Chain Reaction: Managing Financial Risk And Exposure In The Automotive Supply Chain

Hogan Lovells partners Joe Bannister (UK), Heiko Tschauner (Germany), and Chris Donoho (U.S.) are part of the firm's Business Restructuring and Insolvency practice. Bannister and his colleagues have a wealth of experience acting for original equipment manufacturers (OEMs) and suppliers in some of the most complex and intractable automotive cases of the past decade. The development of new powertrain technology; challenges within established markets, such as diesel emissions issues; and falls in automotive production - production in the United Kingdom has fallen during the last 12 consecutive months - have had a significant impact on the automotive and mobility industry.

The rapid increases in demand for connected, electric, and hybrid vehicles - together with the associated infrastructure - means that effective cooperation among OEMs, suppliers, regulators, and other stakeholders is now more important than ever. The cost of this new technology, aligned with shocks to production, such as the ongoing uncertainties around Brexit and China trade tariffs, means that more than ever, fortune will favor the innovative and the well prepared innovator.

The relationship between OEMs and their suppliers has always been highly symbiotic and capital intensive. What makes things different now?

Bannister: Profit margins for the sale of new motor vehicles are now tighter than ever. That has led OEMs to refine and manage relationships with key suppliers more robustly. This tighter management is illustrated in a number of ways. First, we have seen OEMs seeking to hold suppliers to fixed prices for key components for a number of years before insisting upon phased price reductions. That in turn has often reflected the technology underlying particular models becoming more established and less cutting edge. Additionally, OEMs have carried out regular supplier culls so that wherever possible, they hold fewer relationships with individual suppliers, but those relationships extend to a greater number and range of components.

The result is to leave the supply chain increasingly vulnerable to fluctuations in demand. Additionally, the highly integrated just-in-time nature of supplies means that production of particular vehicles will almost invariably be, at best, able to carry on for a few weeks and, at worst, for a few hours in the event of any disruption. The current uncertainty as to when, and if so on what terms, the United Kingdom will leave the European Union...

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