The automotive industry is a powerhouse of the global economy and of immense importance, especially for the German economy, yet it faces significant challenges. High investments, low margins, and global dependencies define the sector. This is particularly evident in the current case of Volkswagen, where the difficult balancing act between weak sales figures, cost-cutting measures, and the ability to innovate becomes apparent. OEMs are still trying to shift their financing costs onto their supply chain, demanding extended payment terms for their purchases.

“This is precisely why optimizing working capital plays a central role: it creates much-needed liquidity, ensures financial flexibility, and keeps companies competitive,” says Thomas Krings, Managing Director of the payment institution cflox. Without smart financing, companies risk supply chain bottlenecks and financial hardships, which can jeopardize not only innovation but also day-to-day operations. This holds even more true given the complex supply chains in the automotive industry and the current disruptions. “It can often backfire on manufacturers when a lack of financing drives suppliers into insolvency,” Krings adds.

So how can companies in this complex industry better manage their capital flows and navigate supply chain disruptions? And how does the Volkswagen case fit into this? Finance expert Thomas Krings sheds light on the key challenges and possible solutions.

The Importance of Working Capital in the Automotive Industry

The automotive industry is one of the most capital-intensive sectors. High upfront investments in raw materials, manufacturing, research, and material procurement are part of the manufacturers’ daily operations, while long production cycles and complex manufacturing processes tie up significant amounts of capital. At the same time, the point at which companies generate revenue from their products is often far in the future due to long payment terms, further straining liquidity.

Efficient working capital management is therefore essential in this industry. It enables companies to maintain financial flexibility, avoid bottlenecks, and stay competitive in a highly challenging environment. Without targeted optimization, liquidity can quickly run dry, which, in the long run, can jeopardize both innovation and market position.

In addition to the high upfront investments, the supply chain plays a crucial role. Automakers rely on numerous international suppliers, who in turn may be affected by geopolitical events or logistical issues. Supply bottlenecks and delays can significantly slow down production and tie up capital that could otherwise be used more efficiently.

Supply Chain Disruptions: A Risk Factor for the Entire Industry

Due to its complex and globally interconnected structure, the automotive industry is particularly vulnerable to supply chain disruptions. Manufacturers rely on a multitude of suppliers, often from various parts of the world, bringing several challenges:

• Global Dependency and Raw Material Shortages

  The production of vehicles requires a wide range of raw materials and components. A combustion engine alone consists of 1,000 to 2,000 individual parts (electric motors only about 200). Geopolitical events, natural disasters, or pandemic-related restrictions have significantly impacted the availability of materials in recent years, endangering entire production lines.

• High Capital Tied Up in the Supply Chain

  Automotive production demands substantial investments in pre-production and inventories. Large quantities of materials and components are kept in stock to avoid production outages. This capital commitment heavily strains a company’s liquidity and limits its flexibility. At the same time, it often leads to delayed payments to suppliers. Smaller suppliers, in particular, depend on timely payments to sustain their operations. Extended payment terms, often employed by automakers to preserve liquidity, can put enormous pressure on suppliers and threaten the stability of the supply chain.

• Fluctuations in Demand

  The automotive industry frequently faces unpredictable fluctuations in demand. Changes in consumer interest, seasonal demand peaks, or economic uncertainties lead to surpluses and material shortages, further burdening working capital.

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The Volkswagen Case: Cost-Cutting in Times of Global Uncertainty

Volkswagen’s recent cost-cutting measures show how deep the challenges in the automotive industry can run when it comes to dealing with supply chain disruptions and rising costs.

The company has announced plans to cut costs and increase efficiency—by reducing jobs and cutting investments in research and development, among other measures. These actions are intended to provide short-term financial relief but could weaken the company's innovation capacity and competitiveness in the long term. Since investments in future technologies like electric mobility and autonomous driving are crucial for the entire industry, the Volkswagen example illustrates the delicate balancing act many automakers face: How can they cut costs while staying innovative and competitive?

Volkswagen’s cost-cutting measures also reflect challenges related to managing working capital and liquidity. Supply chain disruptions and rising costs demand flexible solutions to ensure financial stability without jeopardizing innovation. This balance is crucial for the entire automotive industry to remain competitive in uncertain times.

Working Capital Optimization: A Key to Success

In light of these challenges, optimizing working capital is a crucial factor for success in the automotive industry. An efficient working capital strategy enables companies to secure liquidity, gain financial flexibility, and enhance their competitiveness.

1. Improving Inventory Management

   By utilizing advanced technologies and data analytics, automakers can better manage their inventories. The goal is to reduce inventory levels without jeopardizing production. Just-in-time (JIT) solutions can help limit inventory to the necessary minimum. Additionally, automation and digitized processes can further shorten production cycles, freeing up capital that would otherwise be tied up.

2. Optimizing Payment Terms

   Another key lever for working capital optimization is extending payment terms. This improves liquidity by allowing companies to make payments later while still receiving timely payments from their customers. Supply Chain Finance (SCF) solutions play a crucial role here, enabling both manufacturers and suppliers to take advantage of extended payment terms of 60 days or more.

3. Reducing Financial Debt

   Optimizing working capital can reduce the need for external financing. Companies become less dependent on loans, strengthening their financial stability and reducing interest costs. Moreover, balance sheet management is improved, as liabilities to credit institutions are reduced.

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Best Practices: Supply Chain Finance as a Strategic Solution

More and more companies in the automotive industry are relying on Supply Chain Finance (SCF) to meet the urgent need for working capital optimization. An especially effective method is utilizing SCF solutions, where companies pay their suppliers on time but are not charged themselves until later.

SCF solutions allow companies to pay their suppliers promptly while benefiting from extended payment terms themselves. However, many solutions have weaknesses. They often require the time-consuming involvement of suppliers, with whom payment terms must be renegotiated in lengthy discussions. Additionally, platform-based solutions need to be integrated into the company’s ERP system, which can also be cumbersome.

One solution that is unique in this area is cflox pay. It offers the advantage of not involving suppliers in the process at all. As a result, lengthy renegotiations of payment terms are completely avoided. Moreover, cflox pay requires no IT integration. Instead, the simple setup of a new payment account is enough to benefit from extended payment terms.

By using cflox pay, manufacturers and suppliers can secure liquidity without financially burdening their suppliers or disrupting their existing production processes. This flexibility enables companies to maintain financial stability while responding to supply chain disruptions and rising costs.

Conclusion: Resilience Through Optimized Working Capital

The automotive industry faces significant challenges that require efficient working capital optimization. Complex supply chains, high inventories, and long production cycles strain the liquidity of companies. By utilizing modern SCF solutions like cflox pay, automakers can flexibly manage payment terms and improve liquidity without burdening supplier relationships or requiring additional procurement negotiations. Strategic working capital optimization strengthens not only financial stability but also enhances competitiveness in an increasingly demanding global market.

About cflox

cflox is an international payment institution that combines payment transactions with working capital and financing to create unique solutions. With a focus on supply chain finance, cflox offers its customers the optimization of payment terms and cash flow without the involvement of suppliers.

For more information visit cfloxpay.com

Press contact

Leonie Bauer

Content & Communications Manager

cflox GmbH

Gaußstraße 190c

22765 Hamburg

l.bauer@cflox.com