Guest commentary: 2023 supply chain outlook: Buckle in for more hardships, more partnerships

Pundits everywhere are prognosticating how a potential recession could affect supply chains in 2023. If a downturn materializes, many feel that current supply chain woes will ease.

Automakers and suppliers would be wise to look beyond these simple predictions.

The truth is that demand exceeds supply in the automotive industry right now, and inflation, while slowing, remains above inflationary targets. Furthermore, no massive new suppliers are on the immediate horizon for hard-to-procure components such as semiconductors, rare earth metals or other battery elements.

Therefore, most indicators point to 2023 being another year of supply chain problems. The most noteworthy aspect of the situation is how automakers and suppliers plan to address the ongoing challenge. Namely, by accelerating the establishment of their own production and supply chains —but only for certain elements.

We expect automakers and suppliers to pursue partnerships and acquisitions this year, aiming to take production and supply chain matters into their own hands instead of relying on traditional supply contracts. Announcements such as General Motors' Ultium or Ford Motor Co.'s BlueOval City investments promise to be just the tip of the iceberg.

There is an important caveat, however. We will likely see this activity only for a limited, but critical, set of automotive components.

It is doubtful that companies will upend traditional supply chains for interiors, body panels or crash management systems. On the other hand, many will want greater control over elements already experiencing stress or at risk of commodity pricing, such as semiconductors or wiring harnesses.

This shift means that companies may quickly find it necessary to bifurcate their procurement strategies — one for volatile components and another for more stable components. More "specialists" may need to be retained for their expertise in procuring relevant volatile materials such as lithium or cobalt. Separate procurement offices and contracts may become the norm, making it harder to develop essential relationships and contracts.

Make no mistake: The risk here is a rise in internal silos. Unfortunately, silos always bring complexity, as different objectives and targets within different procurement groups must be managed individually.

Establishing internal supply chains and mastering bifurcated procurement strategies will require stakeholders to:

• Stay focused on innovation — keep abreast of innovations coming out of academic incubators and understand how they might fit into the future ecosystem.
• Remain proactive — evaluate partnership and acquisition decisions.
• Engage meaningfully with one another.

In all these endeavors, automakers and suppliers will benefit from a more nuanced approach to their relationships. While it's true that price rules the supply chain roost, the impact of relationships on profitability can't be overlooked. Time and again, surveys such as the Working Relations Index indicate a positive correlation between profitability and a close working relationship. Amid industry disruptions, survival often depends on how quickly new relationships are developed and existing ones are strengthened.

Suppliers should also take time to reevaluate their value through the lens of the impending electric vehicle landscape. Discussions with potential partners need to focus less on the supplier's current output and more on what that output reveals about the company's core competency.

For example, say that 80 percent of a company's revenue historically comes from components designed for internal combustion engines. The question the company now faces is, "How do our capabilities address the growing EV sector?"

Although this type of evaluation is not novel, now is a good time for a deeper exploration of suppliers' ability to address automakers' evolving needs, which include three primary options:

1. Organically develop a new product set, which could involve substantial changes in engineering/production.

2. Acquire relevant companies, which could entail record-high valuations given today's market.

3. Produce integrated solutions, which typically requires a blend of organically developed, acquired and purchased products.

Regardless of the approach, companies will need to continue investing in product development/acquisition and their marketing strategy. Automakers must believe suppliers will be reliable, credible and long-term providers as they evolve their product portfolios.

The convergence of disruptive forces in the industry makes 2023 the year for supply chain investment. The industry must be prepared for economic conditions to prolong existing supply chain challenges. In addition, the federal government promises to continue promoting EV adoption through the Inflation Reduction Act and infrastructure bill — obligating new supply chains in the transition.

If fortune favors the bold, now is the time for automakers and suppliers to invest in the supply chain. The longer they wait, the more delayed their ability to serve the automotive market successfully.