JLT SPECIALTY THE AUTOMOTIVE INDUSTRY A SECTOR AT RISK - The Future of Driving - Commercial Risk
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www.jltspecialty.com 1 THE WEAKEST LINKS The scale of the supply chain threat to the international automotive sector is immense as proven by a number of high-profile events in recent times. It seems that the industry itself has created a global production and distribution structure that is remarkably vulnerable. Global insurance broker, JLT Specialty (JLT) has invested considerable time and effort into identifying the core risks facing this sector and how they could more effectively be mitigated and transferred. JLT teamed up with Commercial Risk Europe to host a roundtable discussion with leading risk managers from the automotive sector to identify the key issues.
2 JLT SPECIALTY THE AUTOMOTIVE INDUSTRY: A SECTOR AT RISK SUPPLY CHAIN RISK Global Disruption Events The automotive industry was the most disrupted sector in 2017 as the Impacting Automotive Industry number of disruption events leapt by 30% from just over 1,300 events in 2016 to nearly 1,700 events in 2017, according to recent analysis carried out 1,700 by JLT and Resilinc, a supply chain analytics and resiliency company. The core problem is that the global automotive sector is dependent upon a highly complex and global supply chain system that is relied upon to deliver thousands of parts per vehicle. Disruption to the delivery of just one obscure 1,300 element of these parts has the potential to halt entire production lines and sometimes across the entire sector as in some cases all motor manufacturers are reliant on one core supplier or even single plant. The broker points out that, based on the research carried out by Resilinc, it is clear that measures to create transparency often focus predominantly on Tier 1 suppliers and even then many unknowns remain. Resilinc’s analysis found that some 75% of companies surveyed have no visibility into Tier 2 and beyond, a serious cause for concern, given that sub-tier suppliers are at just as much risk, if not perhaps even more so. This matters because disruption risks must not only be identified but evaluated in terms of importance before they can be effectively mitigated. As Matthew Mills, Director, Supply Chain Solutions, Resilinc explains: “Auto manufacturers need to understand exposure from a part and a whole product perspective, and harden their supply chain to those risks accordingly. Pro-actively monitoring supply chain events and then linking those events to manufacturing sites will help prioritise risk and enable contingency plans to be developed, such as building inventory or 2016 2017 identifying alternative sources of supply. This then needs to be replicated Source: Resilinc along the supply chain.” So, what about insurance? Is this a risk that can also be cost-effectively transferred or is it just too complex and difficult to identify and quantify? The JLT analysis found that, perhaps not surprisingly, about half of all organisations are not insured against supply chain risk at all. The bottom line is that covering every risk, everywhere, is just not practical and prioritising what to cover can be “immensely challenging” concludes the broker. But that does not mean that insurance is irrelevant in this area and should not be looked at carefully. Companies in the auto sector do have existing cover for elements of their supply chain risk and bespoke solutions are available. JLT argues that given the huge scale of exposure that the industry faces it is more important than ever to seek policies that cover the most business critical areas and, at the same time, avoid duplications and gaps. This is why JLT has partnered with Resilinc as it enables the broker to add cutting edge supply chain analytics into its insurance solution.
www.jltspecialty.com 3 Matthew Grimwade, Head of Automotive, JLT Specialty “It’s all about quality data: greater transparency along the supply chain can help set auto businesses apart from their rivals. The broader and deeper that knowledge, the better auto manufacturers can mitigate risk and be agile in their response to events - and the more favourably they will be viewed by insurers.” All of this leads to the inevitable conclusion that all parties in the chain – risk managers, brokers, insurers and support professionals – need to work together more closely to more effectively identify, measure, mitigate, manage and transfer this risk.
4 JLT SPECIALTY THE AUTOMOTIVE INDUSTRY: A SECTOR AT RISK THE NATURE OF THE RISK: WHY SO VULNERABLE? The first and most obvious question to ask the risk managers at the roundtable: Why does this sector appear to be so vulnerable to supply chain disruption and failure compared with other sectors? Klaus Braukmann, Managing Director, Conti TIMES HAVE CHANGED Versicherungsdienst, the insurance management arm of Modern vehicles are much more complicated than they were Continental, of the leading German automotive manufacturing just 20 years ago and, as well as the rise of JIT production, company said that it is all about the scale and complexity of there has, of course, also been the rise of the truly global the business. economy and dissemination of supply to all four corners of the “We have five divisions, of which these are three automotive globe. All this has happened remarkably quickly and poses and electronics divisions involving a network of some 17,000 big challenges for logistics, risk and insurance management suppliers that provide about 140 billion components a year. community in this sector, pointed out Mr Braukmann. This says it all really. We are extremely linked in to each other “For certain industries such as the auto sector, I think you in the auto industry and because of the rise of just in time can clearly argue that the challenge has intensified in the (JIT) and just in frequency (JIF) production any interruption in last 10 years. There was a recent case in Switzerland where the supply chain is a real problem and can of course impact the manufacturer of brake systems for all Tier 1 suppliers the balance sheet,” explained Mr Braukmann. worldwide was flooded and under four metres of water. Divers had to retrieve the machinery to rebuild it because it was so rare. The same thing happened in May this year when an explosion and fire disrupted production at a critical supplier of magnesium die-cast vehicle components to Ford, GM, Fiat, BMW and Mercedes in the US,” he said. Pia Weiss, Head Corporate Insurance Management, at ABB, the Swedish-Swiss multinational corporation that operates mainly in robotics, power and heavy electrical equipment, stressed the significance of the fundamental way in which all supply chains are managed nowadays, not just in the auto sector. “It has to be recognised that there has been a major change in the way that supply chains are organised over the last 20 years. Whereas historically a company would have relied upon only one supplier or two maximum, now there are multiple levels of suppliers down to the second, third and fourth tier. At the same time, the supply chain has globalised which obviously adds further vulnerabilities,” she pointed out.
www.jltspecialty.com 5 UNKNOWN SUB-SUPPLIERS COST-BASED DECISIONS Michael Seidl, Insurance Manager at Dräxlmaier Group, Mr Seidl also pointed out that cost is a big factor in the the German automotive component supplier, said that the process. Companies in the auto sector run a lean production availability of information about suppliers and their suppliers and distribution systems because the global market is so is clearly a big challenge when trying to actually identify and competitive and margins are always under pressure. measure the supply chain risk. This forces companies to make cost-based decisions that carry “Our perception is that 60-70% of sub suppliers (a supplier inherent risks. who provides goods or services to another supplier) are “Another point to make is that sometimes the risk is higher required by the customer and there is no chance that they than you would like because of the need for cost efficiencies. will be named by the OEM (Original Equipment Your company may well decide to locate its key factory in Manufacturer). My eye-opener was the fire at the Evonik an emerging country that seems to very stable at the time, plant in Germany back in March 2012. Nobody realised it but, over time becomes pretty unstable with civil unrest and was going to lead to a serious problem for the auto sector probably high natural catastrophe exposure too. Clearly this worldwide because nobody was aware that this very old could lead to serious supply chain challenges in future, but, factory was supplying something like a half of the world’s the reality is that this will be the best cost option. These are supply of a chemical (CDT) that is needed to produce a the realities,” said Mr Seidl. resin called PA 12, an essential part of braking and the fuel systems of cars. The entire auto industry really sat up and took this seriously when global production was threatened,” explained Mr Seidl. “After that people really started to think about where their critical components were produced. Before that nobody really thought about it that deeply. They then realised that they needed to dig much, much deeper. The problem is that if a sub-supplier is decided upon by an OEM they are unlikely to provide information if he knows that nobody can replace him. This means that it is actually often very difficult to find out where the supplies are sourced, where they actually come from and how they get from one factory to another,” he added.
6 JLT SPECIALTY THE AUTOMOTIVE INDUSTRY: A SECTOR AT RISK NOT UNIQUE TO AUTO Ms Weiss added that the electronics industry faces much the same situation, but, pointed out that the impact is not so Matthew Grimwade, Head of Automotive at JLT Specialty, high for the sector because the value of the end product is agreed with the German risk manager but pointed out that this so much lower. risk is certainly not unique to the auto sector. “In September 2017, Hurricane Maria churned across Puerto Rico with the strongest winds to hit the island in over 80 years. It turned out that Puerto Rico is home to more than 50% of the world’s leading pharmaceutical and life science companies, which operate around 80 US Food and Drug Administration (FDA) approved manufacturing plants on the island. This is a concentrated supply chain risk. My question is why is the auto sector so vulnerable? Why, when events happen, do they appear to be more severe?” Mr Braukmann said that the answer is again relatively simple to identify if not so simple to solve. “Basic economics are one explanation,” he said. “The cost of a car is perhaps double of what is was 20 years ago but the value within the car is double-digit higher over the same period. People expect the latest technology and design but are used to not having to pay for it. This means that the auto companies need to use first class technology but low-cost production sites and/or automate everything. If you looked at German factories 20 years ago much of it was manual assembly. You don’t see this anymore. You see managers and software experts, but no workforce, because labour-intensive parts are made elsewhere. This is the only way to deliver the latest technology at the minimal price to the customer.” Mr Seidl added that the complexity is further compounded by ever higher safety features and standards and also the fact that vehicles are increasingly customised to individual requirements adding to the supply chain stress. “Also think about the number of safety components and software in a car nowadays – it has increased 100 times. Twenty years ago the only safety components were safety belts and brakes! Nowadays customers expect the latest safety elements as standard. Also of course customers expect 24/7 service and customised vehicles. All of this has to be delivered on a 24/7 basis which places the supply chain under stress unless very well managed. The fact is that one hour of stoppage equates to $1m of loss and of course the contract says that if the supplier does not produce then it pays!”
www.jltspecialty.com 7 MINIMUM STOCK LEVELS CONCLUSION One fundamental challenge for the risk and supply chain This discussion about the challenges facing the automotive manager is the demand in all industries for minimal stock levels sector when it comes to supply chain among risk managers or inventory to save costs. directly and indirectly involved in the sector delivered one inevitable conclusion: This is indeed a very big challenge. Mr Seidl noted that. For economic and regulatory reasons, the sector has evolved and come to rely on a highly complex, global and diverse supply “Another complication here is that no-one wants stock chain that is very difficult to map, measure and manage. or storage facilities anymore whether on the road or in an aircraft. Nobody really wants to own their own facilities Risk managers do not own this risk but they do have internal because no one pays you for holding stock,” expertise and support from specialist advisers such as JLT and Resilinc to help their colleagues in supply chain and other areas to make a concerted effort to improve the way this Arie Woulters, Risk & Insurance Manager at NXP, the Dutch risk is managed and mitigated. global semiconductor manufacturer, agreed that stock is a challenge. “Part of the management decision will always be to minimise storage. A higher level of stock will clearly always help to a degree but it is not the complete answer. A core part of supply chain management is to make sure that you are able to continue to supply at times of difficulty.” And for the auto sector this challenge is compounded by the very size of the parts pointed out Mr Grimwade of JLT Specialty. “Probably one of the reasons why the auto sector is more vulnerable than most is because it needs so many different parts and they tend to be larger so they take up more space.” Dogu Ozden, Director Financial Planning & Controlling at Tofaş, the Turkish automaker jointly owned by Fiat Chrysler and Koç Holding, and also President of Turkish Risk Management Association ERMA, added that the regulatory environment does not help. “This is a complex product that is mass produced and of course there are high regulatory and safety standards that you have to adhere to. Regulation is another complicating factor.”
8 JLT SPECIALTY AUTOMOTIVE SUPPLY CHAIN DISRUPTION REPORT 2018
RISE OF THE ROBOTS The Future of Driving
10 JLT SPECIALTY THE AUTOMOTIVE INDUSTRY: A SECTOR AT RISK
www.jltspecialty.com 11 The arrival of artificial intelligence offers both solutions and new challenges for those involved in the identification, management and mitigation of supply chain risk in the automotive sector. The rise of artificial intelligence (AI), robotics A survey of manufacturing and distribution and automation offers some answers to the companies serving North America and Western supply chain conundrum faced by the auto sector Europe carried out by consulting firm AlixPartners and is potentially leading to another huge sea- found, for example, that 69% say that they consider change in the way that the industry’s supply chain nearshoring a possible opportunity to meet US and is organised. European demand, up from just 40% in the previous year’s survey.1 The rise of 3D printing/Additive Manufacturing (AM) has been rapidly embraced by the leading The world of auto supply chain could be about to auto companies and could revolutionise the be turned on its head again even before anyone way cars and their parts are made and more has really worked out how to manage the risk as it importantly distributed. currently stand! Rising costs (not least labour) in so-called emerging regions of the world such as South East Asia when combined with the rapid advances in automation and AI is, at the same time persuading a number of multinationals to at least consider the nearshoring of their own production processes back home or closer to their core markets along with those of their key suppliers. 1 AlixPartners Strategic Manufacturing Sourcing Surveys 2014-2016
12 JLT SPECIALTY THE AUTOMOTIVE INDUSTRY: A SECTOR AT RISK Mr Ozden of Tofaş and ERMA brought up this big picture. Experts agree that the rise of 3D printing/Additive Manufacturing “It has to be recognised that this is a very complex process. (AM) could have a momentous impact on the automotive sector We are currently planning the product for the next 10 years. as pointed out by Mr Ozden. This involves lots of software and electronic parts. In total According to Wohlers, the independent consulting firm to the there are 3,000-5,000 parts. The OEM needs to be very sector, in 2017, the worldwide AM industry grew 21% to reach integrated with suppliers and create an ecosystem. The $7.3bn. This compared to growth of 17.4% growth in 2016 average OEM needs 400 Tier 1 suppliers to produce one when the industry reached just over $6bn and 25.9% growth model. It is obvious that it is in the interests of all involved to in 2015. The automotive industry is leading the charge and be closer.” accounts for about 16% of the AM market according to the consulting firm. It is estimated that AM in the auto sector will be “If you find a good factory in Malaysia then you need to worth about $1.1bn by 2019.2 go there and see for yourself how they work. But there is also the recent trend we have seen towards nearshoring – The German automotive manufacturers are not surprisingly bringing supply back closer to home by using the efficiencies leading the way. Audi, for example, has used AM printing offered by latest technology and automation to control costs technologies for many years and launched a 3D printing centre at the same time. This gives a more flexible and responsive in Ingolstadt in 2017. The firm is currently working with SLM supply chain and shortens the order lead time. This is Solutions Group, the metal additive manufacturing firm, to happening as labour costs are rising in emerging regions of produce prototypes and spare parts. the world such as South East Asia.” Rolls Royce has adopted AM to help produce its vehicles which are all bespoke and can take up to seven months to produce. Rolls Royce had printed 10,000 components for its Phantom Mr Braukmann agreed that change is underway again. model by summer 2016. Volkswagen Group already uses 90 “We are certainly seeing evidence of nearshoring. Some printers at 26 different locations. OEMs are actually forcing their suppliers to produce closer to their own factories to manage the supply chain risk. This is also related to the effort to raise transparency and maximise Consulting firm PwC recently published a report on the auto the benefits of Just in Time manufacturing,” he commented. sector and how it could and is already reducing costs and risks within its supply chain by adopting AM. “In the future, it would be conceivable for manufacturers Sahil Kothadia, Managing Director Europe at Resilinc said that to print out individual components that are only needed in he had observed this trend but pointed out that politics cannot smaller quantities, thereby saving time and costs compared be discounted as a further complicating factor. to the previous supply chain,” said Christian Foltz, Partner “We did certainly see a large number of US companies Strategy and PwC’s strategy consulting group. nearshoring to Mexico for example. But this shows how complicated this can be as politics steps in. Given the rise of trade wars in recent times and complicating factors such as CONCLUSION Brexit, it may not be as simple as it seems.” A combination of nearshoring and widespread adoption of AM could provide part of the answer to the supply chain challenge in the auto sector. But it is also clear from this roundtable Mr Ozden also pointed out the potentially massive impact that discussion that all parties involved in the supply chain process 3D printing will have on this sector. still need to work much more closely and effectively together “Another factor to consider is the rise of 3D printing. In the to collectively address the vulnerabilities produced by the rapid online world, people want something delivered on the same transition and globalisation process of the last 20 years. Then day, even a car. The ability to ‘print’ anywhere in the world, perhaps this experience can be used to help navigate the next close to the customer will potentially have a huge impact on momentous period of change on the horizon. the way that supply chains are structured.” 2 Wohlers Report 2018 - 3D Printing and Additive Manufacturing State of the Industry.
www.jltspecialty.com 13 We would like to thank the participants at our automotive roundtable: Klaus Braukmann, Managing Director at Conti Versicherungsdienst, the insurance management arm of Continental Pia Weiss, Head Corporate Insurance Management at ABB Michael Seidl, Insurance Manager at Dräxlmaier Group Arie Wouters, Risk & Insurance Manager at NXP Dogu Ozden, Director Financial Planning & Controlling at Tofaş, and President of Turkish Risk Management Association ERMA Matthew Mills, Director at Resilinc Sahil Kothadia, Managing Director, Europe at Resilinc Adrian Ladbury, Editor at Commercial Risk Europe
CONTACTS MATTHEW GRIMWADE Senior Partner and Head of Automotive JLT Specialty +44 20 7558 3027 firstname.lastname@example.org SHARON MURPHY Partner JLT Specialty +44 20 7528 4247 email@example.com JLT Specialty Limited The St Botolph Building 138 Houndsditch London EC3A 7AW Tel +44 (0)20 7528 4444 www.jlt.com Lloyd’s Broker. Authorised and regulated by the Financial Conduct Authority. This marketing literature is compiled for the benefit of clients and prospective clients of JLT Specialty Limited (“JLT”). It is not legal advice and is intended only to highlight general issues relating to its subject matter; it does not necessarily deal with every aspect of the topic. Views and opinions expressed in this document are those of JLT unless specifically stated otherwise. Whilst every effort has been made to ensure the accuracy of the content of this document, no JLT entity accepts any responsibility for any error, or omission or deficiency. If you intend to take any action or make any decision on the basis of the content of this document, you should first seek specific professional advice. The information contained within this document may not be reproduced and nothing herein shall be construed as conferring to you by implication or otherwise any licence or right to use any JLT intellectual property. If you are interested in utilising the services of JLT you may be required by/under your local regulatory regime to utilise the services of a local insurance intermediary in your territory to export insurance and (re)insurance to us unless you have an exemption and should take advice in this regard. © January 2019 278509
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