As Tesla ignites an EV price war, suppliers brace for Musk seeking
givebacks
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[February 02, 2023] By
Hyunjoo Jin
SAN FRANCISCO (Reuters) -Tesla Inc suppliers are bracing for pressure
from Chief Executive Elon Musk and his team to cut their prices further
after the electric car leader aggressively slashed vehicle prices in a
slowing economy, industry officials who work with the automaker and its
suppliers said.
The suppliers saw as ominous last month's comments by Tesla Chief
Financial Officer Zach Kirkhorn that the carmaker was "attacking every
other area of cost" including the supply chain, and would work closely
with suppliers. During Tesla's earnings conference call last week, Musk
said a recession could lead to "meaningful decreases" in almost all its
input costs.
"It is never good for suppliers when (automakers) cut vehicle prices
because that pressure rolls downhill," said Dan Sharkey, an attorney who
represents suppliers to Tesla and other automakers. "I never like it,
because I know eventually they're going to try to get it out of one of
us."
"My message is, there's not going to be any room there," added the
co-founder of Brooks Wilkins Sharkey & Turco. "Many suppliers are
financially struggling."
In China, Tesla's second-largest market, the automaker has also pressed
suppliers to lower costs, according to two people with knowledge of the
matter who asked not to be named because the discussions were private.
In a meeting with one supplier in mid-January, for example, Tesla
floated a target of cutting costs by 10% because of intensifying
competition, one of the people said.
Tesla did not immediately respond to a request for comment.
Most Tesla suppliers, which include battery makers Panasonic, LG Energy
Solution and CATL, as well as Italian casting machine maker IDRA Group,
avoid discussing the carmaker publicly due to confidentiality
agreements.
Tesla's cost-reduction efforts come after it aggressively cut vehicle
prices last month, prompting U.S. rival Ford Motor Co to follow suit.
That threatens to erode Tesla's profit margins, which are the largest in
the industry.
While the resulting pressure on suppliers to cut their prices is not
new, one executive at a Tesla supplier who asked not to be identified
said the EV leader during the COVID-19 pandemic had focused more on
delivery over pricing and was willing to even pay more to get parts
faster. He worries the comments on last month's earnings conference call
signal that may change.
'SUPPLIERS ARE NOT CHARITIES'
While Tesla and other automakers enjoyed higher vehicle prices and
strong margins during the pandemic, suppliers were not able to fully
pass along higher costs and their margins fell, according to a study by
consultancy Bain. Automakers' profit margins were nearly 3 percentage
points higher than suppliers in the third quarter of last year.
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A Tesla vehicle is charged at a Tesla
supercharging station in Kettleman City, California, U.S., January
25, 2023. REUTERS/Mike Blake
More price cuts could be painful in a sector where some suppliers
are already struggling, industry officials said.
For example, Gissing North America, which had counted Tesla as its
biggest customer, filed for bankruptcy last year, partly due to high
labor costs and commodity pricing, said Steven Wybo, chief
restructuring officer of the Michigan-based maker of acoustic
systems and headliners for car ceilings.
"There's certain things that I think will ease, but there's this
labor component that's built in to the price of everything, and I
don't see that easing any time soon and potentially never," he said.
Sharkey, the supplier attorney, warned: "All of these suppliers are
not charities. They need to make money and if they lose money, then
they're in financial distress."
Musk may seek to reassure suppliers that any potential losses they
suffer in lower pricing will be made up in higher volume, industry
officials said.
Nevertheless, some suppliers are increasing prices due to material
cost inflation.
NXP Semiconductors said on Tuesday it is increasing the prices it
charges customers, citing higher input costs of their own. NXP has
not disclosed it is a Tesla supplier, but analysts said a teardown
of Tesla vehicles shows that to be the case.
"Honestly, we don't have a lot of pushback from the car companies,"
NXP CEO Kurt Sievers told Reuters on Tuesday.
Tesla could negotiate cost reductions with suppliers through
"shared" efficiencies or by simply twisting the suppliers' arms and
taking some of their profit away, a former Tesla executive told
Reuters.
"Tesla will now be doing what every other (automaker) has been doing
for decades," said the executive, who asked not to be identified.
Tesla will face resistance, industry officials warn.
"They will get a lot of pushback from suppliers to cut costs," said
industry consultant Laurie Harbour, who works with suppliers.
(Reporting by Hyunjoo Jin in San Francisco,Additional reporting by
Stephen Nellis IN San Francisco, Jane Lanhee Lee in Oakland,
California and Zhang Yan in ShanghaiEditing by Ben Klayman and
Matthew Lewis)
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