The automotive supply chain in both Europe and North America will be at high risk during the coming months as part suppliers and logistics providers come under financial stress, analysts predict. Following the high number of plant closures and production cuts since December, a result of a global collapse in demand, suppliers will struggle with liquidity because they now have little revenue from customers even as they must spend money to meet new orders.
In the past three months 22 small and medium-sized German suppliers have filed for insolvency, according to the Financial Times, and the number is expected to peak in March. In North America, the situation is identical, where 12-25% of suppliers could disappear by the end of 2010, according to an analyst at CSM Worldwide, with the current period the most critical. Such failures will put automotive supply chains at serious risk, resulting in costly production stoppages.
The hardship extends to transport providers as well, which have had to face not only lower demand but longer payment terms from customers, and bargain-basement freight rates. According to Jon Langenfeld, Senior Research Analyst at Robert W. Baird, freight rates have fallen to unsustainably low levels. “We saw a lot of transport companies disappear in the first half of 2008 because of the rise in fuel prices, and I think we’re going to see that accelerate now,” he told Automotive Logistics.
The unhealthy transport sector could also threaten automotive supply chains, but Langenfeld feels that particular risk will occur more when the market begins to recover and freight rates spike, though capacity and service levels will have been slashed. But with a recovery unlikely this year, most manufacturers are focused on the lowest bottom line today. “A short-sighted shipper, or one that is struggling to survive, will just look to the lowest cost, which from a longer perspective will cause problems in the supply chain,” he said.
While transport providers are unlikely to see any form of direct aid from government, European and American government are now more likely to offer loans to support the car parts industry as well as carmakers. According to Bloomberg, a source has indicated that the Obama administration is exploring the possibility of setting up a lending facility that would allow suppliers to access funds to stave off collapse. Keeping these suppliers in business will bring relief to the transport sector as well.