The automotive industry can seldom exist without its suppliers and the supply chain. Over the years, the OEMs have been sourcing their parts from across the globe due to various factors, including quality, cost, technology and consistent delivery. Ditto with the large suppliers as well.
According to the report from Beroe - the leading provider of procurement intelligence and supplier compliance solutions, auto component buyers are planning to shift gears in their sourcing practices in the long term by engaging with either local or regional suppliers. However, there is always a need for global sourcing in the auto industry for procuring high volume–high precision products.
According to Vignesh Premkumar, a research analyst at Beroe, auto component buyers diversify from the dominant supply bases to ensure supply risk mitigation and reduce the cost per unit of auto components. Buyers from the auto industry plan to take on this strategy slowly and are therefore diverting their partial sourcing activities away from the dominant bases. Buyers have started looking for local sourcing opportunities.
The reason for the shift
Beroe states that there are several reasons why the automotive industry is looking to shift toward more regional suppliers in supply chain diversification. In the past, OEM buyers would limit themselves to a few auto component suppliers. However, this is now changing due to the growing demand and the need to mitigate supply chain risks that have emerged due to the ongoing pandemic. As a result, most major auto OEMs are currently strategising for implementing supplier diversification; this will enable them to improve their sourcing flexibility when the demand levels are high. This also helps buyers bring their products to market with speed, says the report.
The trade war between the US and China in the recent past has affected the automotive industry immensely. The US buyers had to look for alternate sources for their raw materials because of the high taxes. This has made the South-East Asian countries a more appealing option.
In addition, there are several OEMs from Germany that are looking for alternative sourcing options from Eastern Europe. Countries such as Poland, Czech Republic, Hungary, and Bulgaria have lower costs due to supply base concentration, observes the report.
Despite India's political tensions with China, it still depends on sourcing batteries, electronic parts, rare earth magnets, and many more items. For mechanical components such as castings and machined parts, Indian automakers are looking within the country now.
Increasing labour cost
Another reason for the rise in local sourcing is increased labour costs. The cost of manufacturing is high in China due to the increase in minimum wages. In addition, the environmental regulations have forced several manufacturing plants to reduce their production activities. Therefore, South-East Asian countries such as Taiwan, Cambodia, and Laos, are now better alternatives for procuring labour at a lower cost.
The role of COVID
Beroe's report states that COVID has added to the reasons why buyers are increasingly looking at local options to source auto parts. The supply chain has been impacted, and various manufacturing sectors have shut down their operations during the first quarter of 2020. China was significantly impacted and shut down its manufacturing operations completely. They, however, recovered quickly and are currently operating at 95-100% of their capacities. Other countries are still struggling to reach a steady momentum in managing their manufacturing activities.
Premkumar says none can anticipate events like a pandemic. Moreover, the tension between countries is unpredictable too. Such a scenario brings a lot of pressure for companies who source their raw materials from different countries. It disrupts their procurement and supply chain and, subsequently, their entire business. So, it's understandable that the companies in the automotive industry are looking at regional suppliers now. 'This doesn't mean we're nearing an end of global sourcing. It simply means we're carving a parallel line to the existing model that helps stakeholders manage risks effectively,' adds Premkumar.
Courtesy: Beroe. NB: Photo is representational; courtesy: Hyundai Motor India.