The automotive industry is in the midst of a transformative era and, accordingly, that was a prevalent talking point at the recent Southern Automotive Conference in Nashville, Tennessee. Profit margins are thinning, jobs are disappearing, and political conflicts continue to make operating a global automotive supply chain more challenging.
In previous years, the focus of the Southern Automotive Conference seemed to be on innovation and new technology. The focus at the 2019 conference shifted from speculation on future innovations to ensuring that manufacturers are agile enough to support the current challenges in the industry.
Here are the key takeaways from the event:
Automotive Manufacturers Are Grappling With Geopolitical Uncertainty
Fifty years ago, US automakers like Ford, Chrysler, and GM operated out of factories and warehouses within the country. As they lost market share to foreign entities and began aggressively cutting costs, they expanded their reach. Automakers began to shift their focus from US factories to markets abroad, where they were able to assemble vehicles at lower costs and source cheaper parts from manufacturers in Mexico or Asia. Today, rather than physically assemble or carry their products, most automakers only source the necessary materials to produce parts from around the world, which makes recent geopolitical events even more of a headache for those in the auto industry:
- US-China Trade War: The situation in China initially began when US President Donald Trump accused China of unfair trading practices and intellectual property theft. Meanwhile, China's perception is that the US government is simply fearful of the growing power and reach China holds. Thus far, the US has imposed tariffs on more than 360 billion dollars of Chinese goods, and China has retaliated with tariffs on more than 110 billion dollars on US products. While negotiations have continued, the situation seems to be that of, “two steps forward, three steps back” with very little positive progress being made. With no definitive end in sight, many car manufacturers that work with suppliers in China are left wondering if they should find new suppliers in other countries or simply wait the trade war out.
- Japan-South Korea Trade War: While the conflict between China and the US has inflicted significant damage to the global economy, the animosity between Japan and South Korea seems to signals even more troubles ahead. Japan and South Korea have essentially been at odds since WWII, when Japanese forces occupied the Korean peninsula and forced residents there to work for them. In 2018 South Korea’s Supreme Court ruled that several Japanese companies still owed South Korean residents and their families additional reparations. The Japanese government has refused this claim, asserting that the matter was settled by a 1965 treaty. The two sides retaliated against one another with restrictions on trade. Many residents in South Korea have begun boycotting products manufactured in Japan, including Japanese cars, with petrol stations refusing to service Japanese-made vehicles.
- Brexit: In 2016, a public vote was held to decide whether the UK should leave or remain in the European Union (EU). The majority of voters opted to leave, but four years later no agreement has been reached between the UK and other EU countries to outline the terms of their withdrawal. If no deal is made and the UK leaves as scheduled (January, 2020), then the EU will start carrying out checks on British goods. This could lead to delays and disruptions to supply routes and a possible drop in the pound (UK currency), resulting in a potential recession. In fact, UK auto production has already dropped by a fifth, with automakers spending more money on Brexit contingency plans than the technology they need to survive in the current global market.
These conflicts have taken a significant toll on car manufacturers, and will likely continue to do so for the foreseeable future. However, the general consensus at the Southern Automotive Conference was that the challenges could be treated as opportunities for those manufacturers willing and able to make positive changes within their organization’s infrastructure.
Lower Tier Suppliers Need to Adopt Cloud-Based Supply Chain Management Tools
How many cloud-based applications do you use each day? If you have a smartphone, probably upwards of ten or twenty. The reason for the prevalence and popularity of these apps is simple - They make life easier. While some holdouts still express hesitancy when it comes to using similar cloud-based technology to manage their supply chain, more organizations than ever are making the move to the cloud.
OEMs and Tier 1 suppliers have largely already adopted automated and integrated cloud-based supply chain solutions.These larger organizations operate with help from a number of different kinds of software, including EDI, CRM, ERP, WMS, etc. While each program automates a specific workflow, a cloud-based integration ensures the real-time flow of data between cloud solutions, meaning that designated parties can access updates, alerts, inventory and order information from any computer or smart device with an internet connection.
The real room for improvement lies with Tier 2 suppliers and below, that have yet to upgrade their processes. Some still use Excel spreadsheets to track inventory and orders, making visibility a serious issue. This is never more apparent than in the event of a recall, when manual supply chain processes require manual investigation and research in order to identify the problem, whether it lay in the design, material, or the component itself. This significantly slows the reaction time and prolongs the recall process, contributing to profit loss, damage to the company’s reputation, and increased legal liability.
Just-In-Time (JIT) fulfillment has become the gold standard in the automotive industry. Using the JIT model, automakers do not store any inventory. When a customer makes an order, they immediately purchase the parts from their manufacturer(s). Inventory visibility is fundamental for JIT, since you must have real-time insight into stock levels in order to relay a realistic delivery time. Organizations that still use manual data entry and order processing techniques spend more time and resources on processing orders and experience an increased incidence of errors, often resulting in chargebacks or costly delays. Organizations that use cloud-based supply chain solutions are better able to track inventory and comply with the specific requirements of each automotive trading partner, including EDI, automotive industry communication protocols, barcode label printing, and business rules.
OEMs and Tier 1 suppliers in the current market must be incredibly efficient and able to get products to the market very quickly. If lower tier suppliers fail to adopt more efficient cloud-based supply chain management solutions, these bigger, more technologically savvy organizations will simply select a supplier that can comply with more modern, automated systems. Strategies such as data integration into ERPs or other back-office systems and Just-In-Time (JIT) enablement allow for streamlined supply chain management, empowering small and mid-sized suppliers by creating a more level playing field.
Consumer Focus Has Shifted From Autonomous to Eco-Friendly Vehicles
Within the span of just a few years, autonomous cars evolved from a futuristic fantasy to an on-the-road reality. While efforts to research the possibility of self-driving vehicles began as far back as the 1980s, the technology hit a new stride after Toyota announced their automatic parallel parking assistance feature. Many other automotive manufacturers adopted similar technologies, and by 2013, key automotive players such as Google, Tesla, General Motors, Uber, Ford, Mercedes Benz, BMW, were all working on their own autonomous vehicle technologies.
In the race to be the first to achieve full automation, automakers may have taken more risk than was appropriate, evidenced by the fact that both Uber and Tesla autonomous vehicles have been involved in six fatal crashes in the past four years. While these tragedies seemed to dampen some of the excitement around autonomous vehicles, the events coincided with growing fears about climate change, which resulted in a consumer shift in interest from autonomous to electric cars.
“For several years the buzzword at industry events was always “autonomous.” Then, in the last twelve months there’s been a perceptible shift, and that word has almost disappeared. And it's been replaced with “electric”.” - David Eyes, Director of Automotive Solutions at DiCentral
A recent analysis by Bloomberg New Energy Finance found that electric cars could make up 57% of all passenger car sales worldwide by 2040. Gas-powered vehicles seemed to have passed their peak, with manufacturing of automotive parts shifting to focus on electric car components. While autonomous vehicles will likely continue to grow in popularity, today’s consumers seem less concerned with who’s driving and more interested with what’s powering the vehicle.
Take Advantage of the Slow Down
Imagine a Formula One race. After the vehicles cross the starting line, gaps quickly form between them. If an accident occurs, the race grinds to a halt, with all the vehicles keeping a slow, cautious pace behind the safety car. Yet, where many view the slow down as an insurmountable challenge, innovative manufacturers are taking advantage of the down time, making positive changes and implementing new technology so that when the time comes to step on the gas, they’ll be leading the pack.
To hear more on this topic, tune into our webinar Speed Bumps in the Automotive Supply Chain hosted by industry expert David Eyes.