European car manufacturers and their suppliers, who are already under pressure, will have a challenging year ahead as they try to reduce expenses in order to compete with Chinese competitors that are offering more affordable electric vehicles on their own territory.

One major concern is the extent to which European car manufacturers can continue to demand more from suppliers who have already begun cutting their workforce, while numerous smaller companies struggle due to supply chain disruptions caused by the pandemic.

Europe’s traditional car companies and China’s electric vehicle-centric manufacturers will be easily distinguishable at this week’s Geneva car exhibition. The show is back after a four-year break caused by the pandemic.

The primary businesses hosting media events are Renault from France and SAIC Motors and BYD Company from China. These are just a few of the automakers from China looking to expand into the European market.

Renault is introducing their new R5 electric vehicle, while SAIC’s MG brand plans to reveal their M3 hybrid. At the same time, BYD’s Seal sedan is being considered for the Car of the Year honor. If selected, it would be the first Chinese model to receive this esteemed 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.

European car manufacturers rely on outside suppliers for both traditional and electric parts, whereas Chinese competitors have a more integrated approach, manufacturing most components themselves to maintain affordability.

This allows them to effectively outcompete their European counterparts. In the UK, BYD’s Dolphin electric hatchback begins at 25,490 pounds ($32,300), which is approximately 27% lower than Volkswagen’s comparable ID.3 model. Tesla follows a similar approach.

According to Parker from AlixPartners, European car companies may face significant challenges in maintaining their profit margins if they continue to compete with their rivals. This is due to the limitations in how much they can rely on external suppliers for cost-cutting measures.

The task has become more challenging due to a delay in the transition to electric vehicles, causing conventional automakers to be constrained by their two separate supply chains. Recent data revealed a 42.3% decrease in fully-electric car sales in the EU for January compared to December.

In recent updates, Renault and Stellantis have emphasized their efforts to reduce costs for electric vehicles. However, Mercedes has lowered its expectations for demand for EVs and plans to continue updating its traditional lineup through the next decade.

Stellantis Chief Executive Officer Carlos Tavares has taken it a step further, expressing to suppliers that since 85% of electric vehicle costs are associated with purchased materials, they must also share the responsibility of decreasing costs.

He stated that he is conveying that truth to his teammates: If you fail to fulfill your responsibilities, you are choosing to exclude yourself.

The prices of nickel and aluminum have increased this week due to Western nations adding Moscow to their sanctions lists. This brings attention to the ongoing risks for commodities prices, despite there being no specific mention of these two metals.

Job cuts

Several established suppliers have already begun to experience the impact of budget reductions through layoffs, with FORVIA, Continental, and Bosch all recently making announcements or issuing warnings, and more expected to follow suit.

During the recent shortage of semi-conductors, car manufacturers prioritized producing higher-priced models in order to maintain their profits. While this strategy was effective in preserving their earnings, it also resulted in reduced revenue and potential disadvantages for their suppliers.

According to industry professionals, larger suppliers with strong financial resources are able to adjust to the current situation. However, there is concern for smaller suppliers who may be struggling, such as Allgaier in Germany which declared bankruptcy in July.

Europe’s car manufacturers are in a tough situation where they must manage costs in order to remain competitive against Chinese competitors, while also ensuring their suppliers do not suffer. According to Philip Nothard of Cox Automotive, automakers may need to intervene and offer support to suppliers who are struggling.

He expressed concern that if European car manufacturers aggressively bargain with suppliers, it could potentially lead to bankruptcy or prompt them to look for business opportunities elsewhere.