Moving Automotive Supply Chains Forward with Backwards Vertical Integration

The last three years have been a time of unprecedented disruption. Combined disturbances from the pandemic, war in eastern Europe, uncertainty in Asia, weather patterns, labor strikes, regulatory changes, and material shortages have caused many supply chains to hit their brakes. Any approach that offers stability and safe harbor is worthy of exploration – even a classic strategy like vertical integration.

In automotive manufacturing, much of the recent activity in this area has been backwards vertical integration. This means that the integration takes supplier capabilities and brings them into the operation rather than vertical integration that moves production towards the customer. Automotive manufacturers are pursuing backwards vertical integration to ensure that their factories have everything required to stay in operation.

For these companies, vertical integration makes it possible to address three key sources of elevated supply chain disruption risk:

1. Raw material shortages: Key battery materials such as cobalt and nickel are essential in automotive manufacturing, especially with the global transition to electric vehicles that is actively underway. Securing access to these raw materials makes it possible to keep component supply in line with vehicle demand.
2. Semiconductor component shortages: Electronic and semiconductor components are critical to a number of supply chains, automotive included. Even when shortages are not in effect, companies frequently experience delays that hold up their production schedules and force them to miss customer delivery expectations, directly impacting revenue.
3. Battery production: Automakers are taking on an active role in meeting their own battery demand, assuming responsibility for battery manufacture rather than sourcing them from third party producers.

When all of the above are taken into consideration, it becomes clear that companies must educate themselves on raw material availability and risk. There simply aren’t enough specialized natural materials available to meet global forecasted demand, which leads to short term supply constraints as well. The rare earth minerals and component minerals associated with semiconductor and battery production are not only scarce, but they are also largely concentrated in geopolitically complex locations. Automotive manufacturers planning to take responsibility for sourcing these materials will need to do so in a way that does not jeopardize the company’s brand reputation or bring their public sustainability commitments into question.

Vertical integration is ultimately about supply chain control. Manufacturers who want to have increased control must look to the future while meeting the needs of the present. By exploring the opportunity associated with synthetic alternatives for cobalt, nickel, and other rare earth minerals, they will have a solid understanding of the innovative frontier in the automotive industry and can drive towards it.

This is why an increasing number of OEMs are directly engaged with suppliers multiple tiers into their supply chain. Whether they are closely partnering or fully vertically integrating, they are planning ahead for future product releases and forecasted demand – ensuring that they have the increased supply chain visibility required to mitigate risk and orchestrate a complex combination of activities.

For market leaders, collaborative software for procurement and supply chain teams can help enable this vertical integration by providing better supply chain visibility. It is often a company’s ability to collaborate with suppliers on product development and sustainability goals that makes vertical integration possible while preserving (or improving) product sustainability and optimizing the manufacturing process as a whole.

For more insight into the opportunities associated with vertical integration in the automotive industry, watch or listen to The Supply Chain Buzz featuring Florian Seebauer with SAP on Supply Chain Now.