It’s Complicated: Relationships in the Automotive Supply Chain Are More Complex Than You Think
September 23, 2022
The last few years have been particularly hard on global supply chains. The Covid-19 pandemic, geopolitical disruptions, and widespread inflation have all put pressure on suppliers, many of whom are struggling to make deliveries according to the terms of existing contracts.
Perhaps nowhere is this more apparent than in the automotive industry, where long supply chains regularly span across multiple companies and continents. A screw may start life in a factory in East Asia before passing through several assembly lines in a number of other countries and ending up in a car or truck for sale in a European showroom.
In fact, if you look at the stages of production from the very beginning of the process until the very end, the automotive supply chain is one of the most intricate in the world. And the German automotive supply chain, with its outsized reliance on foreign suppliers, is among the most complex in the entire sector.
The future: More disputes
It is difficult to predict when the intense pressure on supply chains will eventually ease. Everything from ongoing pandemic shutdowns in China, increased fighting in Ukraine to the European Central Bank raising interest rates could exacerbate existing logistical challenges for the German automotive industry. Energy costs will remain highly volatile and material shortages may worsen.
But one thing seems certain, given the many difficulties automotive suppliers have already experienced, disputes along the supply chain over late deliveries and unforeseen cost increases will probably become more common in the near term.
Margins for many companies in the automotive sector are slim, which potentially means that delays and pricing adjustments could have a significant impact on the financial well-being of entities across the supply chain. This also means determining the quantum of damages in disputes among suppliers is taking on particular importance.
Some of these disputes will be settled in a fairly straightforward manner. Depending on how contracts between companies are written, there could be clear legal cases where assessing the damages associated with a dispute is relatively simple. However, the automotive industry’s long supply chains and many interdependencies mean there will also be many disputes where assessing damages will be decidedly more difficult.
Beware the spillover effect
While not every disruption in the supply chain will result in a dispute, the increased number of disruptions will likely lead to an overall increase in disputes. More importantly, a number of these disputes could have effects that go beyond just two parties.
That’s because the long, international supply chains that characterise Germany’s automotive sector can compound losses, creating a spillover effect that ripples through multiple companies. For example, if there is an issue with a specific part that is used in an engine component, the problem could reverberate through multiple tiers of the supply chain, eventually even reaching the original equipment manufacturer (OEM).
Delays and cost overruns can also work their way up the chain, resulting in potentially very expensive delays or even stoppages in OEM production lines. This can compound losses and make it difficult to assess total damages. And the more tiers of the supply chain these spillovers affect, the more complicated the question about how to allocate losses between suppliers. That makes the most significant disputes between far more than two companies; the biggest disputes could challenge entire sections of the supply chain.
Feeling the squeeze
Unfortunately, when it comes to making a decision about how to handle these types of issues, there is often no easy answer for a court or tribunal. While laws, regulations, or contracts can provide guidance in some situations, the answer is often not clear cut. Usually, a tribunal or court decision will have to rely on expert economic analysis of supplier responsibilities and their financial positions.
So, suppliers in the automotive sector could frequently find themselves like the filling of a sandwich, squeezed by both the companies that they supply and also the companies that supply them. In short, they could be negotiating with their OEM while also pursuing a claim against one of their own suppliers.
That means companies all along the automotive supply chain need a newfound appreciation for how complicated their professional relationships have become. Now could be a good time to revisit contracts and explore new ways to build redundancy and flexibility into aspects of the supply chain. And what should a company do if it ends up in a dispute despite taking these steps? Reach out to a financial expert for a thorough analysis of the situation.