Escalating trade wars impact on automotive supply chain

18 July 2018

With new data revealing that 42,000 parts and 5,000 companies could be affected by US tariffs on Chinese products alone, the prospect of a global tit-for-tat poses major disruption risks for auto manufacturers

Escalating trade wars look set to be the new risk frontier in auto supply disruption. With countries and trading blocs around the world starting to retaliate against US moves to raise tariffs, open trade borders are closing in very quickly. The implications for the auto industry are becoming clearer and clearer – first materials like steel, aluminium and rubber were on the hit list, now entire vehicles are in their sights, with the EU just one of the global powers threatening to respond in kind, with tariffs on $300bn worth of US goods1.

The scale of the issue is highlighted by new data from Resilinc, JLT’s specialist data provider partner. Its analysis of 60,000 suppliers across six sectors* shows that 42,000 parts and 5,000 companies could be affected by US tariffs on Chinese products alone2. Though these include products and raw materials supplied to auto as well as other industries, the automotive sector will likely be hard hit. Indeed, when looking at US companies with China-based supply chains, Resilinc highlights automobiles (and electric vehicles) as likely to be high-impact, high-dependency products - in terms of potential higher costs/revenue losses and difficulties sourcing alternate supplier sites in another country.

This is just the beginning. Unless an agreement can be reached, additional tariffs on hundreds of billions of dollars-worth of Chinese products could be in prospect, on top of the current $50bn or so3.

In all, some commentators estimate that US tariffs plus the tariffs imposed and being considered in retaliation will affect 1% of global trade4 . With the world’s merchandise exports worth $17.2trillion at the last count , the stakes are high. Numerous global economies are affected by heightened trade tensions – not to mention the impact of Brexit, where the possibility of a no-deal “hard” UK exit from the EU could incur hefty WTO tariffs. Furthermore, additional costs from border delays undermine “just-in-time” delivery.

Move over fires, strikes and hurricanes? Trade barriers are likely to rise up the list of top auto disruption events.

Trade barriers have the potential to alter the risk landscape considerably as far as supply chain disruption is concerned. Last year, Resilinc reported factory fires, hurricanes and labour strikes among the top disruption events impacting the auto sector, while geopolitical risks only ranked mid-table (15th out of 30). Even when looking at manmade-only events over the last five years, geopolitical risk has not been a significant feature on the radar (see graph 6). This year given current global tensions, geopolitical issues - and trade policy in particular – could rise up the list very quickly.

Escalating trade wars impact on automotive supply chain

Given the length and complexity of global supply chains, and the nature of component manufacturing which can see some parts zig-zag across borders multiple times, for the auto industry perhaps more than any other, trade wars are a major concern.

There’s a very real possibility that for some auto manufacturers, the global supply map may have to be radically re-designed in a bid to ensure security of supply – otherwise reduced access to markets, capacity limitations, higher prices and brand damage could result. Knowing where supply chains are most vulnerable is vital so that informed decisions can be made, whether that’s re-adjusting current arrangements or putting in place a “Plan B”. It will give senior management and shareholders comfort that all efforts have been made to make sure the supply chain is as secure as possible – and there may even be competitive advantage to be gained.

There’s huge value from such insight from an insurance point of view. The better the visibility auto manufacturers have across and deep into their supply chains, the easier it is to ensure that optimum coverage for their specific needs and risk profile is in place.

That said, it’s not easy even for the biggest players in the auto sector to achieve this level of knowledge and visibility across supply chain, right down through sub-tier suppliers across thousands of parts. Recognising this, at JLT Specialty, we have a team of analytic and security experts who deploy exclusive data from Resilinc to map and audit different types of risk factors that could affect supply security, so that our clients have the insight they need to create resilience against supply disruption.

As global economies intensify the protectionist rhetoric and with Brexit under a year away, auto manufacturers will need to deploy all the weapons at their disposal, from risk mapping to contingency planning to business interruption insurance to limit the damage. They can’t afford to pin their hopes on a trade truce.

For more information, please contact Matt Grimwade, Head of Global Automotive on +44 (0) 203 797 7734 or email matthew_grimwade@jltgroup.com

Source: The Guardian https://www.theguardian.com/business/2018/jul/02/eu-trump-car-tariffs-tax-us-goods
2 Source: Resilinc http://blog.resilinc.com/us-and-china-trade-wars-analyzing-the-supply-chain-impact
3Source Financial Times https://www.ft.com/content/fa9a6c04-7e28-11e8-bc55-50daf11b720d
4 Source: Morgan Stanley http://www.autonews.com/article/20180626/OEM01/180629859/
5Source: WTO data for 2017 https://www.wto.org/english/news_e/pres18_e/pr820_e.htm
6Source: Resilinc
*Sectors include Automotive, High Tech, Life Science, Medical Devices, Pharmaceutical and Industrial

This blog is compiled for the benefit of clients and prospective clients of companies of the JLT Specialty Limited (“JLT”). It is not legal advice and is intended only to highlight general issues relating to its subject matter; it does not necessarily deal with every aspect of the topic. Views and opinions expressed in this document are those of JLT unless specifically stated otherwise. Whilst every effort has been made to ensure the accuracy of the content of this document, no JLT entity accepts any responsibility for any error, or omission or deficiency. If you intend to take any action or make any decision on the basis of the content of this document, you should first seek specific professional advice. The information contained within this document may not be reproduced and nothing herein shall be construed as conferring to you by implication or otherwise any license or right to use any JLT intellectual property.

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