((Automated translation by Reuters, please see disclaimer https://bit.ly/rtrsauto)) by Nick Carey
European automakers and their already stretched suppliers face a tough year as they scramble to cut costs on electric models to counter more frugal Chinese rivals who offer cheaper vehicles to challenge them on their own territory.
The big question is how much more European automakers can get from suppliers who have already started laying off workers, with many small businesses hit hard by supply chain problems during the pandemic.
The difference between traditional European automakers and China’s more electric-vehicle-focused manufacturers will be highlighted 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 France’s Renault RENA.PA and China’s SAIC 600104.SS and BYD 002594.SZ , two of the country’s many automakers that have set their sights on Europe.
Renault is launching its electric R5 and SAIC’s MG brand will unveil its hybrid M3. In addition, BYD’s Seal sedan is in the running for the Car of the Year award. If she wins, she will be the first Chinese model to receive this prestigious award.
Nick Parker, partner and managing director at consultancy AlixPartners, said of Europe’s legacy automakers and their Chinese rivals: “They really are like chalk and cheese.”
Unlike European manufacturers who rely on external suppliers and have separate supply chains for fossil fuel and electric vehicles, their Chinese rivals are highly vertically integrated and produce almost everything in-house, allowing them to maintain their costs at a low level.
This allows them to be cheaper than their European rivals. In Britain, BYD’s Dolphin electric hatchback starts at 25,490 pounds ($32,300), about 27 percent less than Volkswagen’s equivalent ID.3 model VOWG_p.DE . You’re here
TSLA.O works the same way.
The pursuit of these rivals means that European carmakers’ profit margins could be “heavily challenged” in the future as there is a limit to how much they can extract from external suppliers, Mr Parker said. ‘AlixPartners.
The challenge has been made more difficult by a slower-than-expected shift to EVs, leaving traditional automakers stuck with their dual supply chains. Data this week showed that sales of fully electric cars in the EU in January fell 42.3% compared to December.
Renault and Stellantis both emphasized their EV cost-cutting efforts this month, while Mercedes MBGn.DE lowered its expectations for EV demand and said it would will maintain its traditional range for a good part of the next decade.
Stellantis chief executive Carlos Tavares went further, telling suppliers that because 85% of EV costs are tied to purchased materials, they must bear a proportionate share of the cost reduction.
“I convey this reality to my partners: If you don’t do your part of the work, you are excluding yourself,” he said.
Nickel and aluminum prices also rose this week as Western countries expanded the list of sanctions against Moscow, highlighting continued risks to commodity prices even though those two metals were not mentioned .
JOB REDUCTIONS
Many incumbent suppliers are already feeling the pressure of cost cuts: Forvia FRVIA.PA, Continental CONG.DE and Bosch have all recently announced or warned of layoffs, and more are expected.
To preserve profits, automakers focused production on higher-margin models during the recent semiconductor shortage, but that translated into lower revenues and reduced profitability for their suppliers.
Today, industry experts say large, well-capitalized suppliers can adapt to the new reality, but warn that many smaller suppliers are on the brink, such as Germany’s Allgaier, which filed for bankruptcy in July .
That means European carmakers face a delicate balancing act between cutting costs to combat Chinese rivals and not pushing their suppliers too far. Philip Nothard, director of foresight at dealer services company Cox Automotive, believes automakers may even have to step in to bail out struggling suppliers.
“The risk is that if (European automakers) try to shake up these suppliers too much, they will either push them into administration or look for other markets,” he said.
($1 = 0.7878 pounds)