automotive supply chain: surviving and thriving in the new

Automotive supply chain: Surviving and thriving in the new normalCenter for Automotive Research

Management Briefing Seminars

Power Lunch

Dietmar Ostermann, Partner,

US Automotive Advisory Leader, PwC

PwC | Automotive Supply Chain New Normal

Hypotheses

1. The road to recovery for the auto industry will take several years

2. The transition to electric vehicles (EVs) will continue

3. Supplier bankruptcies will increase over the next 12 months

4. Global supplier M&A will see a new record next year

5. Sourcing strategies will be revisited

6. Supply chain transparency will increase further


Hypothesis 1

The road to recovery for the auto industry will likely take several years

3

PwC | Automotive Supply Chain New Normal Source: IHS Markit December 2019 / July 2020 Forecast Release

IHS’ latest forecast shows a 20 million drop in 2020 global vehicle production due to COVID-19

De

c 2

01

9

Fo

reca

st

Middle

East/Africa

0.1

Greater ChinaSouth America

0.188.9

South East AsiaIndia

0.1 0.2 0.2

Russia +

Non-EU

North America

0.4

2020F

0.0 0.2

EU + UK

88.4

FY19 Production

0.2

Japan/Korea

Global Vehicle Production Forecast Comparison 2019 to 2020F (millions)

1.7

3.7

FY19 Production Greater China

1.5

India

4.6 0.9

South East Asia

2.7

Japan/Korea 2020F

0.6

EU + UKMiddle

East/Africa

Russia +

Non-EU

68.6

South America

1.1

North America

88.9

3.5

Ju

ly 2

02

0

Fo

reca

st

4


Global Production Volume Bridge Forecast Comparison– 2019 to 2026F (millions)

Source: IHS Markit December 2019 / July 2020 Forecast Release

Longer term vehicle assembly in North America and Europe is barely getting back to 2019 figures

South America 2026FRussia +

Non-EU

FY19 Production

6.7

102.5

1.8

EU + UKNorth America

0.9

0.4

1.1 0.8

South East Asia

1.40.8

Greater China Japan/Korea

0.2

India

88.9

Middle

East/Africa

De

c 2

01

9

Fo

reca

st

Ju

ly 2

02

0

Fo

reca

st

FY19 Production

0.2

Greater China EU + UK

94.8

Japan/Korea

0.6

Russia +

Non-EU

0.8 0.8

88.9

South East Asia

0.8

2026F

1.3

4.7

Middle

East/Africa

0.2

South America

0.8

North America India

5

PwC | Automotive Supply Chain New Normal6

North American Vehicle Production & Sales 2019 to 2027F (millions)

10

0

5

25

35

20

15

30

15.5

2019 2020F 2021F 2023F

18.4

2024F 2025F

15.5

2026F 2027F

16.7

2022F

16.317.1

20.3

12.6

14.615.8

18.8

16.1

19.1

16.4

19.5 19.6 19.6

16.5

-3.7

(-23%)

North America Assembly Volume North America Sales Volume

Source: IHS Markit July 2020 Forecast Release

For North America IHS predicts a vehicle production decline of 3.7M units in 2020 and a return to 2019 volumes in 2025


Hypothesis 2

The transition to Electric Vehicles (EVs) will continue

7


Top 20 OEMs’ Spend ($B) in CAPEX and R&D OEMs ROC Scenarios based on EV / AV Investment

In 2019 OEMs were planning to invest more than $350B in advanced technologies over 3 years, reducing already low profitability

8

13

5

126

543

2016-2018 2019-2021

335

516

AV

863

EV

Other

674

140%

165%

-5%

Growth

2019-2021

Note: EV CAPEX and R&D based on historical and future model launches AV R&D and CAPEX includes publicly announced OEM investments. AV investments do not

include ride-hailing, car-sharing, etc

Source: CapIQ, PwC Analysis

2018

Automotive

OEM Industry

(Top 20

Global OEMs)

2023 Scenario 1

(High

Investment)

2023 Scenario 2

(Delayed

Investment)

2023 Scenario 3

(High

Investment w/

Reduced Gross

Margin)

Revenue $2.2T $2.6T

EBIT (%) 6.3% 3.5% to 3.9% 4.8% to 5.1% 2.5% to 2.7%

ROC (%) 3.9% 2.0% to 2.4% 2.8% to 3.2% 1.4% to 1.8%

With mounting losses over the next few quarters,

OEMs will likely concentrate their investments on near term opportunities


Battery Pack Cost Estimates ($/kWh) (U.S.) Example: U.S. ICE & BEV TCO2 w/o Incentives ($ 2019)

We anticipate now that the ICE/BEV tipping point (TCO parity) will be reached in the U.S. at ~2026

9

2010

$395

$/kWhr

2015

$650

$35

2020 2025 2030

Today:

~$150

$150$120 $107

Pack

Cost

Cell

Cost

$10K

$0K

$20K

$30K

$18.2K

2020 BEV

TCO

2025 BEV2019 ICE 2030 BEV

$19.0K$18.4K$20.5K

+11%

Vehicle Depreciation

Fuel Cost

Maintenance Cost Taxes

Battery Depreciation

TCO Parity

2026(+/- 2)

▪ Lower battery cost

▪ Lower fuel cost

▪ Higher recharging prices

▪ Higher EV maintenance cost

▪ EV dedicated platform efficiency

Legend – ICE = Internal Combustion Engine, BEV = Battery Electric Vehicle

Sources: InsideEVs “GM: Chevrolet Bolt Arrives In 2016, $145/kWh Cell Cost, Volt Margin Improves $3,500” 2015; Bloomberg New Energy Finance “A Behind

the Scenes Take on Lithium-ion Battery Prices” 2019; PwC Analysis

Changes Since Last Projections from PwC Strategy&


Global EV penetration Regional BEV/PHEV penetration

We expect ~14% of new car sales globally to be EVs in 2025;US penetration will be lower, China and Europe higher

10

5%

17%

29%

49%

42%

10%

16%

30%

0%

25%

50%

75%

100%

2015 2020 2025 2030 2035 2040

~49%

24%

1%

~62%

4%

14%

~65%

TCO Parity2: ~2024

2020 2025 2030 2035 2040

High 3% 15% 34% 59% 75%

Med 3% 11% 19% 36% 55%

Low 3% 8% 17% 33% 51%

TCO Parity2: ~2026

2020 2025 2030 2035 2040

High 2% 6% 11% 20% 45%

Med 2% 5% 8% 16% 35%

Low 2% 4% 7% 13% 29%

TCO Parity2: ~2024

2020 2025 2030 2035 2040

High 9% 29% 45% 68% 79%

Med 7% 18% 26% 45% 66%

Low 7% 14% 21% 36% 53%

1) Global penetration calculated using China, EU and U.S. EV penetration 2) 3-year total cost of ownership 3) Incentives phase out in 2020+.

Source: PwC interviews with battery experts, PwC Analysis


Hypothesis 3

Supplier bankruptcies will increase over the next 12 months

11


Global suppliers had stronger cash positions prior to COVID-19, as compared to 2007, the year preceding the financial crisis

Sources: CapIQ, PwC Analysis 12

8.2%

Cash as %

of Revenue

Cash & Undrawn

Revolver as % of

Revenue

9.8%

7.1%

14.8%

2007 2019

19.6%

Cash as % of Revenue

10.9%

Cash & Undrawn

Revolver as % of

Revenue

8.1%

10.6%

8.1%

Cash as % of Revenue Cash & Undrawn

Revolver as % of

Revenue

14.7%

10.6%

19.1%

Supplier Liquidity US Europe APAC


Debt leverage of automotive suppliers has increased while profits have declined in the last 6 months

1. 1/4 debt was used to capture 1:1 ratio of a quarter:year

2. FY2019, Q12020, Q2020 = annual filing dates

Source: CapIQ, PwC analysis 13

FY20192 (12 months) Q1 or Q2 2020 (6 months)

0

2

4

6

8

10

12

14

18% 10%30%

LFQ EBITDA (%)

¼ D

eb

t/E

BIT

DA

14%26% 22% 6% 2%

0

2

4

6

8

10

12

14

26% 6%30%

20

19

To

tal

De

bt/

EB

ITD

A

2019 EBITDA (%)

22% 14%18% 10% 2%

48 Suppliers

84 Suppliers

Select Global Auto Suppliers Debt-to-EBITDA vs EBITDA Margin1


In North America, at least 30 suppliers are likely distressed

1. % of suppliers with available data

Sources: CapIQ, PwC Analysis 14

Select North American Suppliers’ Liquidity Cover of Fixed Costs vs. Total Debt / EBITDA [LFQ, 3 months]

> 30 Distressed Suppliers


The distress picture in Europe and Asia is significantly worse

15

Select European suppliers’ Liquidity Cover of

Fixed Costs vs. Total Debt / EBITDA [LFQ, 3 months]

Select APAC Suppliers’ Liquidity Cover of

Fixed Costs vs. Total Debt / EBITDA [LFQ, 3 months]

1. % of suppliers with available data

Sources: CapIQ, PwC Analysis

>150 Distressed

Suppliers

> 40 Distressed

Suppliers


Most distressed suppliers are in body and chassis systems

16

4.8

5.4

4.94.8 4.9

5.1

4.6

5.0

4.3

4.8

4.4

5.1

4.5 4.6 4.5 4.44.2

4.6

3.6

4.6

6.0

6.6

6.26.0 6.0 6.0

5.85.6 5.5

5.4

RM-ChemicalsExteriorRM-MetalsDiversifiedChassis InteriorPowertrainBody ElectronicsAverage

+36%

+29%

+38%+31% +35% +38%

+38%+20% +54%

+17%

FY 2019 Q4 2019 Q1 2020Source: PwC Analysis

Average Supplier Distress Scores by Vehicle System

PwC | Automotive Supply Chain New NormalSources: CNBC “trying times for U.S. auto suppliers…” 2020; US Treasury “PPP loan level data” 2020; NYTimes “Banks Stockpile Billions as They Prepare…” 2020; Business

Insider “This is not a normal recession…” 2020; The Balance “Auto Industry Bailout” 2020; IHS Markit “German Gov. Announces Auto Industry Financial Support Package” 2009;

Tagesschau “Das steckt im Konjunkturpaket” 2020; Bundestfinanzministerium “Das Konjunkturprogramm für alle in Deutschland“ 2020; Bundesministerium der Justiz

“Insolvenzantragspflicht wird ausgesetzt” 2020; PwC Analysis

• In 2009, the German government offered a $2B auto industry bailout

• In 6/2020, Germany agreed on a ~$150B program incl. sales tax

reduction from 19% to 16% and ~$30B interim aid for SMEs

• For the auto industry, the government offers

– $3B invest in EV charging and R&D for EVs / batteries,

– doubled EV purchase subsidies (from $3,500 to $7,000)

– $1.2B to OEMs & suppliers for invest in “transformational innovation”

• Obligation to file for bankruptcies is suspended until 9/2020, delaying

bankruptcies

• In 2008/2009, the US government issued an $80B bailout to

save auto manufacturers and suppliers

• In 2020, US suppliers have taken advantage of SBA PPP loans

with at least $9B granted to the supply industry, but $20B in

liquidity is still needed to stave off larger issues

• Banks set aside $39B to cover potential loan losses, but

“problem banks” monitored by the FDIC increased for the first

time since 2011

Bankruptcies in the US and Germany have been staved off due to government assistance and forgiving banks

17

0

5

10

15

20

25

30

20182006 202020162008 2010 2012 2014

Chapter 7

Chapter 11

0

5

10

15

20

25

30

201720162014 2015 2018 20202019

US Automotive Supplier Bankruptcies German Automotive Supplier Bankruptcies

https://www.google.com/amp/s/www.cnbc.com/amp/2020/05/17/us-auto-suppliers-need-at-least-20-billion-as-plants-reopen.html

https://home.treasury.gov/policy-issues/cares-act/assistance-for-small-businesses/sba-paycheck-protection-program-loan-level-data

https://www.nytimes.com/2020/07/14/business/big-banks-quarterly-results.html

https://markets.businessinsider.com/news/stocks/us-banks-loan-losses-set-aside-billions-potential-coronavirus-defaults-2020-7-1029394107

https://www.thebalance.com/auto-industry-bailout-gm-ford-chrysler-3305670

https://www.tagesschau.de/inland/konjunkturpaket-115.html

https://www.bundesfinanzministerium.de/Web/DE/Themen/Schlaglichter/Konjunkturpaket/Konjunkturprogramm-fuer-alle/zusammen-durch-starten.html

https://www.bmjv.de/DE/Themen/FokusThemen/Corona/Insolvenzantrag/Corona_Insolvenzantrag_node.html


Hypothesis 4

Global auto supplier M&A will likely see a new record next year

18


Buyers will likely take advantage of lower valuations

19

Source: CapIQ; capitaliq.com, 2020.07.10; PwC analysis

(1) Evaluated Div. Adj. Share Price except for S&P 500 Auto & Components Index

(2) Overall average weighted by revenue

4

5

6

7

8

9

10

11

2019 Q1 2020 Q1

Electrical/Electronics

Body

Chassis

Diversified

Exterior

Powertrain

Interior

25%

0%

-25%

-50%

Jan-7 July-10

S&P500 Automobile &

Components Index (-30%)

Low “Traditional” OEM (-33%)

High Tier-1 (+1%)

High “Traditional” OEM (-13%)

Low Tier-1 (-98%)

• Automotive has been one of the hardest hit sectors

• A wide range of performance spans OEMs and Tier-1 suppliers

• Higher performing recover faster but overall valuations are down

-75%

• Multiples have significantly declined since Q1 2019,

affecting suppliers of all systems

• Q2 multiples are inflated due to declining profits

Automotive Stock Performance - Select High/Low Performers1 EV/EBITDA Multiple - Select Global Auto Suppliers2


Top suppliers will likely take advantage of low valuations and distress of competitors and invest in optimizing their portfolio

20

Automotive Players SituationExpected

M&A Activity

OEMs

• Stronger finances than 2008/2009 but reporting big quarterly losses in Q2 2020

• Investment in electrification will continue, while autonomous L4/5 driving invest will slow

• Other powertrain choices likely to be de-emphasized

• More partnerships for level 4 or 5 to share financial risk; L1-3 to continue

Low

Automotive

Suppliers

Top

10%

• Strong financial situation and can take advantage of situation

• Will expand portfolio and vertically integrateHigh - Buyer

Low risk

45-60%• Will need to trade-off between opportunities to acquire cheap targets vs. preserving

liquidityLow

Medium & high

risk

30-45%

• Not in position for acquisitions but in survival mode

• Seeking carve-out opportunities or investors for entire company

High -

Divestor

Note: Supplier risk level defined as liquidity coverage of fixed costs, high risk: < 4 months; medium risk: > 4 months and < 8 months; top: >22 months


Situation and Expected M&A Activity from Automotive Players


7 NA suppliers are among the 2020 global consolidators who might seize the moment and make more acquisitions

21Source: PwC Analysis

2

3

4

5

6

7

8

9

2 3 4 5 6 7 8 9 10

Bridgestone(JP)

Buyer Score

ArcelorMittal(LU)

Cummins(US)

Bu

ye

r A

ttit

ud

e S

co

re

ZF(DE)

BorgWarner(US)

Conti(DE)

Aptiv(IE)

Flex-N-Gate(US)

Freudenberg(DE)

Michelin(FR)

Hitachi(JP)

Knorr-Bremse(DE)

Magna(CA)

Denso(JP)

TE Connectivity(CH)

Weichai Power(CN)

Aisin Seiki(JP)

Lear(US)

N. America

Japan

Europe

China

India

S. Korea

SE Asia

Buyer Score and Buyer Attitude Score by Supplier


Powertrain

#Active Suppliers (%) #Distressed/ Divestor (%)

Interior


Chassis


Body


M&A activity is expected in subsystems with a high % of distressed suppliers and divestors

22

30

44

17

30

17

44

Door Trim

60%47%

50%

Insulation/

Acoustics

Carpet

12

40%

Insulation/

Acoustics

35%

22

Carpet

34%

Door Trim

18

815

6

26

52

3426

52

34

41%

1812

Structural

Stampings

42%

Non-Metallic

Body

46%

Non Struct.

Stampings

35%

Non-Metallic

Body

35%

Structural

Stampings

32%

Non Struct.

Stampings

2214

9 11

10

4840

20

48

10

35%40%

Catalytic

Converters

40%

Fuel Tank

16

35%

Frame Rails

4 33%

Fuel Tank

30%

Catalytic

Converters

1914

73

14

21

26

21

14

26

57%

EV Motors

43%

Prop Shafts

& CV Shafts

38%42%

Prop Shafts

& CV Shafts

Connecting

Rods

36%

EV Motors

35%

Connecting

Rods

8 911

85

9

Number Total Suppliers # Active, Distressed/ Divestor Suppliers

# Active Suppliers and # Distressed/ Divestor Suppliers by Subsystem (Top 3 by %)

Shocks,

Springs, Struts

Source: PwC Analysis


Over the next 18 months, over 150 deals are expected from distressed public and private suppliers, resulting in $30-40B in deal value

23

North America

12%

17%

57%

14%

Suppliers

by risk level

76100%

Europe Asia Pacific

Top Low risk Medium risk High risk

Expected

distressed

deals:

# 5-10 deals

$ 3-7B 22%

24%

46%

8%

Suppliers

by risk level

100%91

# 15-25 deals

$ 7-12B23%

29%

38%

10%100%

Suppliers

by risk level

324

# 60-100 deals

$ 20-25B

Expected

distressed

deals:

Expected

distressed

deals:

• Estimated >150 deals ($30-40B deal value) are expected from distressed automotive suppliers in next 18 month

• Majority of larger deals will likely be executed after 2020

• Additional activity will occur amongst private companies

Note: Supplier risk level defined as liquidity coverage of fixed costs, high risk: < 4 months; medium risk: > 4 months and < 8 months; top: >22 months


Estimated Deals Related to Distressed Companies per Region


PwC forecasts over 200 auto supplier M&A deals in 2020 and over 250 in 2021

24

$24

$13

$20 $19 $20$25

$50

$29

$57

$51

$45

$23

$8

$8

278

303

242

186

217203

166

198

159

61

159

216

0

10

20

30

40

50

60

70

80

90

100

110 350

0

50

300

100

250

200

150

2009 2015

189

2010 2011 2012 2013 2014 2016 2021

159

2017 2018 2019 2020

$38

Note: Automotive deals are defined where target company has greater than 25% automotive revenue and obtains a >50% share of company

Source: Refinitiv M&A Database 2020, CapIQ, company websites, PwC analysis

To

tal D

ea

l V

alu

e (

$B

)D

ea

l Vo

lum

e

Average deal

size ($m)127 47 66 79 107 115 246 175 360 259 292

Multi-Year AverageDeal Volume Actuals Deals projected to closeProjected Volume Deals announced and expected to close Closed Deal Value ($B)

2015 – 2019 average

annual deal value: $462008 – 2014 average

annual deal value: $20B

Record number of deals

following Financial Crisis

Global Auto Supplier M&A Activity 2009 – 2021

https://www.refinitiv.com/en/financial-data/deals-data/mergers-and-acquisitions-deals-database?gclid=EAIaIQobChMIzZiNs_up6wIVE7bICh3imQ0UEAAYASAAEgLbsvD_BwE


Hypothesis 5

Sourcing strategies will be revisited

25


We anticipate sourcing strategy changes going forward and enhancements in supply chain transparency

Resiliency - ahead of cost optimization - must become the new normal in the current environment. Auto

manufacturers need to implement these strategies as they consider sourcing their next programs

Resilient Automotive Supply Chain

Regional/

Global

Sourcing

• Reduce lead

times

• Mitigate trade

barriers

• Mitigate SC risks

Dual Sourcing

• Decrease supplier

dependence

• Increase capacity

• Reduce SC risks

Sourcing

Strategy

Visibility

• Improve visibility and

communication

• Increase reaction

speed

• Build trust across the

value chain

Supply Chain

Transparency

26


The auto supply chain is mostly regional for the ~ 100 T1 systems; discussion focuses on critical T2 and few globally sourced T1 components

27

OEM Supply

Chain

Location in

Relation to OEM

Sourcing

StrategyRationale Sample Commodities

Tier 1 – JIT/

JIS

In Supplier Park in

vicinity of plantLocal

Key modules assembled in

sequence and delivered

JIT to the line

Seats, IP, headliner, rear

suspension, fascia, front-end

modules

Tier 1 – JIT/

Transportation

Intensive

Within ~125 miles

(~2 hours) of plantLocal

Bulky components that are

assembled in sequenced

and delivered JIT to the

line

Engine, transmission, carpet,

fuel tanks, exhaust, HVAC,

glass

Tier 1 – Other LCC locationMostly Regional

Some Global

Metered commodities that

get delivered to the plant’s

warehouse or sequencer

A/B/C pillars, seat belts,

sensors, control modules,

latches, door handles

Tier 2 LCC locationGlobal and

Regional

Components/ raw

materials delivered to the

Tier 1 warehouse

Brake components, Seat

frames, fluid lines, castings,

stampings, resins

Tier n LCC location Mostly GlobalRaw materials delivered to

the Tier 2 warehouse

Ball bearings, electrical

switches, gears

Va

lue

Ch

ain

Select Tier-1 and critical Tier

2-n components, optimizing

cost and SC risk

Current Automotive Supply Chain Structure - Illustrative


OEMs in the US import most parts from Mexico;German assembly plants receive 83% of imported parts from the EU

1) Core auto imports are HTS codes: 8708.94, 8708.80, 8708.50, 8708.40, 8708.90, 8707.10, 8706.00, 8706.50, 8506.50,8409.99,8409.91, 8407.34, 8407.33, 8407.32,

8407.31, 8706 and are based on USMCA Table A.1

Source: United Nations Trade Statistics Database (UN COMTRADE). PwC analysis

15%27%

36%

28%21%

13%

37% 26% 25%

17%19% 18%

2%

20102000

4%

2019

7%

Mexico

Canada

APAC (ex. China)

ROW

Europe

China

19.6 27.2 42.7

58% 52%39%

28% 34%44%

2000

3%

5% 7%

2%0%

6%

2010 2019

Western Europe

ROW

Eastern Europe

China

APAC (ex. China)

7.1 18.4 24.6

Observations

• US auto assembly plants consume ~150B worth of parts/ material

• ~30% are imported, primarily from Mexico

• Top Mexico imports in 2019 include engines ($3.5B),

transmissions ($3.3B), and engine parts ($2.9B)

• Core auto imports from China were primarily in engine parts

($1.1B) and shock absorbers ($0.8B)

Observations

• Germany imported only 17% of core auto parts from outside Europe

• Parts from Eastern Europe dominate German core auto part imports

• China comprises a minor role in German core auto part imports

Regional source Global source China Regional source Global source China

28

US Core Auto Part1 Imports - $B German Core Auto Part1 Imports - $B


Combined effects of tariff savings and labor cost convergence drive expected future regionalization

1) Rate if Regional Value Content is not met 2) President Donald Trump Davos talk, 22 Jan 2020 3) Eastern Europe: Czech Republic, Hungary, Poland, Romania, Slovakia, Slovenia, Bulgaria

Source: International Labor Comparisons (ILC) compiled by the US Bureau of Labor and Statistics (BLS); 2000 – 2019 Chinese Statistical Yearbooks, Federal Reserve Bank of St Louis:

Average Hourly Earnings of Production and Nonsupervisory Employees, Manufacturing; OECD: Manufacturing, Hourly Earnings 2015 - 2019; PwC analysis

42.4

4.7

46.2

12.0

5.8

0

5

10

15

20

25

30

35

40

45

50

1995 2000 2005 2010 2015 2020

Mexico

United

States

Germany

Eastern

Europe3

China

Import

country

Export

country

Current

rate

Potential

rate

US

USMCA 0% 25%1

EU 2.5% 25%2

China 25% 10 – 25%

EU

EU 0% 0%

US10% 10 – 25%

China US 25% 10 – 25%

Key Observations

• In 1995, Chinese labor was incredibly

cheap, with a large workforce

• Chinese labor rates rose from 1995-

2020, eclipsing Mexico in 2016

• Similarly, EU assemblers has

expanded Eastern Europe parts

sourcing into Romania and Bulgaria,

tapping into labor costs as low as

$4/h

• Tariff rates have become increasingly

volatile with countries focusing on

domestic issues and protectionism

29

Latest Auto Tariffs Trends Average Mfg. Compensation Costs – $ per hr.


OEMs and Tier 1s are concerned about extreme weather, natural disasters and insolvencies

These disruptions to supply could be mitigated by dual sourcing and further regionalization

Natural Disaster

30% 29%

24%

Insolvency Human Illness

Major Supply Chain Threats Next 5 years?2

Key Observations

• Insolvency and Natural Disasters/Extreme Weather are expected to

cause most disruptions

• These disruptions can be minimized with dual sourcing and supplier

regionalization

2018 2019 2020

1 Extreme Weather Extreme Weather Extreme Weather

2 Natural DisastersClimate Action

Failure

Climate Action

Failure

3 Cyberattacks Natural Disasters Natural Disasters

4 Data Theft Data Theft Biodiversity Loss

5Failure of Climate

Change MitigationCyberattacks

Human-Made

Environmental

Disasters

High Impact Moderate Impact Low Impact

Ris

k R

an

kH

igher

Low

er

Source: 1. World Economic Forum Global Risk Landscape 2. BCI Supply Chain Resilience Report, 2019, https://continuityinsights.com/bci-supply-chain-

resilience-report-2019/30

Top 5 Global Risks by Likelihood of Occurrence1 Supply Chain Threats in Next 5 years – Percent of Respondents


Tier-2+ components tend to be more globally sourced

Tier-2+ suppliers tend to locate based on a LCC and/ or

specialization strategy

Tier-1OEM Tier-2+

49%23%

31%

16%

20%

61%

2.3

US Germany

0.9

Ball bearings3

72%

18%

19%9%

68%

3.5

US

1.1

14%

Germany

Regionally sourced1 China Globally sourced2

Gears and gearing5

46%24%

20%

35%61%

15%

US

2.7

Germany

2.1

Electrical switches6

60%

23%

27%

15%

62%

14%

GermanyUS

1.3 1.8

Fans4

1) Regionally sourced are parts imported into the US from Mexico or Canada or from Europe into Germany 2) Globally sourced is everything not sourced from China or a regional country 3)

848210 Ball bearings 4) 8414.59 Fans n.e.c. in item no 8414.51 5) 8483.40 Gears and gearing 6) 8536.50 Electrical apparatus; switches

Source: United Nations Trade Statistics Database (UN COMTRADE). PwC analysis

31

Select Imported Components and Sub-Components – 2019, $B Automotive Supply Chain – Example


Dual sourcing and regionalization can enable supply chains to respond to disruptions more quickly, improving resiliency

Sources: PwC analysis

The long term ability to ensure continuity of supply

chain during disruptions can offset short term capital

investments and unit cost increases

• Diversification of supply chain

reduces impact of local disruptions

• Mitigation of tariffs and political

trade friction

• Potential reduction in lead times

• Increased tooling cost

• Increased supply chain

management complexity

• Increase unit cost

Cu

rren

tF

utu

re

Tier-1OEM Tier-2+

Costs

Benefits Should we continue

sourcing from China/

LCC for the world?

Or should we go with a

more regional strategy with

multiple supplier locations?

32

Typical Auto Supply Chain – Example


For example, there is an opportunity to dual-source components within the region to increase resiliency

33

71%58%

49%

29%42%

51%

20192000

$0.6 $1.5

Regional

source

2010

Global

source

Resilient

Supply

Chains

$0.2 $1.5

84%

44%57%

16%

56%43%

2010

$4.5

2000

$0.4

2019

$4.5

Resilient

Supply

Chains

$2.3

46%33%

42%

54%67%

58%

$5.8

2000 2010

$5.8$2.0

2019 Resilient

Supply

Chains

$4.3

1) 8507.10 Electric accumulators, lead-acid, used for starting piston engines 2) 8708.94 Steering wheels, columns & boxes

for motor vehicles 3) 8708.30 Vehicle parts; brakes; servo-brakes and parts thereof

Source: United Nations Trade Statistics Database (UN COMTRADE), Harmonized Tariff Schedule (HTS) codes

In this example, US based suppliers could dual-source production back to regional sources in NA/ Mexico to

mitigate global disruptions

US Lead Acid Battery Imports1 - $B US Steering Component Imports2 - $B US Brake Component Imports3 - $B


Hypothesis 6

Supply chain transparency will further increase

34


Supply Chain Transparency Capabilities

Transparency can help mitigate supply chain disruptions as well as lead to increased revenue and additional savings What is SC transparency?

Additional Revenue On Time in Full Delivery

Additional Savings Visibility Implementation

+2-4% +6-15%

+2-3% +34-48%

Digital Champions vs.

Others

360° supply chain data network capturing SC

data and their relationships end-to-end

Near real-time track and trace including

dynamic ETAs and proactive alerting

End-to-end traceability and chain of custody

of products

End-to-end supply chain visibility (e.g.

inventory, capacity, but also financial stability)

Cost-to-serve visibility down to

transactional level

AI control tower enabling end-to-end

collaboration, optimisation and automated

decisions

49%

35% 36%

12%

2%

84%

68%62%

47%

13%

BOM Visibility AI Control

Tower

Real-Time

Visibility

Financial Visibility Digital Twin

Digital Champions

All Companies

Increased Transparency Benefits

Source: 1 PwC, Connected and autonomous supply chain ecosystems 2025, 2020, https://www.pwc.com/gx/en/industries/industrial-manufacturing/digital-

supply-chain.html35

https://www.pwc.com/gx/en/industries/industrial-manufacturing/digital-supply-chain.html


There are opportunities to increase transparency for both, OEMs and Tier-1s to unlock benefits

Sources: 1. PwC Strategy& survey and analysis

2. Synchrono.com “Supply Chain Visibility and the Bottom-line”, 2016 3. Controlant “The ROI of real-time supply chain visibility”, https://controlant.com/uploads/rti--the-roi-of-

real-time-supply-chain-visibility.pdf . BCI Supply Chain Resilience Report, 2019, https://continuityinsights.com/bci-supply-chain-resilience-report-2019/36

No/ Bad Process

10%30%

OK ProcessInsufficient

Process

20%

40%

World Class

• 40% of T1 suppliers have no or unacceptable T2 visibility

• Only 20% of Tier 1s have world-class processes to monitor and

mitigate Tier 2 financial and operational problems

60%

30%

8%

50%

21%8%

49%

25%12%

Tier 1

Problems

Tier N ProblemsTier 2

Problems

2011 2015 2019

• OEMs have focused efforts on improving visibility into Tier-1s

• Tier-2+ visibility can still be improved

• Loss of productivity is the largest issue faced by a lack of visibility

• Financial visibility is just as important as operational visibility

Benefits

• Real time visibility

• Better decision making

• Minimize disruption impact

• Insurance savings

• Limit time on quality review

• Comprehensive data for

advanced analytics

Average Return

• 10% improvement in earnings per share

• 5% increase on ROA

• 2.5% gain in profits

Evolution of Supply Chain Visibility for OEMs – 2011-2019 Tier-1 Supplier SC Visibility into Tier 2s

https://controlant.com/uploads/rti--the-roi-of-real-time-supply-chain-visibility.pdf

https://continuityinsights.com/bci-supply-chain-resilience-report-2019/


Auto OEMs and Tier 1s should consider investing in processes and systems to improve visibility across their supply chains

37

$1.4

2018

$0.6

2020201720152014 20212016 2019 2022 2023 2024 2025

$0.7$0.6$0.7 $0.8 $0.9 $1.0

$1.1$1.3

$1.6$1.9

+12%

• Elementum

• Llamasoft

• Resilinc

• RiskMethods

• SourceMap

• Supply Risk

Solutions

Some common players and capabilities in this space:

Acquire supplier network data

• Partial to full mapping of supply chain

• Active monitoring of potential disruptions

• Secure sharing platform for partner data

Analyze network data

• Development of analytical monitoring tools

• Dashboards visualize supply chain and analysis

• Proactively resolve supplier issues

Solutions: Common Capabilities:

Sources: 1. PwC Strategy& survey and analysis

Supplier Risk Management Process Framework Visibility Software Market Growth – 2014-2019

pwc.com

Thank You

© 2020 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member

firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a

substitute for consultation with professional advisors.

For questions or inquiries, please contact:

Dietmar Ostermann, Partner,

US Automotive Advisory Leader,

PwC Detroit

+1.972.672.4424

[email protected]

www.pwc.com/us/automotive

automotive supply chain: surviving and thriving in the new

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