Negative Default Dependencies: Do Automotive Suppliers Benefit from Their Competitors' Default?

Summary

Given the criticality of the supplier network and the increasing number of supplier defaults [3], automotive OEMs are well advised to actively manage their supplier networks, consider supply risks [9], and avoid negative and exploit positive consequences of supplier defaults. We aim to extend the research on supplier defaults along two dimensions: First, with a few exceptions [1, 10], previous studies have focused on the default consequences of individual suppliers [2]. However, since suppliers do not operate in isolation, their financial situation is often interlinked. We argue that default dependence (also default correlation) exists in supplier networks and that OEMs should manage the entire network as a group and consider interdependencies among suppliers. Second, all studies that have considered default dependencies have exclusively modeled positive dependence, i.e., they have assumed that, given two suppliers 1 and 2, the default of supplier 2 is positively related to the default of supplier 1. In contrast, we model negative default dependence (i.e. scenarios where supplier 2 benefits from the default of supplier 1).