German automakers are developing an early-warning system to prevent the next chip crunch

May 31, 2021, 12:50 PM UTC

With supply chains stretched to their breaking point, Germany’s carmakers are developing an early-warning system to better prepare for the next crisis, after a drought of semiconductors brought vehicle assembly lines to a screeching halt the world over.

Dubbed “Catena-X” after the Latin word for chain, this cloud-based network is designed to illuminate every corner of the industry’s vast, globe-spanning web of automotive parts suppliers in the search for stresses.

Data would be shared safely via a central repository that any participating firm can tap into, thanks to one common interface. By eliminating hardware and software barriers, it facilitates the flow of information from one company to another.

“The industry needs more transparency in the supply chain, not just for semiconductors but for all components, and Catena-X can be a solution,” Uwe-Karsten Städter, Porsche’s head of procurement, tells Fortune.

Undeniable need

Previously, this kind of cooperative approach might have sparked antitrust suspicions. However, the initiative piggybacks on a broader cloud-computing standard called Gaia-X that is currently under development and is backed by European governments, with the aim of making it easier for Europe’s industrial giants to share data among themselves.

First championed by BMW and business-software group SAP, membership in Catena-X has grown to include Daimler’s Mercedes-Benz and Porsche’s parent Volkswagen Group, as well as IT specialists Siemens and Deutsche Telekom, to name just a few.

The need is undeniable. The IHS Markit purchasing managers index, a leading indicator, points to growth in new Euro-zone orders outpacing that of production at a rate never before seen in the 23-year history of the survey.

These strains are most evident in the semiconductor market. Consultancy firm AlixPartners earlier this month nearly doubled its forecast for economic damages from the ongoing chip shortage currently plaguing all automakers, now estimating $110 billion in lost revenue.

Catena-X can already help detect and identify, at a much earlier stage, stresses building in the system when imbalances in supply and demand begin to occur,” Städter says.

It also promises benefits that are important for environment, social and governance (ESG) reporting. For one, Catena-X should enable more accurate tracking of CO2 emissions in the supply chain and allow companies to trace and verify the origins of critical raw materials, such as cobalt, right down to where they were mined.

Eskander Yavar, manufacturing national practice leader at the U.S. arm of advisory firm BDO, believes Catena-X has the potential to become a gold standard thanks to Europe’s uniquely collaborative approach to connecting factories to the cloud.

“Its interoperable model is the next evolution of supply chain management. With everyone using the same platform and nomenclature consistent throughout, you lose all need to build the kind of technological paths and bridges that allow machines to talk to each other,” says Yavar. “The U.S. is nowhere close to leading in that regard—we’re not even thinking that way.”

Inventory a ‘four letter word’

No car is manufactured in its entirety from a box of parts like a puzzle. Instead automakers sit atop a pyramid where their factory lines are fed large pre-assembled groups of parts by a small number of so-called Tier 1 suppliers. These in turn source their components from a dozen or more smaller firms down the line, and so on.

There can be thousands of companies involved in the process when including those at the bottom tier, and each has its own role to play. When a problem arises lower down, however, valuable time can be lost before information works its way up the chain.

The ongoing chip crisis has highlighted a strategic weakness in the industry’s lean manufacturing process known as just-in-time (JIT) production. This entails delivering parts to the line only when they are needed, in order to maximize floor space for final assembly while simultaneously minimizing the drain on cash from warehousing stock.  

“Inventory became a four-letter word,” says Ambrose Conroy, founder and CEO of consultancy Seraph. “The whole JIT supply chain depends on everything running absolutely perfectly.”

For now, the various parties are all blaming the other for the crisis. Chipmakers like Infineon argue that auto manufacturers first cancelled deliveries before belatedly submitting orders. Car companies meanwhile question how a fire could break out at a key semiconductor supplier in Japan or why Taiwan chip foundries combatting a drought have no better solution than to bring water in by trucks.

“This whole chip shortage could have been prevented had car manufacturers understood you have to keep buying chips,” Conroy adds.

Porsche’s Städter, who retires in August, takes issue with this argument.

“With the singular exception of the six-week period during the first lockdown, we did not cancel any orders,” he says. “Ours was a V-shaped recovery in which we quickly returned to pre-pandemic production levels.”

Buoyant demand

Thanks to Städter and his team, production has barely been affected by the shortage. Like other luxury goods makers, Porsche typically enjoys predictable demand with more customers looking to buy its cars than it can build. This gives it greater planning certainty than volume brands that compete on price and hence depend on consumer confidence.

Preventing a stoppage will be the number one priority for Städter’s successor, Barbara Frenkel, the first woman to be appointed to Porsche’s board. The brand is a cash cow for its parent. On average, it took three Audis or nearly 14 Volkswagens to contribute the same amount of profit as one Porsche during the first quarter.

But since it could take months before Catena-X is working, Porsche is taking matters into its own hands for the moment. While it won’t breach industry etiquette by going behind its suppliers to source chips directly, it is rounding them up and sitting them down together with representatives from the semiconductor industry to ensure its factories keep humming. 

While a solution has always been found thus far, Städter admits “these talks are very demanding.” 

Clarification: This article was updated on June 1 to note that Städter will be retiring in August rather than the end of July.

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