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Navigating the future of the U.S. automotive industry

Discover the latest U.S. automotive industry trends and learn how companies can restructure their business to thrive in the future.

How KPMG can help: Distressed Supplier Advisory

From 2010 to 2019, the U.S. automotive industry experienced a consistent sales growth rate of almost 5% per year. However, ever since the pandemic, the industry is grappling with unprecedented challenges, including global supply chain disruptions, labor issues, inflationary pressures, and changes in consumer behavior.

To help offset the impact of these issues, the U.S. government has implemented programs such as the Paycheck Protection Program and Employee Retention Tax Credit. However, with funding drying up, suppliers now face increased financial pressure and are turning to other stakeholders for additional liquidity. The following are trends that are impacting all stakeholders throughout the automotive supply chain.

Financial deterioration: The automotive supply base appears in an overall weaker position now versus prior to the COVID-19 pandemic.  More strain appears to be at the lower level Tier 1 and Tier 2 suppliers. Better supply chain visibility will enhance transparency and collaboration, from suppliers to customers.

Lenders: During the pandemic, lenders were more lenient, but now they are becoming more aggressive with borrowers regarding defaults and restructuring. With the cost of debt increasing, companies with significant borrowings are vulnerable and may experience cash flow strains. To mitigate risks, companies need to develop a strategy for communication and transparency with its lender and ensure there is sufficient liquidity.

Supply chain constraints: The COVID-19 pandemic has caused severe supply chain issues due to a shortage of raw materials for the automotive industry which has driven operational inefficiencies and increased costs. Proactive partnerships between OEMs and suppliers are key to securing critical materials and avoiding disruption.

Labor: The industry has struggled to hire and retain qualified employees—leading to increased wages and the use of contract labor. Companies are using data and analytics to target recruiting/retention and developing creative partnerships with local organizations to remedy labor shortages and turnover to meet long-term growth objectives.

Inflationary pressure: Mounting inflation in the U.S. is resulting in higher input costs and lower margins for automotive suppliers. Suppliers are also asking automakers to compensate them for higher non-commodity supply chain costs. Given the current dynamics of supply shortages where every sale is critical, having a strong and efficient supplier network is vital to success. Transparency with data and communication between stakeholders is critical to mutually beneficial resolution.

Mega-Trends: A focus on long-term viability has created a shift towards sustainability efforts, including the transition from ICE to EV, alternate powertrains, autonomous vehicles, and connected driving. This is leading to M&A transactions where companies are separating out ICE and BEV divisions. Suppliers must proactively address future volume, plant footprint, capacity, and capital requirements to determine the optimal path forward.

Cash forecasting: An effective cash flow forecasting system is essential to managing and planning within the organization. Mapping a range of scenarios and applying these to a financial plan can help automotive companies gain visibility into future cash flows and plan for the future. Having defined action plans, as well as cross functional and leadership support in the process is critical to its success.

As new challenges continue to emerge, the automotive industry has an opportunity to restructure its value chain and business models, help stakeholders adapt to evolving economic conditions, and focus on innovation and sustainability.

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Navigating the future of the U.S. automotive industry

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