How Supply Chains are Changing in the Automotive Industry

Supply chains in the automotive industry are stabilizing. But for long-term resilience, they also need to change. How nearshoring, digitization and the circular economy are changing supply chains.

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Automakers are more confident that they can manage future supply chain disruptions, according to a Capgemini Research Institute study, "The Automotive Supply Chain: Pursuing long-term Resilience." They have now reduced their backlogs by 61 %, according to the study, which surveyed more than 1,000 executives from leading global automotive companies in 10 countries. A further reduction of 39 % is expected next year, it said.

Most recently, automakers have been forced to rethink, restructure and refinance their supply chain management on the fly. While problems could have been resolved in the short term, supply chains would continue to transform due to their complexity and changing factors. For example, building up inventories has increased resilience, but this is not a long-term strategy. To survive in the future, supply chain management must respond to the following transformational factors. These include increased nearshoring, driven primarily by the introduction of electric and software-defined vehicles as well as regulatory and political developments, sustainability requirements, and digitalization.

Procurement from Offshoring Locations Declines

The supply chain transformation for semiconductors and electric vehicles is expected to accelerate nearshoring , the relocation of production facilities back to or near the sales market. Only half of OEMs consider their current supply of semiconductor components secure, according to Capgemini. Of those, 70 % said the majority of supplies currently come from China, Taiwan, Japan and Korea. To achieve greater supply security, OEMs are investing in alternative sourcing methods and moving away from Tier 1 and Tier 2 suppliers, analysts said. In addition, OEMs have secured raw materials for EV batteries for only three years on average, they said.

The nearshoring trend and thus a global realignment can already be seen today. Procurement at offshore locations, for example, has fallen by 22 % in the last two years. Europe is leading this trend and has reduced offshore sourcing by 25 % since 2021; in Germany, the decline is the highest at 27 %, according to the study. It was followed by APAC and the U.S., which had reduced offshore sourcing by 20 % and 18 %, respectively. According to the study, automotive companies expect sourcing from offshoring locations to fall by a further 19 % by 2025, as electric vehicle production increases and the manufacture of key electronic components is relocated.

Sustainability Efforts Falter

Although sustainability and circular economy are important components of the more resilient supply chain of the future, less than half of companies have implemented key sustainable supply chain initiatives in the last 12 months, the study found. Only 13 % would actively develop these initiatives. The reason, it said, was several successive supply chain crises that have pushed the issue of sustainability into the background. In addition, circular economy initiatives have been delayed due to a lack of suppliers of recycled materials (and the materials themselves), it said.

The fact that sustainability efforts in the automotive supply chain have stalled is also illustrated by the following figure: Only 37 % of the companies surveyed had indicated that issues such as carbon footprint management and environmental risks influence decision-making in the supply chain. The decline in investment across the industry reflects this trend, it said: while OEMs' overall investment in supply chain sustainability is on par with the previous year, suppliers' annual investment has fallen significantly, by 17 %. The problem: OEMs need to balance sustainability and circularity with factors such as cost and affordability. The study shows that digital solutions can help.

Reduce Supply Chain Risks through Technological Leap

To create a more reliable supplier ecosystem, visibility and transparency are key. Automakers should therefore develop a long-term, intelligent and data-driven strategy that creates resilience and competitive advantage, Capgemini advises. Yet only slightly more than half of respondents have a mature intelligent supply chain that enables data-driven decision making and the integration of emerging technologies such as artificial intelligence and data analytics. Capgemini says resilience and sustainability could be driven by greater participation in standardized, open and trusted data ecosystems.

However, results from McKinsey's recent Supply Chain Pulse Survey suggest that a technology revolution in supply chain management is underway. This year, it says, the percentage of respondents who have implemented dashboards for end-to-end visibility has increased significantly to 79 %. The survey also shows a significant increase in the use of advanced planning and scheduling systems. "End-to-end visibility, effective scenario planning and access to IT expertise are the three most important factors in making supply chains resilient," sums up Knut Alicke, a partner at McKinsey in Stuttgart and a professor of supply chain management at the University of Cologne. However, while progress is being made with the first two measures, access to qualified specialists is lagging behind. According to McKinsey, only 8 % worldwide say they have access to a sufficient number of IT experts to achieve their digitization goals.