Supply chain and auto market growth

• Post pandemic, automotive markets in Europe and Asia are experiencing steady growth, while progress in the Americas has been variable, amid prevailing geopolitical crises and resulting supply chain bottlenecks.
• Global automakers are building supply chain resilience by vertically integrating into essential raw materials, and diversifying their supplier base.
• Automotive companies are also focusing on ESG, including vehicle electrification, sustainable supply chains, and computer-aided software engineering (CASE) technologies to drive the next growth wave.
• While supply chain bottlenecks, and scarcity of electronic chips and other raw materials should gradually ease in the near-term, the next phase of growth will depend upon reducing or removing volatility from complex supply chains.

The global automotive industry is seeing a resurgence following a downturn between 2020 and late 2021, primarily due to COVID-19. As we step into 2024, the sector is enjoying a notable uptick in sales across various regions, indicating a promising recovery. Despite this renewed optimism, industry stakeholders should remain vigilant and proactive in addressing emerging supply chain concerns, while also adapting to fast technological disruption without being held back by legacy infrastructure.

KPMG Financial Performance Index (FPI) data shows that the global automotive sector has demonstrated sustained stability and growth since late 2021, reflecting an ability to adapt and recover following the challenges posed by the pandemic. However, there are notable regional differences, with Europe and Asia on a consistent upward trajectory, while North America's FPI scores have declined. This contrasting performance is down to regional variations in economic conditions, regulatory frameworks, and consumer preferences.

North America's FPI scores fall due to squeeze in supply exacerbated by supply chain crisis. Automakers are taking significantly longer to convert cash as supply chain disruptions force them to hold unfinished products and hoard raw materials.

Cash conversion periods have risen significantly as a result of supply chain disruption and macroeconomic headwinds across all geographies, but North America and Asia have suffered the most. This can be attributed to supply chain bottlenecks, changing consumer preferences for electric vehicles (EVs), and stocking up in the hope of investing in new projects and operations.

In recent quarters, Europe has exhibited a positive trend in cash conversion cycle and days inventory outstanding (DIO). Prior to this, automotive companies from this region had been increasing inventories and stockpiling raw materials in response to the supply chain crisis and geo-political conflicts  - which worsened their working capital position.

The automotive sector is a cornerstone of the global economy, contributing significantly to GDP and employment in many countries. In recent years, the industry has faced unprecedented disruption and innovation, affecting the intricate web of manufacturers, suppliers, and service providers  - large and small.

ESG is proving a huge influence on a number of fronts:

1. Electrification of vehicles: One of the most visible trends is the shift towards EVs. As per an IEA estimate, global market share has risen from 4 percent in 2020 to potentially 18 percent in 2023. This move is driven by increasing global commitments to sustainability and stringent government policies to reduce carbon emissions. Automobile companies are leading the charge, increasing the share of electric vehicle fleets to substantially lower carbon emissions compared to traditional vehicles.
2. Sustainable supply chains: The transition to EVs has increased the demand for certain metals essential for battery production, like copper, lithium, and cobalt. According to Bloomberg NEF, demand for copper to increase by 53 percent, with supply only rising by 16 percent by 2040. But, in the race to electrify, automotive companies need to ensure sustainable and ethical mining practices.
3. Computer-aided software engineering (CASE) technologies are improving the efficiency and productivity of the automotive industry by automating various processes. However, legacy systems are holding back wider integration of these technologies.
4. Improved ESG reporting and transparency: There is an increasing need for greater corporate transparency in ESG data. Companies are investing in ESG analysis and data visualization tools to better understand their environmental impact and to communicate their sustainability efforts to stakeholders.

Responding to these trends can be costly and challenging due to the complexity of vehicle components, legacy infrastructures, integration, and training and skill development.

Automakers should aim to transform supply chain challenges into growth opportunities

Across all regions, the automotive sector is expected to grow steadily, although progress is likely to be impacted by region-specific challenges. The Americas face workforce shortages and demands to create sustainable supply chains, while European automotive players need to overcome legacy infrastructure as they shift from ICE to electric vehicle components. Chinese automotive companies are gaining a larger share of the global automotive market, which is putting pressure on European companies.

To navigate these turbulent times, companies are making strategic investments in supply-chain resilience to mitigate the risks associated with disruptions and ensure a steady flow of essential materials.

Major players across regions have been proactively diversifying their supplier base, investing in in-house mineral supply, incorporating sustainability frameworks in production (such as the Copper Framework The Copper Framework promotes responsible practices across the copper, molybdenum, nickel and zinc value chains.), investing in real-time monitoring and data analytics, and focusing on talent development and risk management expertise. These strategies can reduce the risk of supply chain interruptions, minimize dependency on a single entity, maintain optimal stock levels, and avoid either shortages or surplus inventory.

We will closely track FPI scores over the next couple of quarters (available in January 2024) to continually monitor the automotive industry's efforts to diversify supply chains and increase EV production.