Europe carmakers put the squeeze on suppliers

Europe’s carmakers and their already stretched suppliers face a tough year as they race to cut costs for electric vehicle (EV) models to counter leaner Chinese rivals which are bringing cheaper vehicles to challenge them on their home turf.

A big question is how much more Europe’s carmakers can squeeze out of suppliers that have already started laying off workers, with many smaller firms hard hit by supply chain issues during the pandemic.

The difference between Europe’s legacy carmakers and more EV-focused Chinese manufacturers will be on stark display this week at the Geneva car show, which is back after a fouryear hiatus due to Covid-19.

The only major companies holding media events are France’s Renault, and SAIC and BYD — two of a number of China’s carmakers that have set their sights on Europe.

Renault is launching its electric R5 and SAIC’s MG brand will unveil its M3 hybrid. BYD’s Seal sedan is shortlisted for the car of the year award. If it wins, it would be the first Chinese model to get the prestigious award.

“They really are like chalk and cheese,” Nick Parker, a partner and MD at consulting firm AlixPartners, said of the legacy European carmakers and their Chinese rivals.

Unlike European carmakers that rely on external suppliers with separate supply chains for fossil-fuel and electric, their Chinese rivals are highly vertically integrated, producing almost everything in-house and keeping costs down.

That helps them undercut their European rivals. In Britain, BYD’s electric Dolphin hatchback starts at £25,490, about 27% less than Volkswagen’s equivalent ID.3 model. Tesla works in the same way.

Chasing those rivals means European carmakers’ profit margins could be “heavily challenged” because there is only so much they can squeeze out of external suppliers, Parker said.

The challenge has been made more difficult by a slower-thanexpected shift to EVs, leaving legacy carmakers stuck with their dual supply chains. Data last week showed EU fully electric car sales in January fell 42.3% from December.

Both Renault and Stellantis have stressed their EV costcutting efforts this month while Mercedes toned down expectations for EV demand and said it will update its traditional line-up well into the next decade.

Stellantis CEO Carlos Tavares has gone further, telling suppliers that with 85% of EV costs related to purchased materials, they need to bear a proportionate burden in reducing costs.

“I am translating that reality to my partners: if you don’t do your part of the job, then you exclude yourself,” he said.

Nickel and aluminium prices rose last week as Western countries expanded sanctions lists against Moscow, highlighting the lingering risks to raw materials prices even though there was no mention of the two metals.

Many legacy suppliers are already feeling the strain of cost cuts with Forvia, Continental and Bosch all recently announcing or warning of layoffs, with more expected.

To preserve their profits, carmakers focused production on higher-margin models during the recent semiconductor shortage, but that meant less revenue and less upside for suppliers.

Now industry experts say well-capitalised larger suppliers can adapt to the new reality but warn that plenty of smaller ones are teetering on the edge, such as Germany’s Allgaier, which filed for insolvency in July.

That means Europe’s carmakers face a delicate balancing act between cutting costs to fend off Chinese rivals and avoiding pushing their suppliers too far. Philip Nothard, insight director at dealer services firm Cox Automotive, said carmakers may even have to step in to bail out struggling suppliers.

“The risk is if [European carmakers] try and screw those suppliers down too much, they’ll either push them into administration or they’ll push them into seeking different markets, ” he said.

UNLIKE EUROPEAN CARMAKERS RELIANT ON EXTERNAL, SEPARATE SUPPLY CHAINS, CHINESE RIVALS ARE HIGHLY VERTICALLY INTEGRATED