Facing Chinese EV rivals, Europe's automakers squeeze suppliers on costs

By Nick Carey

LONDON (Reuters) -Europe's automakers and their already-stretched suppliers face a tough year as they race to cut costs for electric 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 automakers can squeeze out of suppliers that have already started laying off workers, with many smaller companies hard hit by supply chain issues during the pandemic.

The difference between Europe's legacy automakers and more EV-focused Chinese manufacturers will be on stark display this week at the Geneva car show, which is returning after a four-year hiatus due to the pandemic.

The only major companies holding media events are France's Renault, and China's SAIC and BYD - two of a number of the country's automakers that have set their sights on Europe.

Renault is launching its electric R5 and SAIC's MG brand will unveil its M3 hybrid. Meanwhile, 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 managing director at consulting firm AlixPartners, said of the legacy European automakers and their Chinese rivals.

Unlike European automakers that are reliant 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 pounds ($32,300), about 27% less than Volkswagen's equivalent ID.3 model. Tesla works in the same way.

Chasing those rivals means European automakers' profit margins could be "heavily challenged" moving forward because there is only so much they can squeeze out of external suppliers, AlixPartners' Parker said.

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

Both Renault and Stellantis have stressed their EV cost-cutting efforts this month while Mercedes toned down expectations for EV demand and said it will update its traditional lineup 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 have also risen this 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.

JOB CUTS

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, automakers focused production on higher-margin models during the recent semi-conductor shortage, but that meant less revenue and less upside for their 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, like Germany's Allgaier which filed for insolvency in July.

That means Europe's automakers 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, says automakers may even have to step in to bailout struggling 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 said.

($1 = 0.7878 pounds)

(Reporting By Nick Carey; Editing by Kirsten Donovan)