Survival in the Automobile Industry – The industry is still ill-prepared for risks
05.10.10The automobile industry is not well-prepared for the risk of a possible new industry crisis. That is one of the results of the study concerning Risk Management in the Automobile Industry, published by the Supply Chain Management Institute (SMI) at EBS Business School in collaboration with the economic information service D&B Deutschland. The researcher team under Prof. Dr. Michael Henke and Prof. Dr. Constantin Blome surveyed 55 executives in the automobile industry, as to how they handle the insolvency risk of their suppliers. The researchers discovered that in surprisingly numerous companies, a professional system to handle Risk Management was lacking. “The companies concentrate too much on internal corporate problems and react accordingly to crises,” Prof. Dr. Michael Henke explained. “Instead, their risk radar should cover the complete supply chain, in order to identify impending supplier insolvencies and to ensure room for action in case of domino effects.”
Many companies do not currently rely on long-term instruments for forecasting supplier insolvency despite their poor experience with the economic crisis. Especially large automobile manufacturers, so-called OEMs (Original Equipment Manufacturer), were hit most often and the hardest by insolvencies of strategic suppliers. Nevertheless, they only actively seek information about insolvencies at various supplier tiers to a limited extent. “For an industry, which has taken the idea of efficiency to extremes, the amount of risk precaution does not exist to the same degree,” Henke summarized. “The manufacturers and suppliers still have a lot of work to do in this area until their Risk Management functions properly.“
Risk paradox
The researchers see a risk paradox in the current situation. On the one hand, the supply structures in the industry are close-knit. If a supplier in this row of dominos drops out, the insolvency has a negative effect on all companies involved. On the other hand, 1st tier and 2nd tier suppliers only employ rudimentary Risk Management, which is poorly developed and reactively designed, for supplier failures, according to the study.
Economic crisis offers opportunities
Nevertheless, the crisis has intensified the risk awareness of companies. For example, risks in the supply chain are often monitored beyond the classical purchasing departments and are dealt with at board level. The crisis brought Risk Management into the focus of directors, with the objective of enhancing and consolidating it. Moreover, the economic crisis offered suppliers new opportunities to improve their situation. The relief in the pre-product and raw material markets, caused by the crisis, has been taken advantage of by 2nd-tier suppliers (suppliers’ suppliers), who have negotiated better purchasing conditions.
Insolvency despite upturn
Currently, the industry appears to be doing well, as apparent in the positive growth rates of OEMs and suppliers for the first half of 2010. Despite the present upturn, there is still a threat of insolvency in the automobile industry. The surveyed 1st tier and 2nd tier suppliers expect illiquidity of many suppliers mid-term. The crisis appears to be over, however many suppliers stand on shaky ground. They lack the necessary financial strength to re-invest during the recovery. “The industry will not calm down yet,“ Henke observes. “Insolvency, as well as mergers and acquisitions, will cause the industry to experience further disturbances in the coming months.”
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