Escalating trade wars look set to be the new risk frontier in the automotive supply chain. With countries and trading blocs starting to retaliate against US moves to raise tariffs, open trade borders are closing in quickly. On July 6, 2018, the US began imposing a 25% tax on $34 billion of Chinese imports. In August, tariffs were added to $16 billion of Chinese goods, and the US has threatened to apply levies on the remaining $267 billion of imports from the country.
The implications for the automotive industry are becoming clear: while initially materials like steel, aluminium and rubber were on the hit list, entire vehicles are now being targeted, and the EU is just one of several global powers threatening to respond in kind, with tariffs on $300 billion worth of US goods.
The scale of the issue is highlighted by data from Resilinc, JLT’s specialist data provider partner. Its analysis of 60,000 suppliers across six sectors shows that 42,000 parts and 5,000 companies could be affected by US tariffs on Chinese products alone. Though these include products and raw materials supplied to a range of industries, the automotive sector will likely be hard hit. When looking at US companies with China-based supply chains, Resilinc highlights cars, including electric vehicles, as likely to be high-impact, high-dependency products, in terms of potential higher costs or revenue losses and difficulties sourcing alternate supplier sites in another country.
This is just the beginning. Unless an agreement can be reached, the ongoing trade war is likely to incur additional tariffs on Chinese products, and businesses at the lower end of the supply chain will face serious consequences.
It is estimated that US tariffs, plus the tariffs imposed and being considered in retaliation, will affect 1% of global trade. With the world’s merchandise exports worth $17.2 trillion at the last count, the stakes are high. Numerous global economies are affected by heightened trade tensions – not to mention the impact of Brexit, where the possibility of a no-deal “hard” UK exit from the EU could incur a hefty charge. Furthermore, additional costs from border delays will undermine “just-in-time” delivery.
Risk on the radar
Trade barriers have the potential to alter the risk landscape considerably as far as supply chain disruption is concerned. Last year, Resilinc reported factory fires, hurricanes and labour strikes among the top disruption events impacting the auto sector, while geopolitical risks only ranked mid-table (15th out of 30). Even when looking at manmade events over the last five years, geopolitical risk has not been a significant feature on the radar. This year, given current global tensions, geopolitical issues – and trade policy in particular – could rise up the list very quickly.
Considering the length and complexity of global supply chains, and the nature of component manufacturing which can see some parts zig-zag across borders multiple times, for the automotive industry perhaps more than any other, trade wars are a major concern.
There is a real possibility that for some vehicle-makers, the global supply map may have to be radically re-designed in a bid to ensure security of supply – otherwise reduced access to markets, capacity limitations, higher prices and brand damage could result. Knowing where supply chains are most vulnerable is vital so that informed decisions can be made, whether that’s re-adjusting current arrangements or putting in place a ‘plan B’. It will give senior management and shareholders comfort that all efforts have been made to make sure the supply chain is as secure as possible – and there may even be competitive advantage to be gained.
There is huge value from such insight from an insurance point of view. The better the visibility automotive manufacturers have across their supply chains, the easier it is to ensure that optimum coverage for their specific needs and risk profile is in place.
That said, it’s not easy even for the biggest players in the automotive sector to achieve this level of knowledge and visibility across the supply chain, right down through sub-tier suppliers across thousands of parts. As global economies intensify the protectionist rhetoric and with Brexit less than a year away, vehicle-makers will need to deploy all the weapons at their disposal, from risk mapping to contingency planning to business interruption insurance, to limit the damage. They can’t afford to pin their hopes on a trade truce.
Matt Grimwade is a senior partner and head of automotive at leading global insurance broker JLT Speciality