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Human Capital

  • Labor Practices
  • Employee Health & Safety
  • Employee Engagement, Diversity & Inclusion

Business Model & Innovation

General Issue Category
(Industry agnostic)

Disclosure Topics (Industry specific) for:
Auto Parts

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Energy Management

Energy Management

Most of the energy consumed in the automobile manufacturing process happens in the supply chain. The use of electricity and fossil fuels by auto parts manufacturers in their production processes results in direct and indirect emissions of greenhouse gases (GHGs). Purchased electricity represents a major share of the energy used in the Auto Parts industry. Sustainability initiatives such as incentives for energy efficiency and renewable energy are making alternative sources of energy more cost-competitive. Regulators and consumers are also pressuring the industry to reduce GHG emissions. Therefore, it is becoming increasingly important for companies in energy-intensive industries to manage the cost and reliability risks associated with their overall energy efficiency, their reliance on different types of energy, and their access to alternative energy sources.

Waste & Hazardous Materials Management

Waste Management

Manufacturing auto parts involves the use of significant amounts of materials (including steel, iron, aluminum, and plastics, among others). Types of waste generated by the industry include machine lubricants and coolants, aqueous and solvent cleaning systems, paint, and scrap metals and plastics. A significant portion of auto parts manufacturers’ revenue is spent on the cost of materials. Therefore, companies that are able to manage their manufacturing inputs through reducing and recycling waste are likely to be better protected from price volatility and the risk of supply disruptions. Moreover, auto parts manufacturers can achieve savings and improve operational efficiency by increasing the amount of waste that is recycled. At the same time, auto parts manufacturers that cause negative environmental impacts through their waste management practices are likely to face regulatory oversight. Violation of environmental regulations is likely to generate legal expenses as well as capital expenditures for pollution-control facilities and occupational safety and health projects.

Product Quality & Safety

Product Safety

Driving is a risky activity, as distracted driving, speeding, drunk driving, and dangerous weather conditions, among other factors, can lead to accidents that expose drivers, passengers, and bystanders to possible injuries and deaths. Accidents can also be caused by defective parts in vehicles, and failure to detect defects before vehicles are sold can have significant financial repercussions for both automobile and auto parts manufacturers. Ensuring vehicle safety and responding in a timely manner when defects are identified can protect auto parts companies from regulatory action or customer lawsuits, which might otherwise result in significant costs. It can also help them retain their relationships with original equipment manufacturers (OEMs), which often select Tier 1 suppliers based on their safety performance and reliability. As cars incorporate more sophisticated electronics and other technologies, the risks related to recalls may increase. Through effective management of product safety, auto parts companies can enhance their reputation and drive higher sales over the long term.

Product Design & Lifecycle Management

Design for Fuel Efficiency

Automobile manufacturers are increasingly demanding motor parts and components that can help reduce the fuel consumption of the vehicles they sell. Fuel-efficient components and parts play a vital role in reducing tailpipe emissions of automobiles through energy efficiency gains and contributions to weight reductions, among other factors. Auto parts companies that can design and manufacture such parts will be better positioned to increase sales to auto manufacturers that are increasingly facing stricter environmental regulations and customer preferences for more environmentally friendly cars.

Materials Sourcing & Efficiency

Materials Sourcing

Companies in the Auto Parts industry commonly rely on rare earth metals and other critical materials as key inputs for finished products. Many of these inputs have few or no available substitutes and are often sourced from deposits concentrated in few countries, many of which are subject to geopolitical uncertainty. Other sustainability impacts related to climate change, land use, resource scarcity, and conflict in regions where the industry’s supply chain operates are also increasingly shaping the industry’s ability to source materials. Additionally, increased competition for these materials due to growing global demand from other sectors can result in price increases and supply risks. These materials play a crucial role in clean energy technologies, such as electric and hybrid vehicles. As regulators aim to reduce greenhouse gas emissions and consumer demand grows for more fuel-efficient vehicles, the share of hybrids and zero-emission vehicles (ZEVs) produced by the Automobiles industry is likely to continue to increase in the future. Companies that are able to limit the use of critical materials, secure their sourcing, and develop alternatives will protect themselves from supply disruptions and volatile input prices, which may impact their margins, risk profile, and cost of capital.

Materials Efficiency

Millions of vehicles worldwide reach the end of their useful lives every year. At the same time, the rate of vehicle ownership is expanding globally, leading to more end-of-life vehicles. To lower the lifecycle impact of vehicles, auto parts manufacturers can design their parts to be easily recyclable and reusable and can apply modularity principles to product design. They can also create take-back programs to ensure safe disposal and reuse of the products. Given input price volatility and resource constraints, auto parts companies that manage materials efficiency are likely to improve their long-term operational efficiency and strengthen their risk profile. In addition, companies can potentially reduce their manufacturing costs by using fewer materials and/or recycling materials, which will improve margins.

Competitive Behavior

Competitive Behavior

Competitive business practices are an important governance issue for companies in the Auto Parts industry. Although industry concentration is low, there is a wide range of auto parts, and competition for business within each category of parts may not be robust. Thus, leading producers of any specific auto part may wield substantial market power in that segment, creating antitrust concerns. Collusion and price fixing by auto parts manufacturers ultimately leads to costs being passed on to consumers through higher vehicle prices. If involvement in such activities is discovered, the imposed penalties and reputational damage may have an acute impact on a company’s valuation and balance sheet.

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