Nick Carey
LONDON (Reuters) – European automakers and their already stretched suppliers face a difficult year as they seek to cut costs on electric models to fend off smaller Chinese rivals that offer cheaper cars to challenge them on their home turf.
The big question is how much more European automakers can squeeze out of suppliers who have already begun laying off workers, with many smaller companies hit hard by supply chain problems during the pandemic.
The difference between traditional European automakers and the more electric-vehicle-focused Chinese automakers will be on full display this week at the Geneva motor show, which returns after a four-year hiatus due to the pandemic.
The only major companies holding media events are French companies. Renault (EPA:) and China’s SAIC and BYD (SZ:) are two of a number of country automakers that have set their sights on Europe.
Renault will launch the electric R5, while MG SAIC will introduce the M3 hybrid. Meanwhile, BYD’s Seal sedan has been shortlisted for the Car of the Year award. If it wins, it will be the first Chinese model to receive the prestigious award.
“They really are like chalk and cheese,” Nick Parker, partner and managing director at consultancy AlixPartners, said of the legacy European automakers and their Chinese rivals.
Unlike European automakers, which rely on external suppliers with separate supply chains for fossil fuels and electricity, their Chinese competitors are highly vertically integrated, producing almost everything in-house and keeping costs down.
This helps them undermine their European rivals. In the UK, BYD’s Dolphin electric hatchback costs from £25,490 ($32,300), which is around 27% less than the equivalent ID.3 model from Volkswagen (ETR:). Tesla (NASDAQ:) works the same way.
Chasing these rivals means European automakers’ profitability could be “severely compromised” going forward as they can squeeze very little out of outside suppliers, AlixPartners’ Parker said.
The task has been made more difficult by a slower-than-expected shift to electric vehicles, leaving legacy automakers stuck in their dual supply chains. Data this week showed EU sales of all-electric cars fell 42.3% in January compared with December.
Both Renault and Stellantis (NYSE:) this month emphasized their efforts to cut costs on electric vehicles, while Mercedes toned down expectations for EV demand and said it would refresh its traditional lineup in the next decade.
Stellantis CEO Carlos Tavares went further, telling suppliers that since 85% of EV costs are tied to purchased materials, they will have to bear a proportionate burden of cost reductions.
“I convey this reality to my partners: If you don’t do your part, you exclude yourself,” he said.
Nickel and aluminum prices also rose this week as Western countries expanded sanctions lists against Moscow, highlighting ongoing risks to commodity prices, although the two metals were not mentioned.
REDUCTION OF WORK
Many legacy suppliers are already feeling the strain of cost cutting: Forvia, Continental and Bosch have recently announced or warned of cuts, and more are expected.
To maintain their profits, automakers focused production on higher-margin models during the recent semiconductor shortage, but that meant less revenue and less growth potential for their suppliers.
Now industry experts say large, well-capitalized suppliers can adapt to the new reality, but warn that many smaller companies are teetering on the brink, such as Germany’s Allgaier, which filed for bankruptcy in July.
That means European automakers face a delicate balancing act between cutting costs to fend off Chinese rivals and avoiding putting too much pressure on their suppliers. Philip Nothard, director of analytics at dealership Cox Automotive, says automakers may even have to step in to bail out struggling suppliers.
“The risk is that if (European automakers) try to blame these suppliers too much, they will either push them into administration or force them to look for other markets,” he said.
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