Automotive OEMs Must Further Tighten Supply Chains

Auto manufacturers face stark choices over the next five to seven years, a period that is likely to see increasing bankruptcies and consolidations, according to KPMG’s annual global automotive survey.

Some 87 percent of executives said they think the bankruptcy rate will remain the same or slightly increase over the next few years.

Slightly more than half — 56 percent — said that rate would increase as bankruptcy becomes a more strategic option for firms. Only 10 percent expect a decrease in bankruptcy activity.

“Not surprisingly, bankruptcy is on the minds of industry executives,” said Gary Silberg, lead automotive partner in KMPG’s Transaction Services practice. “With shrinking market share, ongoing cost cutting and other pressures, beleaguered companies are tempted to reorganize by way of bankruptcy, which provides them protection from creditors while they sort out their affairs as they seek to strategically restructure and gain breathing room to meet their obligations.”

Supply Chains

A tighter realignment of global supply chains is viewed as one of the first lines of defense against falling margins, especially as 47 percent of auto executives see non-competitive cost structure as the driving force of bankruptcy.

For instance, 96 percent of executives expect manufacturing to grow in Asia while 60 percent of executives expect increases in manufacturing in South America and Eastern Europe.

China will continue to play a paramount role in auto manufacturers’ sourcing operations — 75 percent of all executives agree that automakers and suppliers will continue to make significant investments in the country over the next five years.

Executives are split on which country is best situated to take advantage of the growing Chinese automotive industry. Thirty-eight percent say China is best poised to take the upper hand, while 29 percent name Japan.

BRIC Countries Dominate

Indeed, these findings emphasize previous studies that have found manufacturing and sourcing operations must migrate to emerging market economies — namely the so-called BRIC countries of Brazil, Russia, India and China — in order to remain competitive.

BRIC countries will account for more than 40 percent of expected global light-vehicle assembly increases and represent 52 percent of the industry’s forecast global capacity expansion, according to a PricewaterhouseCoopers report released in Q4 2006.

In that report, PricewaterhouseCoopers claimed that nearly all major global automakers are already pursuing a BRIC strategy in some form in order to gain competitive advantage.

“These are the countries where auto manufacturing is moving,” Ryan Robinson, manager of Global Analysis at PricewaterhouseCoopers’s Automotive Institute, tells CRM Buyer.

“Not only is assembly going in that direction, but OEMs are also looking for more procurement of components to take place in these areas, as well,” he said.

As procurement and manufacturing go, so will other, more advanced strategies. “The general trend has been to move the OEMs and suppliers closer together so R&D is better integrated in the development process,” Robinson noted.

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