Tesla Suppliers Are Bracing For Musk’s Demand For Givebacks As The EV Maker Activates EV Price War

Tesla Inc suppliers are gearing up for more price cuts from Chief Executive Elon Musk and his team after the electric car maker cut down on prices of its vehicles aggressively in a slowing economy, according to industry officials who work with the automaker and its suppliers.

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, were interpreted as ominous by the suppliers. During Tesla’s earnings call last week, Musk stated that a recession could result in “significant decreases” in almost all of 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.”

Due to confidentiality agreements, most Tesla suppliers, including battery makers Panasonic, LG Energy Solution, and CATL, as well as Italian casting machine maker IDRA Group, avoid discussing the carmaker publicly.

Tesla’s cost-cutting efforts come after the company aggressively reduced vehicle prices last month, prompting rival Ford Motor Co to do the same. This has the potential to erode Tesla’s profit margins, which are among the highest in the industry.

While the resulting price pressure on suppliers 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 prioritized delivery over pricing and was willing to pay even more to get parts faster. He is concerned that comments made during last month’s earnings conference call indicate that this may change.

There were no comments on the issue available from Tesla.

During the pandemic, while Tesla and other automakers enjoyed higher vehicle prices and strong margins, suppliers were unable to fully pass along higher costs, and their margins fell, according to a Bain study. In the third quarter of last year, automakers’ profit margins were nearly three percentage points higher than suppliers’.

More price cuts could be painful in an industry where some suppliers are already struggling, according to industry officials.

Gissing North America, for example, filed for bankruptcy last year, owing in part to high labor costs and commodity pricing, according to Steven Wybo, chief restructuring officer of the Michigan-based manufacturer 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’s attorney, issued the following warning: “These are not all charitable organizations. They need to make money, and if they don’t, they’ll be in financial trouble.”

According to industry sources, Musk may try to reassure suppliers that any potential losses from lower pricing will be offset by increased volume.

Nonetheless, some suppliers are raising their prices due to rising material costs.

NXP Semiconductors announced that it is raising its prices to customers, citing higher input costs. NXP has not disclosed that it is a Tesla supplier, but analysts claim that a teardown of Tesla vehicles confirms this.

“Honestly, we don’t have a lot of pushback from the car companies,” NXP CEO Kurt Sievers told Reuters on Tuesday.

According to Reuters, Tesla could negotiate cost reductions with suppliers through “shared” efficiencies or simply twisting their arms and taking some of their profit.

“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 opposition, according to industry experts.

“They will get a lot of pushback from suppliers to cut costs,” said industry consultant Laurie Harbour, who works with suppliers.

(Adapted from Latestly.com)


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