Uncertainties abound: Geopolitical events disrupt automotive supply chain

Since the COVID-19 pandemic reared its ugly head, the supply chain issues across the globe and industries have taken precedence among Automotive sector executives. In fact, according to KPMG’s 22nd survey of global automakers and suppliers, more than 7 in 10 executives are very concerned about the negative impact of the recent volatility in commodity prices, and the inadequate supply of semiconductors.¹ The dominant reason for these supply chain issues has been the spillover from COVID-19 lockdowns and border restrictions. But just as the world was getting ready to return back to normal, the Russia-Ukraine conflict now threatens to further destabilize the precarious supply chain equilibrium.

LMC automotive in its latest update has also downgraded its earlier forecast of European vehicle sales forecast, by an average of around 2 million units per year in the 2022-2024 period – mostly due to the commodity shortages on account of the ongoing Russia-Ukraine conflict.² The conflict, now entering into its final stage, is responsible for shortages of key commodities like Palladium, Nickel (of which Russia is the key supplier), and Neon gas (used in semiconductor manufacturing), Wire harnesses (of which Ukraine is the key supplier). And even as major European automakers wean their production away from Russia, the supply-side risk from Ukraine (rather than Russia) remains paramount – particularly among the German automakers who are most exposed to it. Even if consumers are willing to buy new vehicles, automakers are not in a position to completely fulfill the pent-up demand owing to low inventories and inadequate supply of key components.

However, many analysts are giving a positive spin to the current situation. While some predict that much of the production (now away from Russia) will be directed towards fulfilling pent-up demand in Western Europe, the others surmise that the current situation will give the much-needed boost to the Electric Vehicle (EV) adoption in Europe – specifically in light of the rising prices of crude oil and its derivatives. However, downside risks remain in the form of higher EV prices (due to higher prices of battery raw materials like Nickel, Cobalt), and higher cost of charging EVs (due to Russian gas taps being switched off).³

At the current moment, therefore, the downside risks to the automotive supply chain remain at large. While automakers might undertake a host of short-term measures to partially resolve the situation, only a long-term strategic resolution of issues affecting the automotive supply chain remains the best hope. Some of these strategic maneuvers which automakers (and suppliers) might adopt in their finer prints are as follows⁴:

• Regionalizing and optimizing the supply chain: Regionalization ensures that automakers are less vulnerable in terms of production and procurement, as proximity to the sales market has already been established. Digital technologies (like Blockchain) can ensure higher transparency and visibility of the supply chain. However, detailed feasibility studies need to be done to ensure the success of these initiatives.
• Introducing supply chain diversity: Automakers and Tier-I suppliers should be adopting strategies that reverse the trend of single-sourcing, where a company is dependent on a single supplier, to dual-sourcing. Apart from dual-sourcing, near-shoring of critical materials while re-sourcing them away from at-risk suppliers is also key.
• Establishing task force for the management of critical commodities: Establishing a task force and implementing a shortage management system to manage scarce resources and to avoid plant closures can help companies tide over a supply chain crisis.
• Entering strategic partnerships or joint ventures: Long-term partnerships are extremely important for future success, as can be seen in some of the current collaborations between the automotive and semiconductor industries. But it’s not just about ensuring the availability of critical raw materials and components. Partnerships are also key when it comes to complying with increasingly stringent ESG regulations.
• Complying with regulations and ensuring transparency: Compliance with regulations is not only important for customers, and environment in general but also for granting of loans under the European Green Deal. Many new solutions are already available in the market that help track, identify, trade and offset emissions across a company’s supply chain related to all ESG areas.