Price increases in the automotive industry – the consequences and risks

Interview with Carsten Bieng about the current supply chain situation and the challenges faced by procurement.

“Well-functioning supply chains are a major competitive advantage in the current environment”

The global political situation has proven to be increasingly unstable for years. Covid, Ukraine, inflation and the climate crisis are just a few examples of the difficult situations that the economy and society are facing. Globalized supply chains in the automotive industry are also having to face up to these challenges. 

As part of the “yourmdexpertise” series of interviews, we talk to MD ELEKTRONIK about current and future topics in the automotive sector.

In this episode, we met with Carsten, Purchasing Manager at MD and talked to him about his job, the causes of the current price increases in the automotive industry and the resulting risks and consequences, as well as the way in which MD is handling this situation.

Carsten, please tell us a little bit about yourself. What inspires you most about your job?

My name is Carsten Bieng and I have a degree in business engineering. I am responsible for production material purchasing within the MD Group. I have been with MD for 12 years. I am happily married and have one daughter. I’m passionate about purchasing, and a family man with heart and soul.

Let’s talk about your job in purchasing. I can imagine that the last two years have been extremely turbulent. What do you see as the causes for the current price increases in the automotive industry?

The lockdowns during the corona virus pandemic paralyzed entire regions at various times. Companies responded to the events in different ways. Some of them canceled customer orders while other manufacturers scaled down their production capacities or outsourced them elsewhere. As a result, certain goods were in short supply when businesses got up and running again. The supply side was reduced. These upheavals in a globalized economic world with closely synchronized supply chains and frequently optimized inventories marked the beginning of the price increases.

Recovery packages during the pandemic brought in to support the demand side reinforced the effects of inflation that we are experiencing today. High demand met scarce supply, causing the prices to increase. This situation was also aggravated by the energy crisis in Europe caused by the geopolitical events of this year. The original supply chain problems are gradually improving or dissipating to a certain extent, however price increases are still at a high level as the countermeasures, such as interest rates raised by the central banks, will only take effect after a certain delay. Until inflation cools down again, rising material and energy costs will be transferred to wages and salary increases in order to tighten up consumer purchasing power. Price increases will continue to remain at a comparatively high level in the coming year. This is because structural inflation is currently developing, its causes have not yet been eliminated, and it may continue in Europe particularly because of the energy crisis.

Thank you for that excellent summary. What are the resulting risks for the automotive industry?

The supply chain problems and resulting inflation have led to uncertainties in all areas of the value chain, and to great insecurity on the entire global automotive market. The risk of large-scale supplier failures or even the collapse of supply chains appears very real. Multiple source strategies, i.e. sourcing several suppliers at the same time, are manageable in the automotive industry. Mostly, only a few approved manufacturers exist for each supplied part and the same is true throughout the entire value chain, and this becomes an increased risk in the current environment. Indeed, supplier sectors with high energy requirements are being hit twice over in Europe. Higher material costs and to some extent multiple energy costs are very rapidly putting a strain on the liquidity of companies.

New developments and the expansion or restructuring of production capacities are being examined for feasibility, but in the worst case scenario, they are not being implemented. This is exacerbated by the fact that suppliers are less able to take risks in their in-house risk management due to the economic environment. Through the invasion of Ukraine by the Russian troops, a highly sought-after production region for the car industry fell out of existence from one day to the next. Within a matter of weeks, companies had to relocate their production sites to mostly more expensive locations in order to protect their deliveries. Costs increased while money was lacking in other areas. In addition, rising interest rates are now calling certain projects into question, as the “return-on-investment” is suffering. It remains to be seen how this situation will affect the competitiveness of companies in the long term. Until then, stable and well-functioning supply chains will be a major competitive advantage in the current environment.

What are the consequences of this?

For years, prices in automotive supply chains knew only one direction: “cheaper”. Production sites were set up in more and more distant countries in order to keep up with this price pressure. Since 2021, this development appears to have stopped.  Suppliers are no longer in a position to reduce prices. On the contrary, increasing costs have to be passed on through the value chain so that they can remain intact. Society also has a duty to pass on the rising costs so that the economic system can get back to normal or reform itself, and so that, ultimately, we can maintain our level of prosperity. The prerequisite for the transfer of costs is a plausible representation of the relationships between MD’s products and the increasing costs of materials, energy, staff, etc. There is an increasing requirement for cost transparency. New, index-based price adjustment clauses are being established to remove the risk of highly fluctuating raw material markets from the value chain and to avoid situations like the current one in the future. These processes have been practiced for decades with copper in the field of on-board power systems, and are therefore already well-established in the industry.  In addition, increasing costs for transport and logistics are leading companies to examine supply routes more closely. Before the corona virus, logistics costs were of little relevance to the results of companies. That has now changed. “produce regional ” is the new guiding principle to avoid long supply routes and high costs.  Of course, this step means getting out of low-wage countries and raising the costs of products. To minimize the cost effect, companies are investing more in automation.

How are we dealing with this situation in purchasing at MD?

The main objective is to find the economically best and also the fairest solution for the supply chain. The basis for any discussions is cost transparency so that the situation can be assessed based on a plausible and comprehensible presentation of prices. Suppliers are invited to play their part in reducing additional costs and implementing their efficiencies. We are aware of our responsibility and intend to maintain functioning, partnership-based supplier relationships, in the future too.

Carsten, many thanks for this very interesting interview.

Thinking globally, doing business regionally, and ensuring dependability

In times of global uncertainty, the automotive industry needs to change the way it thinks to a certain degree. Increased costs will inevitably be reflected along the entire value chain. So, higher procurement prices are a fact and it is important that we communicate the price increases transparently, and make consistent use of any savings potential. Greater automation could be a way to manufacture more efficiently and in closer proximity to the customer again, to avoid unsafe regions and to lower logistics costs.

Contact MD now to find out more about the supply chains and delivery capacities for our products.

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Carsten Bieng

“Carsten Bieng, Director of Procurement, is responsible for the purchase of production materials at the MD Group. More than 12 years of industry-specific experience and just under 10 years of management responsibility in purchasing have turned him into an expert in his field. He started out as a strategic purchaser and today is responsible, together with his purchasing team, for the whole scope of production material procurement. In recent years, a holistic purchasing strategy has evolved out of his role which involves guaranteeing supply reliability and strengthening MD’s competitiveness. As Jon Kabat-Zinn says: “you can’t stop the waves, but you can learn how to surf.” And indeed, it is important to be able to read, understand and anticipate the procurement market and the environment and its challenges in order to set the strategic course in the long term.”