Tempers are running high in Europe’s automotive industry. So high, in fact, that VDA, Germany’s automotive industry association, has had to intervene to try to broker peace between manufacturers and suppliers.
At the end of June, the association updated a code of conduct that for 20 years had governed best practice in supplier-carmaker relationships. The move, first reported in Germany’s Handelsblatt last week, followed months of growing tension over how to spread the soaring costs of materials and energy.
It seems many carmakers are less inclined to share the financial burden of a volatile environment with suppliers who may not be as relevant in the coming electric revolution as in the past.
“Tensions today are really, really high,” one industry executive told me under condition of anonymity. “There used to be an understanding that . . . the whole system was as strong as the weakest link. There was more solidarity and partnership.”
Some suppliers have had enough, and are refusing to renew inflexible contracts. Speaking to Handelsblatt, the chair of filter specialist Mann+Hummel, Thomas Fischer, said it was “quite normal” to terminate contracts where “both sides can no longer laugh”.
Times have been tough for everyone in the automotive sector. Covid-19 was the catalyst for a semiconductor shortage that hit global car production. Many companies adapted by prioritising higher-margin, premium models. This in turn hit a supply chain accustomed to providing high volumes of components to many customers.
Where once suppliers boasted higher margins, the situation has reversed, according to AlixPartners’ Global Automotive Outlook published last week. Carmakers delivered almost 13 per cent average operating margins in 2021, against less than 11 per cent for suppliers.
Suppliers are now furious that carmakers refuse to share the bounty of booming profits.
Because as suppliers struggle with soaring costs, they are bracing for a rough transition to electric vehicles. AlixPartners estimates traditional suppliers will be able to claim just 28 per cent of the value of the electric powertrain in the future, the system that drives the car forward and is by far the most valuable element of an EV. The rest will be taken by new entrants or the carmakers. Some estimates suggest about 500,000 jobs are at risk.
There is nothing new about tensions between manufacturer and supplier. But supplier anxiety is heightened by signs that carmakers want a greater share of the EV value chain, bringing more systems, manufacturing and software design under their control.
“From raw material procurement to battery recycling, we want to keep everything in our hands,” said Volkswagen chair Herbert Diess recently. “We are increasingly sourcing in, not out.” Ford’s chief executive Jim Farley in March said he intended to control battery supply chains “all the way back to the mines”.
The world’s big carmakers understandably want to exploit opportunities offered by technological change to secure competitiveness and create new revenue streams. They also have to reshape supply chains for the EV world.
But the strategy comes with risk. Mining, battery production and software are not carmakers’ traditional skill sets. Nor has vertical integration been problem-free for Tesla.
It also seems unwise in the longer term to turn a blind eye to the struggles of current suppliers. Not everything will change in an EV. Even the absence of a relatively innocuous component can hold up production.
More importantly, EV production will have to accelerate dramatically, as conventional car sales will be banned in Europe from 2035. This can be done only if the traditional price-focused relationship with suppliers changes — and not just with big companies, but those further down the chain. Carmakers will have to give suppliers more visibility over production and technology plans — and security over orders — if they are to invest the sums needed to succeed.
Better transition planning right down the supply chain could help to save 40 to 60 per cent of the estimated $70bn restructuring costs, according to AlixPartners’ Global Automotive Outlook.
Inevitably many companies will not find a place in the new EV world. But there are those whose value lies not just in the components they produce, but in the industrial competences developed over many years. It would be a pity not to value that expertise in the rush to realise electric dreams.
peggy.hollinger@ft.com
Source: Economy - ft.com
