Gaining control in the perfect storm
INSIGHT ARTICLE |
Each quarter, RSM US LLP sponsors the Original Equipment Suppliers Association’s Automotive Supplier Barometer, a survey of the top executives of OESA regular member companies. The survey provides a snapshot of the industry’s commercial issues, business environment and business strategies that influence the supplier industry. Each quarter’s survey focuses on a different topic, from planning to production. For Q3 2019, the OESA examined supply chains and globalization. The following analysis is based on the survey results.
If a rising tide lifts all boats, the auto industry was at a high tide that lifted all vehicles for quite a few years. Sales of new cars and trucks rose steadily from 2009 to 2016 in a record-setting growth streak. But nature is nothing if not cyclical, and the tide is turning. In fact, there appears to be a perfect confluence of external forces that may be bringing about the end of a historic business cycle for the industry.
With so many disruptions, it can seem as if suppliers may not be able to endure. Automakers and their suppliers, however, can adopt methods of manufacturing and forecasting that can help them ride out the storm.
The winds of change
Over the past decade, and particularly in the last five years, automakers have figured out how to offer the best attributes of SUVs in smaller, more fuel-efficient models—and consumers have flocked to this segment of the market. The resulting shift in product portfolios to these higher-margin pickup trucks, SUVs and crossovers has recently buoyed automakers’ profits. However, even sales for these vehicles are slowing. It will likely take years for retail sales of trucks and electric vehicles to offset the decline in cars. According to The New York Times, car dealers around the country are ordering fewer vehicles from manufacturers in order to manage excess inventory.
The convergence of a number of factors is disrupting the industry:
As noted in this quarter’s OESA Supplier Barometer, trade policy is seen as the greatest industry threat, a concern that has only increased since the second quarter. For some time, economic growth in China has obligated manufacturers to look outside of that country for more cost-effective production locations. But revised trade policy agreements are forcing the issue. In the USMCA, for example, automakers must manufacture 75% of a vehicle in North America in order to qualify for tariff exemption. If the USMCA goes into effect, it could have a significant effect on suppliers both foreign and domestic. According to the Peterson Institute for International Economics, steel tariffs imposed a cost of $5.6 billion on U.S. steel users, while domestic steel producers’ pretax earnings increased by $2.4 billion on higher steel prices. Aluminum tariffs added a burn of about $1.7 billion to domestic consumers. As RSM US LLP Chief Economist Joseph Brusuelas points out, it makes little sense for auto producers to bring production back home to a market that, in population-adjusted terms, is falling. Rather, they will almost certainly, under the new managed-trade format, look to make new investments closer to the growth markets of Brazil, China and India.
Perhaps the most high-profile factor affecting the industry, tariffs levied on steel, aluminum and a significant amount of goods from China—and the inevitable retaliatory tariffs imposed—have forced OEMs and their suppliers to reconsider their supply chains, renegotiate contracts, adjust their margin expectations, or raise prices on products and services in order to offset the impact. Many companies were caught off guard, and now need to review the classification of their products in an effort to adjust the tariffs imposed or gain exemptions.
U.S.-based suppliers with offshore locations are also being taxed at higher rates for global intangible low-taxed income and foreign-derived intangible income. Due to the Tax Reform and Jobs Act of 2017, domestic suppliers working in overseas locations may find they need to move manufacturing and distribution operations to more tax-favorable countries. But the consequences of such a move could create additional risks for product quality control and production-delivery timelines as OEMs engage new suppliers. (As the OESA Barometer shows, company “watch lists” for direct suppliers rose in Q3.)
The recent agreement by four of the world’s largest automakers to adhere to the emissions standards set by California, rather than those proposed in Washington, D.C., illustrates the uncertainty surrounding regulatory reform.
While there are so many external forces beyond their control, OEMs and suppliers can address a number of areas that fall within their authority to manage:
Know where things are
Timing delays and quality issues are among the greatest supply chain risks for suppliers, according to the Q3 Barometer. Exacerbating these risks are the disparate platforms used along the supply chain from source to consumer. Suppliers and parts manufacturers need to integrate onto a common platform that will allow access to data showing the status of parts and providing warnings of delays on a real-time basis. Internet of things and blockchain technology can provide secure, accurate data across the value chain, allowing management to track timing, quality and inventory.
Know where things are going
Companies often have the data needed to make decisions, but not the infrastructure necessary to access and analyze it. Executives may find themselves unsure of whether they need to restructure their supply chain, raise prices, move manufacturing or change the very nature of the product they import or export. By implementing a data analytics strategy, suppliers can obtain timely, valuable and actionable information to support or discourage process changes and manage inventory. From altering the supply chain to changing marketing strategies to modifying pricing processes, data analytics can help management more accurately forecast client demand and the impact of changes on operations.
Manufacturing, distributing and building the more than 35,000 parts that go into a vehicle is a difficult and complex process. Like the Apollo missions, there are thousands of steps that need to be taken to get to the destination; a mistake at any one of them can have an impact on the entire journey. It takes individual suppliers, working together as a team, to get it done.
After all, the strength of the supply chain is only as strong as its weakest link. If suppliers are going to weather the storm, everyone needs to be engaged and working toward a common goal.
To see the OESA’s Q3 barometer results, download the PDF.
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