Global Auto Supply Chain Risk

A friend of mine sent me a link to the above picture of unsold cars piling up in England. Nothing we haven't seen before but the mess is growing globally. Click here to see the photo gallery of autos piling up around the world courtesy of The Guardian. The gallery tab is in the upper left hand side of linked page.

As we wrote back in 2006 during seemingly happier times, or at least times when the illuminati would have us believe were happy, the world was still ramping up significantly excess industrial production at an alarming rate. If there is one thing I am certain of, we are going to see a substantial amount of this capacity taken out of the system. Forever. And, forever is a long, long time.

Again it is almost a certainty that every major auto maker on earth is going to receive a bailout from their respective governments by the time this crisis is over. What we will very likely see is that all but the top tier of global manufacturers will pull back operations to within their domestic borders. In other words, global expansion will be reversed or worse for a significant number of auto makers. That means the aspirations of China and India, as an example, to sell cars in Europe and North America will almost assuredly not develop.

This brings up another very key point not being discussed. North American and European firms that have outsourced much of the supply chain to emerging Asia are exposed to incredibly high risks associated with their business models. Risks that should have been clearly understood and quantified before this latest scheme of outsourcing was embraced. But, it wasn't and for that we will all likely suffer the consequences.

I'm not going to write a book on supply chain management because its a very complex topic. But we can distill it down to a sound bite as it pertains to risk this cycle. Supply chain management is a key business discipline used to achieve higher productivity and customer service. Supply chain management links the market, distribution & logistics, manufacturing and procurement to accomplish these goals. Every major manufacturer and retailer, as an example, has a team or division responsible for supply chain management and optimization. Much of the supply chain for today's markets, including autos, exists in extremely high risk areas of the world. GM, in particular, has been a key advocate of offshoring parts procurement to China. And, while the world was partying we were highlighting the substantial risks of emerging markets. What happens when China experiences a depression? What risks exist for the auto industries of Japan, North American and Europe that source so many parts from China? Will suppliers in southeast Asia be able to deliver product? Will the government of China remain in control? Will the world be in the middle of a trade war caused by drastic devaluation measures by the Chinese government? Will North America and Europe have the necessary alternative suppliers in case of serious supply shocks emanating from China? Will firms based in North America and Europe survive because of the pressure caused by automakers to source more goods from low-wage countries? Remember, those are the best case risks. The worst case is far more disconcerting. This may seem unlikely at the moment but it likely won't in the not too distant future.

When this crisis hits its stride, the world is going to become very interesting. And, it was all avoidable.