Automotive Engineering - November/December 2021 - 5

SUPPLIER EYE
Suppliers battle a new set of ILLs
M
uch has been written about the challenges
facing the automotive industry's
impending shift to an electrified
future. Along with the growth of advanced
automated driving systems (ADAS) content,
one might assume that supplier plates are
full. Unfortunately, the industry is grappling with
the critical near-term issues of supply-chain outages,
labor shortages and the unprecedented
economics for virtually every raw material input.
This constant cost-and-supply firefight weighs
heavily on the suppliers at every tier.
Rising costs are not new. Within the planning
process, smart companies account for economics
within three key variable-cost drivers: Inputs,
Labor and Logistics (ILL). To this point, suppliers
would look to the past for economics as well as
integrating expected known structural changes
into future contracts; this would offer a level of
protection from cost increases. Recently, however,
the economics facing suppliers are not normal,
anticipated, nor easily accommodated in
this capital-intensive industry.
While many will point to the COVID pandemic
as the sole driver of unprecedented economics
and the variable costs within, the situation has
exasperated many and revealed the soft underbelly
of ongoing industry issues. Labor/skills
availability and the fragility of both global logistics
and raw-material supply chains are all exposed.
Adding to the mayhem are man-made
issues such as U.S. Section 232 steel/aluminum
tariffs artificially inflating costs, or the chip-supply
issue spurring ecosystem inefficiencies.
What has impacted suppliers can best be
characterized as successive " black swan " events
- outside the normal course of business.
Shortages of skilled and semi-skilled U.S. labor
has driven extraordinary wage hikes ranging
from 10-20% over the past two years. Such levels
were never anticipated. Government COVID
subsidies, competing options for auto labor, early
retirements and the exodus of some workers
choosing other occupations are factors reducing
the available pool. A core tenet of economics
theory states that wages don't ratchet backwards
- only automation or structural shifts can
reduce labor costs.
The new 'stay-at-home' economy has helped
Michael Robinet
Executive Director,
IHS Markit
SAE Foundation
Trustee
michael.robinet
@ihsmarkit.com
The result
of this... will
impact the
ability for
suppliers to
reinvest in their
business and
develop new
technologies.
upset the precarious balance of container ships,
containers, ports, warehousing and truck/rail
capacity. Countless cargo ships waiting to unload
and supply chain inefficiencies are raising
costs. While one would hope this is transitory,
several shippers have signed longer-term contracts
at accelerated price levels.
The industry has faced rising raw-material
costs in the past. This time, however, the situation
is different. Steel, aluminum, magnesium,
resin, oil and other key commodities are impacted
by the aforementioned labor and logistics
issues - all driving prices higher. While the experience
is especially acute in North America
versus other regions, global input prices are impacted
for all. According to recent IHS Markit
forecasts, prices are expected to settle at new,
higher plateaus, at a level of economics not anticipated
by suppliers.
Grouped together, these cost impacts are not
transitory. Accelerating labor economics, shipping
customers signing long-term contracts to
guarantee capacity and surging material input
costs are placing significant pressure on suppliers.
Unless a supplier is on a commodity resale
program (i.e., their customer purchases key
inputs on their behalf), or can adjust input
costs according to an industry index, fixed contracts
mean there are few levers for suppliers
to gain price relief.
The result of this unparalleled cost squeeze
will impact the ability for suppliers to reinvest in
their business and develop new technologies. It
will impair their capability to withstand future
extraneous events. At this industry juncture, with
the enormous investment pressures of electrification
and ADAS/AV integration, a strong and
resilient supply base - not one facing an unprecedented
cost crunch - is critical.
AUTOMOTIVE ENGINEERING
November/December 2021 5
Automotive Engineering - November/December 2021

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