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  • automation
  • Supply chain bottlenecks
  • working capital

Supply squeeze hits automaker working capital

Feature-image

VW, BMW, Ford are taking longer to convert cash as escalating supply chain disruptions force them to hold unfinished products and hoard raw materials

by Anmol Karwal

Published: May 17th 2022

After a pandemic and a global chip crunch, Russia’s war in Ukraine has exacerbated the supply chain crisis faced by seven largest car manufacturers by revenue- Toyota, VW, Mercedes, Ford, Honda, BMW and GM.

In the first quarter, these companies stockpiled inventory of raw materials to mitigate future production stoppages, which worsened their working capital position. Their average Cash Conversion Cycle (CCC), which expresses how many days it takes a company to convert inventory into cash after a sale to a customer, rose by 14.7% or 4.4 days to 34.7 days during this period.

Mounting Supply Issues

Expecting electric vehicle (EV) sales to grow in the second half of the year, Wolfsburg based- Volkswagen (VW), started to accumulate batteries in the first quarter to prevent supply disruptions hitting EV production. This led to a 5.5% or €2.4 billion in outstanding inventory to €46.13 billion at the end of the quarter.

“We saw a slight increase in inventories and that’s specifically in raw materials and one of that basically increase in raw materials is due to the storage at least to a certain extent of batteries” said Arno Antlitz, CFO at VW during a May 4th conference call.

As EV demand continues to rise, hoarding raw materials like batteries and semiconductors is critical for automobile companies in order to operate an untroubled production line, otherwise they risk seeing the EV revolution accelerate away from them. But this comes at the cost of a deteriorating cash conversion cycle which treasurers need to finance effectively.

As VW’s working capital increased by €3.29 billion to €38.9 billion in the first quarter, its CCC increased by 7.4% or 5.3 days to 76.8 days during the same time period.

“Q1 results showed a strong gross cash flow burdened by a negative change in working capital due to supply chain disruptions due to the war and limited supply of semiconductors” Antlitz added.

Michigan based automobile manufacturing giant- General Motors (GM) also faced a similar situation as its inventory increased by 21.5% or $2.58 billion to $14.65 billion in the first quarter. The company stockpiled palladium, a key material used in vehicles engines, to levels sufficient enough to cover expected production volumes till the end of the year.

This resulted in GM’s Days Inventory Outstanding (DIO), a measure of the average number of days that a company holds inventory for before turning it to sales, to increase to 42.7 days in the first quarter, highest in the last five years.

Questioned about strategies to tackle supply disruption, Paul Jacobson, GM’s CFO told investors during a Q1 earnings call, “The strategies include pricing actions as well as holding additional inventory of key commodities to manage price and global trade volatility.”

While GM has enjoyed a negative working capital, whereby its operating cycle has been a source of cash in the past, but longer inventory holding time coupled with early payments made to suppliers and delay in payments received from customers extended its CCC to 3.4 days in Q1 as compared to -4.2 days at the starting of the year.

GM’s American counterpart, Ford followed suit with a 21% or $2.58 billion increase in inventory to $14.65 billion in the first quarter. The company held almost 53,000 semi-finished vehicles on its balance sheet which were completed but awaiting installation of components affected by the semiconductor supply shortage.

As its DIO increased by 10.8 days to 41.4 days, the company took an additional 4.7 days to convert cash. However, working capital was still a source of cash for Ford as CCC stood at -13.5 days at the end of the first quarter.

Similar concerns as Ford were pointed out by VW’s arch rival, Mercedes-Benz, as inventory increased by 11.8% to €23.45 billion in the first quarter. However, due to a higher increase in goods purchased during the quarter, DIO decreased by 6.4 days to 74.3 days and along with faster payments received from customers, it helped CCC to accelerate to 60.2 days, fastest in the last five years.

While there is optimism that supply chain bottlenecks, scarcity of electronic chips and other raw materials would gradually ease, treasurers are struggling on how to remove volatility from their supply chain as they aim to tap the next phase of growth- the electronic vehicle market.

EuroFinance’s private discussions with a treasurer at a global carmaker, suggests that a part of this strategy is allocating capital to strategic investments with suppliers.

Volkswagen has formed an alliance with China's Tsingshan Group and Huayou Cobalt to mine and refine enough nickel and cobalt to generate 160 gigawatt hours’ worth of EV batteries. While, BMW secured long term supply for Lithium as it signed a €285mn contract with a US manufacturer.

Fear of missing out is driving automakers upstream, a process known as vertical integration, whereby automakers are taking ownership of supply of key raw materials to be used in the future.

 

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