How Supply Chain Finance Can Fund the Future of Automotive

The future of the automotive industry has arrived. Electric vehicles and autonomous driving are fundamentally changing the business models and supply chains of automotive OEMs – and that’s putting many automotive companies in a tough position. How can they profitably meet the demands of today’s consumers while investing heavily in the innovations that will sustain them tomorrow? -Tom Roberts, SVP Global Marketing, PrimeRevenue

Profound transformation is happening across the automotive industry. Revised estimates from Bloomberg New Energy Finance’s global Electric Vehicle Outlook indicate EVs will account for 54 percent of global new car sales by 2040, up from a little over one percent now.

At the same time, a clear picture of the impact of self-driving vehicles on the industry is finally coming into focus. Accenture estimates OEM sales of fully-autonomous vehicles will reach material volumes by 2025. By 2035, A.T. Kearney predicts, the annual value of the self-driving vehicle market (including the core services that will support it) will be $560bn.

An Industry Upended

Autonomous driving and EVs are redefining conventional business models within the automotive industry. While traditional OEMs are still the carmakers of today, IT leaders like Google and Apple could introduce autonomous systems or even their own vehicles in the not-too-distant future – upending the automotive supply chain as we know it.

A.T. Kearney describes this transformation from a pyramid-like structure to a hub-and-spoke wheel. Historically, OEMs have been responsible for producing vehicles and controlling the customer relationship. In the future, the finished vehicle will be the hub supported by multiple players or “spokes” – the OEM, suppliers, IT providers, telecom companies, etc. Any player, not just the OEM, may influence the customer relationship.

Surviving and Thriving with Supply Chain Finance

To survive these dynamics, today’s automotive OEMs and suppliers must reframe their business for the changes ahead. This requires significant investment in new production capabilities and areas previously dominated by IT giants. It also requires careful examination of the supplier ecosystem to understand which partners are well equipped to handle the roller coaster ahead and which are not.

Most importantly, OEMs and suppliers must have access to sizeable amounts of capital to invest in these innovations, capabilities and new business opportunities. For a growing number of automotive companies, one way is through the implementation of global supply chain finance programs. Currently, supply chain finance programs unlock billions of dollars of capital in automotive supply chains each year.

Backed by multiple sources of funding that span all geographies and currencies, these supply chain finance programs enable automotive companies to extend supplier payment terms to optimize cash flow, while simultaneously allowing their suppliers to get paid early by a funder. Unlike traditional bank lending or factoring, supply chain finance does not increase debt on the company’s balance sheet.

The Outlook

Automotive companies will need to become leaders in innovation and agile business strategy. The availability of investment capital – regardless of current financial performance and market conditions – will play a large role in determining whether companies will survive the transformations ahead. Forward-thinking companies will turn towards supply chain finance to meet liquidity requirements without negatively impacting the financial health of the business.