Auto Industry CFOs Buckle Up for Disruption

Original equipment makers, tech companies, and suppliers are vying for control of the auto's “center stack,” which customers may value more than th...
Brian PeccarelliSeptember 8, 2017

The auto industry is coming off a record run of auto sales and heading straight into headwinds of disruptive technology and a confusing global trade environment. Both threaten to undermine the formula that made it so successful for so long. What should CFOS do now to prepare?

Gear shifter in reverseWhile many of the factors contributing to the rapid pace of change in the auto industry are outside the purview of the finance department, those responsible for the corporate purse strings will play a fundamental role in the industry’s ability to adapt successfully.

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The key is to focus on flexibility by first acknowledging some of the biggest factors influencing the business and then installing systems that allow it to be nimble in the face of disruptive threats.

Risk-Proofing the Supply Chain

Perhaps the biggest immediate threat to the auto industry is coming in the form of volatile global politics that are spurring major changes in global trade policy. The U.S. withdrawal from the Trans-Pacific Partnership (TPP), the pending renegotiation of the North American Free Trade Agreement (NAFTA), and Brexit are just a handful of massive changes upsetting the natural order of global trade that’s been in place for decades.

While each of these presents its own unique challenges, they all present the finance department with the heightened need to protect the supply chain from “stroke-of-the-pen risk.” With a single regulatory action or shift in policy sentiment, entrenched supplier and regional manufacturing relationships can be rendered unsustainable.

That puts a premium on building dispersed supply chains that spread production and capacity among multiple vendors. Diversifying production can help auto companies to avoid location-based supply shocks and allow this manufacturing-centric business to continue to service regional markets despite changing trade dynamics. Such moves are essential now to future-proof manufacturers from wide swings in global trade policy and, correspondingly, dramatically different sets of rules for managing global supply chains.

Supporting the Right Technologies

As if the global trade complexity weren’t enough, the auto industry is at the center of a massive evolution in technology. Autonomous vehicles, electric vehicles, ride-sharing services, and the integration of phones and other outside technologies all have the power to make or break auto manufacturers if they don’t get the tech formula right.

From the finance department perspective, that often comes down to difficult decisions about allocation of funding and even harder decisions about forecasting demand. The key here for the CFO is to become the sober voice in the room. That means being  informed by concrete data on everything from geographic sales trends to competitive intelligence on R&D spend and strategic acquisitions.

We’re living in a world where original equipment manufacturers, tech companies, and third-party suppliers are vying for control of the automobile “center stack,” which has become a more desirable feature to many customers than the engine. But manufacturers cannot afford to be distracted by the bright shiny thing.

They need to focus on what they’re best at – integrating technologies into a complex system, regardless of whether those technologies are homegrown or outsourced from third parties. The finance department can play a key role in helping to enforce discipline around this focus and giving senior management and R&D professionals the ammunition they need to be successful.

To accomplish that, though, they need the right data – comprehensive information from across the organization that captures not just high-level P&L data, but also the deep-dive regional information, including changes in local regulatory policy, and tax exposures. CFOs in the industry will also want to be able to track and forecast the effect of such things as the changing regulatory and tax consequences of incorporating new wireless connectivity into cars. Such changes could, in theory, expose auto manufacturers to telecom tax rates.

The Road Ahead

That is the kind of bedrock information the finance department needs to be able to bring to the table to both temper pie-in-the-sky ideas and lay the groundwork for calculated moon shots. The challenges ahead for the auto industry are significant and, it’s the CFO’s job to make sure the business is in the monetary position to seize the right opportunities when they present themselves. Along the way, they’ll also need to be comfortable saying no.

Increasingly, hard data and flexible systems that allow a much more fluid response to changes in the regulatory, economic, and consumer environment are becoming the keys to enable that decision making process.

Brian Peccarelli is president of the tax & accounting business of Thomson Reuters.