In order to compete with its leaner Chinese rivals who are releasing cheaper vehicles to compete with them on their home ground, Europe’s automakers and their already overworked suppliers are in for a challenging year as they scramble to reduce costs for electric models.

How much more Europe’s automakers can extract from suppliers who have already begun to lay off employees is a major question, as many smaller businesses have been severely impacted by supply chain problems during the pandemic.

This week, the Geneva auto show—which is returning this week after a four-year break due to the pandemic—will include a striking demonstration of the differences between Europe’s legacy automakers and more EV-focused Chinese manufacturers.

The only significant corporations hosting press conferences are China’s SAIC and BYD and

France’s Renault, two of several European-focused automakers.

SAIC’s MG brand will present its M3 hybrid, while Renault will introduce its all-electric R5. In the meantime, the Seal sedan from BYD has made it to the Car of the Year shortlist. Should it triumph, it would be the inaugural Chinese model to get the esteemed accolade.

About the established European automakers and their Chinese competitors, Nick Parker, a partner and managing director at consulting firm AlixPartners, remarked, “They really are like chalk and cheese.”

European automakers rely on outside suppliers and maintain distinct supply chains for their fossil fuel and electric vehicles, whereas their Chinese competitors are largely vertically integrated, producing nearly all of their products internally and maintaining low costs.

They can undercut their competition in Europe thanks to this. The starting price of BYD’s electric Dolphin hatchback in the UK is 25,490 pounds ($32,300), which is almost 27% less than the ID.3 model from Volkswagen. Tesla operates similarly.

European automakers’ profit margins may be “heavily challenged” going future as a result of chasing those competitors because there is only so much that they can get from outside suppliers, according to Parker of AlixPartners.

A slower-than-anticipated transition to electric vehicles has compounded the dilemma, leaving legacy automakers with two supply networks. This week’s data revealed a 42.3% decline in EU fully electric car sales in January compared to December.

This month, Mercedes lowered estimates for EV demand and announced that it will refresh its conventional portfolio well into the next ten years. Renault and Stellantis, on the other hand, emphasised their efforts to reduce the cost of EVs.

Going one step further, Carlos Tavares, CEO of Stellantis, has informed suppliers that they must contribute a commensurate amount towards cost reduction, as purchased materials account for 85% of EV expenses.

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

Pricing for nickel and aluminium have also increased this week as Western nations have added more sanctions against Moscow, underscoring the ongoing threats to the pricing of raw commodities even if the two metals were not specifically mentioned.

The impact of cost reductions is already being felt by many legacy suppliers; Forvia, Continental, and Bosch have all recently announced or warned of layoffs, and more are anticipated.
During the recent shortage of semi-conductors, automakers concentrated production on higher-margin models to protect their profits, but this resulted in lower revenue and less upside for their suppliers.

Experts in the field now state that well-capitalized larger suppliers can adjust to the new situation, but they also caution against ignoring the fact that many smaller suppliers, such as Germany’s Allgaier, which declared bankruptcy in July, are at risk.

Therefore, in order to compete with China, European automakers must strike a careful balance between keeping costs down and not overstretching their suppliers. Automotive dealer services company Cox Automotive’s Philip Nothard, director of insight, thinks automakers would even need to intervene to save their faltering suppliers.

“The risk is if (European automakers) 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 stated.

(Adapted from MillenniumPost.com)

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