A huge increase in working capital investment is approaching the automotive industry owing to issues securing semi-conductors. COVID-19 led to intermittent production downtime and impacted 2020 sales heavily, with auto companies squeezing working capital balances to support additional liquidity to survive the pandemic. As consumer demand for vehicles resumes, OEMs and Tier 1 & 2 suppliers are struggling to secure supply of semi-conductors – a crucial component in modern vehicles.

2021 has seen severe semi-conductor chip supply constraints owing to unexpected weather patterns and geopolitical tensions alongside COVID-19 production disruption. Meanwhile demand from the consumer electronics sector has risen at unprecedented levels. While the electronics sector has boomed, the automotive industry failed to predict the strong 2021 rebound that materialised and had reduced chip orders just as securing them was about to become challenging.

As a result, from this imbalance in supply and demand, semi-conductor prices have risen by c20% in 2021. This has forced OEMs such as Tesla to secure supply through the unusual step of making payments in advance. For large OEMs, this could lead to an additional working capital investment upwards of c$600m¹.

VAG and Daimler have announced plans to create greater supply security through stockpiling semi-conductors. This is a departure from the Just-in-Time (JIT) supply strategy which enables minimal cash tie-in at the expense of increased supply risk. Stockpiling not only requires a short-term cash need but also has cost implications given specialist storage facilities are required for semi-conductors given the high susceptibility to contamination.

What can the Automotive industry do to minimise the resulting cash requirement?

By challenging existing working capital approaches there may be potential to offset the impending investment needed by streamlining in other areas. Changes that can deliver immediate working capital benefit could include:

• Ensuring robust internal ‘housekeeping’, such as process and policy adherence
• Targeting ‘Quick Win’ levers, such as stopping early supplier payments and pushing hard on cash collection
• Deploying a 13-week cash flow forecast to allow short term or even tactical levers to be pulled at the right time
• Leveraging digital capabilities to drive speed and efficiency into existing processes and freeing up resource to focus on value-add activities
• Embed a ‘Cash Culture’ to ensure awareness of working capital across the organisation and how it underpins the broader financial framework considerations and strategy

Understanding the picture “bottom-up” can steer the appropriate actions to deliver material improvement.

Looking at a balance sheet 12 times a year gives a very limited view of actual working capital performance. Building a bottom-up view from transaction and SKU level detail can drive real insight and remove the balance sheet bias that typically exists when reviewing and measuring working capital.

Act now to mitigate and prepare for the cash impact of the semi-conductor crisis!

To be on the front foot and avoid the need for costly 3rd party financing, companies should take a thorough look at what cash levers are immediately available to them in order to help fund the impending ramp up in working capital investment.

From experience working with companies that have not previously undertaken a working capital optimisation programme, typically 10 to 15 percent of gross working capital can be sustainably released as cash, a large proportion of which is achievable within 12 months.

This could be invaluable to mitigate or absorb the impending wave of semi-conductor driven cash investment looming on the horizon.

A&M: Leadership. Action. Results.

A&M’s Automotive sector team helps OEM’s and auto suppliers transform operations, maximise growth and build resilience to the latest challenges faced. When traditional improvement activities are not enough, A&M’s restructuring and turnaround heritage brings fact-based, action-oriented leadership to transformation, delivering rapid cash and P&L benefits.

[1] Calculated with the assumptions: $475 semi-conductor cost per vehicle on 7m units PA, with a 65-day net worsening of terms