Managing risks and embracing opportunities in the automotive industry

When people think of the automotive industry, they generally think only of the end product: a car. Likewise, when consumers hear about the number of new cars produced,¹ the semiconductor shortage or the rise in raw material prices, they tend to think of the carmakers – not the suppliers.

However, the automotive industry is made up of a complex global supply chain with a variety of actors, and some are at greater risk of nonpayment or default than others.

Disruptive forces in the automotive value chain

Tier 1 and Tier 2 suppliers have faced several overlapping challenges that have affected company finances, from border closures and component shortages that led to production delays and stoppages.

Say that a Tier 1 supplier has ordered a part from its Tier 2 contact, but that component can’t be obtained. In this scenario, the Tier 2 supplier might extend the payment terms. However, at the same time it has placed an order with one of its suppliers and paid in advance for the goods. This impacts their cash flow, budget and planning.

Tier 3 suppliers are often smaller and less diversified, both in terms of buyers and production sites, and their biggest challenge is the rapidly rising price of energy and materials. Plus, bound by annual pricing agreements with their customers and without a “USP,” they have limited ability to pass those cost increases on in the short term. These conditions put pressure on Tier 3 suppliers’ liquidity, making credit risk management all the more important.

Combining credit assessment and industry expertise

All that being said, it is possible for companies to protect themselves against the risks of nonpayment through a three-pronged approach:

Diversification. Businesses with diverse portfolios are less reliant on particular regions, customers or suppliers. With their cashflow less vulnerable, they can generally react to crises more effectively and are more able to embrace new opportunities.
Credit management. Strong internal credit management helps identify customers’ solvency issues before entering into contracts or delivering goods. The right deal with the right customer could have long-term benefits.
Trade credit insurance (TCI). TCI adds an extra layer of security to credit risk management. Allianz Trade also provides credit information and grading for over 83 million companies around the world. Our credit analysts and underwriters understand the risks our customers face through and through, and we closely monitor market conditions to help customers make informed decisions.

It’s not all about the “bad” either. With our predictive capabilities, we can also support customers to identify good buyers – those who manage well during challenging times. Perhaps one company hedged costs significantly, or another had its own energy production on site, buffering it from rising costs.

A trusted partner for the auto industry

Looking to the future, we expect tensions in the global supply chain to improve. But in the meantime, companies must continue to navigate a complex and uncertain landscape.

Allianz Trade is more than just a credit insurance provider – we’re your trusted industry experts committed to providing market-leading insight so you can better manage credit risks. By leveraging our knowledge, experience and evolving services, together we can drive toward a brighter future.