The race towards internet of things (IoT) connectivity, the sharing economy, electrification and autonomous driving, together with global efforts to tackle climate change, are driving automotive companies to transform and embed sustainability into their supply chains. But just as these companies were adapting their strategies, investment and innovation models, the pandemic struck, creating unprecedented stresses on demand and supply chains. Standard Chartered launched its Critical indicators of sustainable supply chains global research to understand supply chain priorities across a range of industry sectors, and how companies are both addressing these challenges and leveraging opportunities. 106 treasury, finance and supply chain professionals from the automotive sector took part.
The automotive sector has relied on the ‘just in time’ production model for many years, with highly resilient, efficient and flexible supply chains designed to meet customers’ precise needs and adapt to changing demand patterns.
Automotive supply chains were put under pressure during the early stages of the pandemic. For example, when COVID-19 first hit Italy, a crucial supplier shut down production, with widespread impact across the sector. This highlighted the reliance that the automotive sector often has – either directly or indirectly – on sole suppliers of specific components. These are often small businesses that are typically most vulnerable to demand and liquidity shocks. The specialist nature of automotive supply chains, and potential vulnerability to key suppliers has implications when evaluating and onboarding suppliers.
The degree of specialisation also makes it difficult to diversify the supplier base.
Second source is quite important. It is always a topic. And the goal is to have second sources. In reality, yes, there are second sources in some instances, but it’s definitely the minority.
As we have seen in the supply of semiconductors, the automotive and technology sectors are highly dependent on individual markets as well as key suppliers, most notably Taiwan. This creates substantial, but in many cases, unavoidable risks in the short to medium term, until alternative production becomes feasible. 94% of respondents highlighted the need to be able to pay suppliers in new markets. However, only 40% indicated that they could do so easily. In addition, the time to develop new production capacity means that geographic diversification may not be an immediate solution.
As automotive companies look at longer-term approaches, Standard Chartered is helping them to understand regulatory, market and environmental, social and governance (ESG) practices in new and prospective sourcing and production markets, such as Vietnam and Malaysia. Our TradeCo business, the bank’s non-financial arm, for example is also playing a bigger role, such as buying and financing semiconductors on behalf of clients.
Automotive companies regularly experience market and supply chain shocks, and have therefore equipped their businesses to manage the impact.
The Japanese earthquake and tsunami in 2011 that knocked out production of electronic components for cars affected the entire sector. Likewise, the Ever Given cargo tanker blockage in the Suez Canal in March 2021 added to supply chain stresses that companies were already experiencing. McKinsey research in August 20201 notes that in four industry sectors alone (automotive, pharmaceuticals, aerospace, computers and electronics), companies experience material disruptions lasting a month or more every 3.7 years on average, with shorter disruptions happening even more frequently. Even so, the pandemic was an extreme shock, and the scale and breadth of its impact was not fully anticipated in automotive supply chain risk models. Automotive companies were already engaged in initiatives to boost supply chain resilience.
If you have a good partnership, you can support a supplier, for example, on overheads if they are not competitive anymore, or for a certain raw material on the market if you can get that at a better price.
However, the pandemic strained existing risk models in a variety of ways:
First, it highlighted the importance of indirect or tier two (and deeper) suppliers, who are the most vulnerable to liquidity shocks but the least equipped to finance liquidity shortages at a competitive rate. Over half of respondents recognised the value of extending liquidity support to deep tier suppliers; however, barely a quarter were doing so successfully. To help companies such as in the automotive sector support their indirect supply chains, Standard Chartered launched a deep-tier supply chain financing solution in China in 2019, in partnership with Linklogis, a China-headquartered supply chain platform provider2. This could provide a valuable model for automotive companies, particularly as opportunities for western companies to gain majority stakes in joint ventures in China increase, as we saw in 2018 with BMW taking a 75% stake in joint venture Brilliance China Automotive3.
Second, it showed the vulnerabilities of global organisational structures and supply chains. China recovered more quickly than Europe, but with automotive companies structured as joint ventures in China, and a slower European recovery, some companies found it difficult to adapt.
Resilient and sustainable automotive supply chains of the future will be driven by digital and data, and reduced environmental impact as automotive companies seek pole position in the race towards electric and autonomous vehicles, whilst reducing carbon emissions to meet demands from regulators, shareholders and customers.
Leveraging digital and data for supply chain visibility and innovation
Automotive companies cannot achieve their innovation and sustainability ambitions alone, but need to engage their wider supply chains, including raw materials and components. Data is essential to achieving this, to give visibility over supply chains and potential vulnerabilities.
This is in part due to the lack of consistent and reliable sustainability metrics; however, there are increasing initiatives to help overcome this, such as the EU Taxonomy on Sustainable Activities.
With better insights into supply chains, automotive companies can then engage financing solutions, including automated financing and digital onboarding, to help suppliers invest in sustainability.
Digital tools are also helping to address the problem of concentration risk in individual suppliers and markets. For example, cobalt is a key component of lithium-ion batteries. The biggest market for cobalt production is in the Democratic Republic of Congo, which continues to experience labour, environmental and governance challenges, therefore damaging automotive companies’ ESG credentials. Companies are finding innovative ways to overcome such risks. In 2019, for example, Volvo announced a partnership with the Research Institutes of Sweden to explore the use of blockchain to trace the origin of cobalt used in its electric cars4, and in May 2021, Mercedes invested in a green, CO2-free steel project to reduce carbon emissions5.
Reducing carbon emissions
Another challenge for automotive companies as they adapt and develop new supply chains is accessing low-carbon energy, particularly in regions such as Asia Pacific, where there are not enough renewable energy sources to meet demand. In addition to working with automotive companies and energy companies to invest in cleaner energy, a well-functioning voluntary carbon market will be critical to reaching net-zero and negative carbon targets, an area in which we are extensively engaged. Through these markets, companies can buy carbon offsets from verified suppliers to offset their emissions, including projects that reduce emissions from deforestation or conserve, rehabilitate and replant forests.
Although this market already exists, it will need to scale up by 15 to 160 times its current size. Standard Chartered is heavily engaged in the development of a well-functioning voluntary carbon market.
Our Group Chief Executive, Bill Winters, chairs the Taskforce on Scaling Voluntary Carbon Markets, which was initiated by Mark Carney, UN Special Envoy for Climate Action and Finance. It is a private sector-led initiative working to scale an effective and efficient voluntary carbon market to help meet growing demand, and in line with the goals of the Paris Agreement.
COVID-19 will not be the last shock that automotive value chains experience, particularly as the scale and frequency of environmental and macroeconomic shifts is increasing. McKinsey’s research identifies 40 weather disasters in 2019 alone, each of which caused economic damage above $1 billion6. At the same time, economic protectionism and the prevalence of trade disputes is growing, not least between the United States and China. The same research highlights the automotive sector’s particular vulnerability to pandemics, large-scale cyberattacks and trade disputes. Automotive companies need to leverage the benefits of interconnected supply chains and global flows of data, finance, and people, whilst managing the associated risks that can destabilise entire ecosystems. Standard Chartered has a crucial role to play in this, through its expertise in emerging markets, financing expertise and access, and commitment to the sustainable and responsible business practices that will help drive automotive companies’ success.
6 McKinsey, ibid
