, but continuing the move toward regionalization may help on several fronts.
The ability to pivot will remain crucial, especially considering that supply chain bottlenecks likely aren’t going away anytime soon. The RSM US Supply Chain Index rose in March but is still 2.76 standard deviations below neutral, RSM economist Tuan Nguyen wrote in early May, adding that current lockdowns in China and the geopolitical conflict in Ukraine “will most likely assure another round of supply chain snarls ahead.”
What are companies doing to become more resilient?
In regionalization, the operating model shifts in a way that aims to maximize service levels while minimizing the total landed cost of products, including customs, duties, tariffs and taxes. These are key considerations as companies determine the locations in which they want to operate.
Essentially, by creating more regional supply chain networks closer to the end customer, manufacturers hope to give their operations more of a buffer from the factors at play in global trade—essentially establishing insurance policies against some of these disruptions. This will involve evaluating new sources and suppliers, tapping regional sources, and assessing the company’s manufacturing footprint overall.
Here are some important considerations and questions for auto suppliers—especially those in the middle market—looking to regionalize:
- Understand the ways in which your customers are similar or different on a region-by-region basis. This will help prepare the company to become more customer-centric in response to significant regional differences, and potentially enable the capture of more market share.
- Understand/optimize your manufacturing and distribution footprint to minimize transportation costs, transport times, and total landed costs—including customs, duties, tariffs and taxes—while maximizing customer service levels.
- Understand the multimodal modes of transit available for the regions in which you plan to operate.
- Work with a third-party advisor to evaluate various global trade scenarios and strategies for handling them.
- Take into account how your labor practices will need to change if you are moving jobs to and from various countries.