M&A activity can have a significant impact on the automotive supply chains and logistics management of the companies involved. Consider this: There are, on average, 20,000 parts in a typical vehicle, many of which run on specialized semiconductors. Designing, sourcing, producing, and assembling all of these parts into a complete, functioning car, truck, or SUV is an extremely complex task.
Whether you are an OEM or a supplier, the success of the finished product depends on every entity involved performing at a very high level. If any components are either defective or missing, a vehicle cannot roll off of the end of the production line. Mergers and acquisitions involving the participating companies carry potential risks that can affect the production process in both positive and negative ways.
While there are many aspects of this issue that are worthy of attention, we will focus in this article on three that are of particular importance: The consolidation of suppliers, the relocation of production facilities, and the realignment of logistics.
The consolidation of suppliers
One of the primary effects of M&A on automotive supply chains is the consolidation of suppliers. This is nothing new – it simply continues the ongoing trend of many decades of ongoing concentration in the automotive sector.
In many cases, the merged company or the acquiring company may already have established relationships with certain suppliers. As a result, some suppliers may lose business, while others may gain new opportunities. The two companies’ suppliers may even be pitted against each other in a fight for the new entity’s business. The increased purchasing power of the now-larger company has some other side effects for their lower-tier suppliers:
- Larger orders that will likely necessitate price cuts on their part
- Fewer remaining customers for those suppliers to sell to, making it essential to retain this new entity as a customer
Another consideration, in the wake of the microchip shortage and other supply chain issues that have bedeviled the auto industry during the COVID-19 pandemic, is whether single sourcing is still a valid strategy for the world we live in today. The added costs of having additional suppliers may be outweighed by having a secondary supply of key parts when your sole supplier is unable to produce what you need. It has happened recently and it could occur again.
The relocation of production facilities
Another impact of M&A on automotive supply chains is the relocation of production facilities. When two companies merge, they may have duplicate facilities that can be consolidated to save costs. This is an excellent opportunity to reduce redundancy and optimize the new company’s footprint.
This can result in the closure of some facilities and the relocation of production to other locations. It is important to view this activity through the lens of the new corporate entity’s long-term objectives, not just considering its present-day needs. Doing this will better position the company for growth in future years. Factors such as costs, labor availability, areas of projected growth, security, and tax issues must all be considered. The transition to electric vehicles (EVs) may dictate additional changes in facilities, including battery manufacturing plants placed near EV assembly factories.
Relocating your production facilities can have a ripple effect on the supply chain, as suppliers may need to adjust their delivery schedules and logistics operations to accommodate these changes. Depending on your specific plan, some suppliers may also need to relocate or otherwise adapt to accommodate your needs. If your legacy suppliers are unwilling to do this, new suppliers will need to be vetted and sourced.
The realignment of logistics
M&A can also lead to a realignment of logistics and distribution networks. With the consolidation of production facilities and suppliers, the merged company may need to adjust its transportation and distribution networks.
While the potential logistics and distribution benefits of a merger can be easily stated in a document, the actual process of producing these benefits can be a major challenge. Dealing with the rationalization and integration of dual IT systems, separate processes for handling these functions within each company, different operating procedures, varying contract terms, as well as disparate corporate cultures, is not an easy task.
Optimizing the new company’s logistics can take years, as all of these issues are worked through in search of an ideal solution that functions effectively for the new entity. This can lead to changes in delivery routes and modes of transportation, which can impact lead times and delivery schedules. Everything should ideally be “on the table” for consideration, including:
- Increasing costs and lengthy shipping times related to manufacturing abroad
- Reshoring manufacturing for speedier delivery and modifications when necessary
- Maintaining backup supplies of essential parts in case of a production stoppage
- Ability to re-source parts “on the fly” if and when shortages occur
- Improved, up-to-date knowledge of your automotive supply chain through the use of cutting-edge technologies such as the Internet of Things, AI, and real-time data analytics
DCG knows the value of automotive supply chains and logistics management
At Dave Cantin Group (DCG), we understand that the impact of M&A on automotive supply chain and logistics management cannot be overstated. Without a functional, high-performing, and reliable supplier base, along with cost-effective and dependable transportation networks, the combined new automotive entity will struggle to be successful.
The M&A company that you hire to assist you with an acquisition or a sale must be knowledgeable about all aspects of automotive supply chain and logistics management. Sure, you want a good deal, structured to your needs. But you also need the transaction to fit in with your business goals for the future.
DCG is a financial advisory company focused on the automotive sector. Our industry-leading Acquisitions division includes M&A attorneys, accountants, former OEM executives, and former dealers, and we have successfully represented a diverse range of companies on both sides of the negotiating table.
We’ve earned an impeccable reputation and a long track record of proven results in the automotive industry, because we’re committed to service beyond the sale. With hundreds of successful acquisitions, and billions of dollars in transactions closed, nothing is out of reach for our team of Mergers & Acquisitions specialists.
Contact the Acquisitions division of DCG to speak directly with an automotive M&A specialist and learn how our expertise can help you get the most out of your next transaction.