The on-demand economy is having a huge impact on the automotive sector, creating new challenges for manufacturers and automotive businesses looking to get a handle on their growing global supply chain. By Stanley Chia, VP at Tungsten Network.
The emerging markets of Brazil, Russia, India and China are outpacing established markets and, by 2020, will account for approximately two-thirds of the total automotive profit.
BMI Research also predicted that Asian sales will have grown by 4.7 per cent during 2018, with much of this growth being fuelled by the rise of increased domestic consumption, better infrastructure and roads, and the continual roll-out of new cars by manufacturers eager to tap into new potential.
However, as manufacturers focus on new and emerging markets in the east, they are facing numerous challenges. Dealing with new markets and vendors and adhering to foreign compliance regulations adds further complexity to the global automotive supply chain.
The priority for OEMs should be establishing a local supplier base, building an enhanced supply chain and bolstering supplier capacities.
Widespread supplier failure
Research conducted by Tungsten Network, in conjunction with Forrester, found that 84 per cent of businesses have suffered some form of supplier failure in the past two to three years. The most common impact of supplier failure is financial, with 30 per cent of firms reporting a loss in revenue or business partners. Other impact areas reported were higher insurance premiums, damaged reputation, as well as significant legal and regulatory fines.
To protect themselves, companies must keep comprehensive records on their suppliers.With increasing pressure on financial institutions and companies to comply with Know Your Customer (KYC) regulations, the need for this enhanced vendor master management has never been more urgent.
Firstly, it’s important to check the trading status of a potential vendor, ensuring they are compliant and registered with all the appropriate authorities. OEMs should ask for comprehensive company details, bank account data and information about registered signatories to build a clearer picture of a supplier. This information can then be cross-referenced against sanction, watch and law enforcement lists to help identify financial crime. Running a credit score check can also help minimise issues down the line, as those that are considered low-risk are more likely to be financially sound and therefore pay on time.
Being compliant in emerging markets
Another major challenge facing automotive manufacturers, as they expand, is compliance and ensuring their payment processes are legal in all the jurisdictions within which they operate. Exact requirements vary hugely between countries, which means ticking all the right boxes can be a headache, particularly when the goalposts keep moving. For example, depending on what country you’re paying it in, VAT could be as much as 25 per cent of the price of a product or service. The amount is often deducted or reclaimed by businesses, unless the invoices are found to be non-compliant, in which case it’s unlikely they can claim this back. This can radically affect a company’s profit margin.
To avoid falling foul of the tax gap and losing out on revenue, a growing number of countries are moving to a clearance model, with this particularly prevalent in Latin American countries and most recently introduced in Italy. This involves a supplier having to create invoices via a government-sponsored online portal in order to meet the tax authorities’ requirements, before then sending them over to their buyer to get paid. The person purchasing the goods is legally required to make sure this is done at the point of sourcing to avoid a serious fine.
Lifting the burden
While organisations themselves are ultimately responsible for complying with local tax regulations, the outsourcing of administrative processes to specialised third-party service providers is increasingly popular and a way to reduce the burden on already stretched OEMs.
As OEMs expand into unknown territories, it is vital that they have a thorough understanding of their supply chain. By operating their finance function on a global digital network, businesses are better equipped to tackle new markets head-on.
Online networks help manufacturers navigate the minefield of fiscal and legal compliance regulations, while also performing a robust analysis of their supply chain to ensure better reliability, reducing the potential for fraud and mistakes. Additionally, businesses can make timely payments which lead to stronger business-supplier relationships throughout the supply chain.