Faced with Chinese electric vehicle rivals, European automakers are squeezing costs on suppliers. By Reuters

By Nick Carey

LONDON (Reuters) – Already stretched European carmakers and their suppliers face a tough year as they race to cut costs of electric models to counter leaner Chinese rivals who are bringing in cheaper vehicles to challenge them in home.

A big question is how much more European automakers can squeeze from suppliers that have already started 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 manufacturers will be on display this week at the Geneva auto show, which returns after a four-year hiatus due to the pandemic.

The only large companies that organize media events are the French ones Renault (EPA:), and China’s SAIC and BYD (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. Meanwhile, BYD’s Seal sedan has been shortlisted for the Car of the Year award. If he won, he would be the first Chinese model to win the prestigious award.

“They really are like chalk and cheese,” Nick Parker, partner and managing director at consultancy AlixPartners, said of traditional European automakers and their Chinese rivals.

Unlike European automakers that rely on external suppliers with separate supply chains for fossil fuels and electricity, their Chinese rivals are highly vertically integrated, producing almost everything in-house and keeping costs low.

This helps them dwarf their European rivals. In Britain, BYD’s Dolphin electric sedan starts at £25,490 ($32,300), around 27% less than Volkswagen’s equivalent ID.3 model (ETR:). Tesla (NASDAQ:) works the same way.

Chasing these rivals means European automakers’ profit margins could be “heavily challenged” in the future because they cannot squeeze much out of external suppliers, AlixPartners’ Parker said.

The challenge has been made more difficult by a slower-than-expected shift to electric vehicles, which has left legacy automakers stuck in their dual supply chains. Data this week showed that sales of all-electric cars in the EU in January fell by 42.3% compared to December.

Both Renault and Stellantis (NYSE:) highlighted their EV cost-cutting efforts this month, while Mercedes tempered expectations for EV demand and said it will refresh its mainstream lineup over the next decade.

Stellantis CEO Carlos Tavares went further, telling suppliers that because 85% of EV costs relate to purchased materials, they bear a commensurate burden in reducing costs.

“I’m translating this reality to my partners: If you don’t do your share of the work, then you exclude yourself,” he said.

Nickel and aluminum prices also rose this week as Western countries expanded their list of sanctions against Moscow, highlighting lingering risks to commodity prices even as there was no mention of the two metals.

JOB CUTS

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

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

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

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

“The risk is that if (European carmakers) tried to screw these suppliers too much, it would put them into administration or push them to look for different markets,” he said.

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