Examining the Hidden Fragilities in Auto Supply Chains
Around the world, supply chain risk has become a given, rather than being seen as a single event. This is prevalent in the auto supply chain, an industry often reliant on just-in-time manufacturing.
Financial stress, compliance, materials shortages and cyber issues have all hit the sector in recent years, in part driven by geopolitical risks and global trends.
Moody's latest analysis explores a pattern of growing vulnerabilities across automotive suppliers, which then trickle into the wider supply chain.
- More than 1,100 suppliers are carrying high operational risk
- 6.4% of auto suppliers carry high risk
- Approximately 85% of Japan's suppliers are low risk
- More than 2,800 of China's supplier base are at low or medium risk
Rising automotive risk
Over the last few years, supply chain disruption has been a constant. Since COVID-19 hit, delays and other events have occurred every few months, driven by trade tensions, inflation, materials shortages, climate change and volatility.
Supply chains around the world have been operating in a reactive state, forced to pullback on production capabilities or stop altogether. For auto supply chains, many of which operate in a made-to-order production line, a vulnerability from one supplier can halt production entirely.
Outside of supplier issues, cost pressures, cyber vulnerabilities and geopolitical risks are all colliding, causing vulnerabilities across automotive supply chains. Moody's research, from almost 18,000 automotive suppliers around the world, 1-in-16 are exposed to high operational risk. These issues are increased due to impact from the Iran conflict, oil-linked product prices and materials risks of those hard to substitute.
Critical raw materials are also facing a surge in demand, with an inability to maintain a resilient production line. These materials are used in the energy transition – including EVs and wind turbines – as well as data centres, smartphones and more. Many of these are are hard-to-substitute, meaning vehicles cannot be manufactured if organisations cannot get access to the materials.
Supplier performance is a major signal for supply chain risk, so increased transparency and visibility is critical for automotive manufacturers aiming to avoid disruption.
"Anticipating and mitigating operational risks among key suppliers remains a critical challenge for manufacturing supply chains," explains Andrei Quinn-Barabanov, Supply Chain Industry Practice Lead at Moody's Analytics, to Supply Chain Digital.
"Moody’s analysis of financial health indicators identifies more than 1000 automotive companies facing financial pressure. Financial stress can create challenges for workforce stability, including risks to employee retention, experience and training levels. While these pressures may contribute to operational disruption, many of the associated risk signals can be identified in advance, giving companies an opportunity to take proactive action.”
Regional data points
Exploring suppler risk by region, Moody's finds that Eastern Europe has the highest risk globally, in relativity to its supplier population. The European supplier ecosystem is vulnerable, due to its thinner margins and limitations to absorbing pressure.
Though North American suppliers currently appear operationally stable, Moody's finds that some suppliers are under strain, as demonstrated by their financial health indicators.
Anticipating and mitigating operational risks among key suppliers remains a critical challenge for manufacturing supply chains.
Andrei Quinn-Barabanov, Supply Chain Industry Practice Lead at Moody's Analytics
Moody's research suggest that vulnerabilities may be starting to arise across the global network – with possibilities of the vulnerabilities interacting with one another, making them worse.
Turkey, Russia and Ukraine are noted as being part of the higher-risk environments from the dataset. Conflicts, sanctions and macroeconomic instability have been a major contributor to risk for these regions for the past few years, but this is supported further by their higher supplier performance risk scores, as found in the research.
Supply chain concerns
Risks in each country come from different root causes – though it may look financially stable, underlying trends are already threatening long-term supply chain integrity.
Though Japan has one of the lowest-risk supplier profiles, with 85% of its 712 suppliers at a low risk, its domestic environment may cause issues. Japan's domestic supply chain is at risk due to an aging population and a slow-growing home market. This means it is limited in facing external shocks and its future supply chains may be vulnerable.
Germany has a moderate risk-warning, despite 7% of suppliers being at high risk. This is caused by a deteriorating auto parts supplier market, with quality lessening and increasing numbers of mid-tier suppliers raising cash on the private market.
Ecuador's auto supply chain is vulnerable due to ongoing economic fragility. It has a 78% high-risk supplier concentration, with a heavy reliance on external financing. Colombia has a high-risk concentration of 18%, caused by budget deficits, limited flexibility and weak business investments.
Moody's research is working to help organisations identify and mitigate potential risks, exploring when they come from domestic or macroeconomic issues. By integrating risk indicators into their processes, using thorough onboarding systems, due diligence and ongoing monitoring, organisations can work to mitigate the impact of disruption.
