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Sustainability in the automotive supply chain

Author EY denkstatt
Sustainability in the automotive supply chain

Boyan Rashev is one of the leading experts in environmental and resource management in Bulgaria. Since 2007, he has been a managing partner at now EY denkstatt, the most experienced consulting company in Bulgaria specialising in ESG (Environmental, Social, and Governance), decarbonization, product sustainability, and reporting.  As of April 2024, denkstatt is part of the EY network in Austria, Bulgaria, Romania, Hungary, and Slovakia and is now on the marekt as EY denkstatt. 

His professional expertise lies in sustainable development, environmental management, ecosystem services valuation, circular economy, air quality, climate adaptation and policies, and natural resource management.

He holds a Bachelor's and Master's degree in Environmental and Resource Management from Brandenburg Technical University in Cottbus, Germany. He has also studied at Sofia University "St. Kliment Ohridski," the University of Natural Resources and Life Sciences in Vienna, and the Central University of Venezuela in Caracas. In 2012, he was a finalist in the national competition for young business leaders, Next Generation.

The automotive industry is certainly among the sectors that first started working to implement sustainable practices throughout their supply chain and set standards in this regard. Following the principle of trickle-down, this led to changes in many other industries as well. Simply put, the supply chain of the automotive sector involves many levels of suppliers, manufacturers, and distributors. An average vehicle contains between 15,000 and 25,000 parts. Even the biggest companies in the industry have subcontractors around the world who manufacture and provide all kinds of details and elements for the final product. However, it is not only the finished car that unites them - the requirement for sustainability, which reaches the smallest manufacturers in the chain, is also common. 

Firstly, this is the sector where the Science Based Targets Initiative (SBTi), which aims for scientifically-based climate targets, spread most rapidly. It brings together businesses and organisations working to establish and reduce the private sector's impact on the climate by setting specific scientifically-based goals. Thus, in practice, the majority of players in the automotive industry, even the more niche ones, have set targets to reduce their carbon footprint in absolute terms.

When a large company sets ESG goals, it affects everyone else with whom it does direct and indirect business. Therefore, if a smaller manufacturer wants to be a subcontractor for one of the world's automotive giants, it must be ready to meet a serious number of requirements and commitments. There are several examples of medium and small productions in Bulgaria that make parts or whole elements for some of the German, French and Italian car concerns. These small productions know that they have to meet a very strict and precise criteria to be part of their supply chain.

How does this happen? Usually, the parent company sends out questionnaires to its subcontractors for them to fill out. For example, BMW has such a questionnaire for its Bulgarian partners, covering topics from company management practices, labour conditions, environmental conservation, to raw material supply.

However, that is not all. Companies cannot simply declare some policies and commitments. They must provide evidence that they are compliant. They are required to have a designated person to work on the topics of sustainable development, prepare and present sustainability reports and strategies, provide official documents on the life cycle of the products and the details that the respective car plant will install in its cars. Entire teams review the evidence, and when it does not fit, the risk of the subcontractor losing their job because they do not meet the big company's sustainability requirements is huge.

The scrutiny is so serious that in most cases, even at the bidding stage, automotive giants want to know the carbon footprint of the product that the smaller company is offering to make for them. The calculations go even further - suppliers are required to calculate and predict the footprint even before their component or detail is produced.

The process itself is more interesting - what can a relatively small Bulgarian manufacturer do to reduce the footprint in question and meet the customer's expectations? Switching to a different type of plastic or material might not be enough. Using metal components and incorporating recycled materials could help but it is still rare. Transitioning to green energy is an option, but sometimes even that is not enough. Large companies often impose too many conditions – they want this specific product with this specific material and this specific footprint...

What Bulgarian companies most often do for automotive giants are finishing works – there's hardly any production of parts here; mostly they are assembled and delivered as finished products. This makes the task of ensuring a sustainable product even more challenging.

Pressure does not stop there. Winning such a contract is a great success but also a responsibility. Usually, the parent company has long-term commitments to improve its climate impact. This inevitably trickles down to its suppliers and partners. Therefore, conditions are set already at the offer or deal stage – for example, what can you do in five years to further reduce the footprint of your product and by how much exactly?

What do companies do to meet all these requirements? The simplest and most direct solution is calculating their carbon footprint. This is the first step, but then it leads to a full life cycle assessment, i.e., considering the overall environmental impact. Often, large manufacturers require their subcontractors to calculate both the carbon footprint of the specific product and that of the entire company. However, many firms go further – they write their ESG (Environmental, Social, and Governance) strategies or reports, detailing their sustainable policies, outlining their environmental, social, and corporate impacts, tracing their progress and future goals. This, along with taking responsibility through specific people and teams dealing with corporate sustainability issues within the company, is usually sufficient to meet the expectations of major automotive conglomerates. However, all this really needs to be backed up by real actions - for example, data on labour conditions or the S part of ESG - what is the employee remuneration, are human rights respected, etc. On-site audits are also conducted, so simply claiming to adhere to policies is not enough.

If all this seems too abstract and even unnecessary, just remember how many critical situations and unforeseen events have occurred in recent years. The coronavirus epidemic, the war in Ukraine, instability in the banking sector – all of this has led to problems and disruptions in supply chains and the economies globally. Sustainable development to a large extent is synonymous with risk management. By placing all these requirements on their suppliers, the big players in the automotive industry ensure their long-term work and perspective. That is why they have goals and want to see progress. If their Bulgarian partners are developing and improving, they also make progress.

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