Implications of the shortage of materials for credit management
International supply chains are under a lot of pressure. According to a study by the German Chamber of Commerce and Industry (DIHK), 42 percent of German companies are unable to fulfil existing contracts because they are waiting for the necessary materials; 26 percent have had to reduce or even stop their production. This has a direct effect on the liquidity of the affected companies. How should credit managers maintain an overview?
Semiconductor shortage in the automotive industry
This lack of input materials has been most publicly communicated by the automotive industry, where there is a particular lack of semiconductors for manufacturing their highly digitalized vehicles. Shrinking of vehicle production and therefore sales are not the only effects of this.
Whereas vehicle manufacturers have been able to compensate, at least partially, for the reduced production with increased prices and higher margins, as the quarterly results show, it is their smaller suppliers that are particularly badly affected. Following the lockdown due to the pandemic they are now battling with large reductions in turnover through the automotive industry. Especially companies whose only customers are in the vehicle industry, who have a limited product spectrum and a turnover of 50 to 200 million euros have major problems. Their margins are normally small anyway so that reduced turnover quickly leads to liquidity shortages and financial cushions are soon used up. The result is the first insolvencies in the industry.
Mechanical engineering also has problems
The effects on suppliers to the automotive industry also apply directly to the automated mechanical engineering sector. Here, turnover reductions due to the lack of components have a direct impact on the mechanical engineering companies. Many of them, however, have the advantage of higher margins and thus a larger financial buffer.
Building industry affected – situation somewhat improved
Long delivery times and increased prices have also affected the building industry. In order to increase stocks of materials, companies in building trades have strained their liquidity. Offers without price-variation clauses are highly risky and possible time shifts can lead to penalties. These are all elements that increase the financial risk.
All the effects of shortages always result in increased prices, at least in the medium term. This then leads to a decrease in demand. Lack of sales reduces the turnover, and the affected companies have to hope that they will at least be able to reach the breakeven threshold.
Shortage of personnel
It is not only materials that are in short supply in many industries – there is also an immense shortage of personnel in particular areas. In the hotel and restaurant sector, the lockdown caused staff to find alternative jobs; new personnel are hard to find. A lower level of activity with reduced turnover and income is the result.
The logistics industry also reports a lack of workers – and not only in Great Britain. Limited logistics capacities are leading to supply bottlenecks with far-reaching consequences for the affected companies.
Which default risks are there in your own portfolio?
Credit managers need to take a careful look: which suppliers further back in the value-creation chain are affected? Do they belong to an industry that is suffering from turnover problems and is the available liquidity low? If so, great care is advisable.
At the moment, it must be assumed that the shortage of particular components will continue for a long time and there will be further financial problems. Therefore, credit managers must analyse exactly which industries and areas are affected, how much financial strain the respective companies are under and how the customer credit limit needs to be set to take these aspects into account.
A basis of sufficient information is the precondition for good decisions in credit management in times of continuing economic uncertainty.