It is no secret that the automotive industry plays a key part in the global economy. Some 92.8 million motor vehicles were produced worldwide in 2019. In the EU, this contributes to 7% of its GDP. The strength of the automotive industry does not rest simply on the turnover of large car manufacturers such as Volkswagen (VW), Daimler or BMW, but the total supporting industries this sector requires.
The demand for complex supply chains, infrastructure and a variety of necessary services has a far-reaching impact on the global economy, generating millions of jobs and building interdependent communities worldwide. Consequently, a significant proportion of the global economy is vulnerable to a downturn in the automotive industry.
In the last two years, multiple factors have built up to create a perfect storm for certain car manufacturers. With financial troubles present due to a weakened Chinese market, reduced demand for diesel engines, and Brexit and COVID-19 causing unprecedented challenges to the industry, there has never been more focus on maximising the margin made on each vehicle. Within and beyond the automotive industry, companies have looked to improve ever-tightening margins by removing material costs from their products. Earlier this year, Rolls Royce requested a cost reduction of between 5% and 15% from their aerospace supply base to share the financial impact of COVID-19.
What solutions are there?
In a world where some automakers have been forced to furlough half of their employees, the following levers could also be implemented in parallel to reduce cost and achieve larger margins:
- Increasing commonality of components across vehicles to bring about economies of scale can give carmakers better leverage when sourcing and optimises the total cost of tooling for production. One success story is VW’s MQB platform, which has highlighted their expertise in this area. The VW Golf, SEAT Leon, Audi A3, Skoda Octavia and many others are all built from the same platform which ensures that costs are optimised across model lines.
- Appropriately managing raw material expenditure allows companies to unlock vast savings potential. Whether this involves a carmaker directly buying the raw materials that their suppliers are sourcing (i.e. steel or aluminium) or more simply investing in internal initiatives that review raw material requirements to understand whether moving to cheaper alternatives is viable.
- Reducing engineering changes post sourcing agreement to mitigate situations that leave the carmaker without leverage in their procurement process. Ensuring that post contract technical changes are minimised mitigates the impact of cost creep and helps to keep material costs at target. Of course, certain changes are unavoidable. Nobody wants a driving position that gives you back problems or a braking system that could potentially fail. However, during these challenging financial times, a more critical weigh up between minor performance improvement versus disproportionate increase in cost must be made.
- Exploring BCCS (best cost country sourcing) is more important than ever as relatively recent obstacles such as trade wars and Brexit have increased the need for creativity. Anti-dumping duty associated with parts produced in China have now, to some extent, reduced the lure of purchasing parts from this region and have provided an opportunity for countries such as India to step in, so long as they meet the required standards.
- Avoiding unnecessary over-engineering will also play its part in keeping material costs down. Removing excessive component performance requirements can unlock hidden savings.
- Introducing more robust electronic quotation systems will improve transparency and help reduce extensive cost creep. Although effectively enforcing such a system with certain suppliers would be a challenge in itself, the right operational support can drive previously untapped savings potential.
On the whole, 2020 has been a very challenging year for a most industries, especially automotive. It is not all doom and gloom though; this downturn in the market presents a great opportunity (for those businesses that take it) to radically improve efficiencies, cut back the unnecessary fat and come back leaner and more competitive once automotive sales return to what they were pre COVID-19.
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