Tesla started a price war last month, and as the company works to keep its costs as optimized as possible, some of its suppliers are preparing to experience some pressure. The concerns were related by industry officials who work with Tesla and its suppliers.
Comments from executives during the fourth quarter and full-year 2022 earnings call suggest that Tesla is currently focused on its costs. Tesla Chief Financial Officer Zach Kirkhorn, for one, noted that the company was “attacking every area of cost,” and CEO Elon Musk noted that a recession, if one does happen, could lead to “meaningful decreases in almost all of our input costs.”
Dan Sharkey, a co-founder of Brooks Wilkins Sharkey & Turco and a lawyer who represents automotive suppliers, noted that aggressive price cuts are never really good news for suppliers. “It is never good for suppliers when (automakers) cut vehicle prices because that pressure rolls downhill. I never like it, because I know eventually they’re going to try to get it out of one of us,” Sharkey said.
“My message is, there’s not going to be any room there. Many suppliers are financially struggling,” he added.
While major Tesla suppliers such as Panasonic, LG Energy Solution, CATL, and IDRA, are typically cautious about statements concerning their relationship with the electric vehicle maker, a Tesla supplier who opted to remain anonymous informed the publication that the company focused more on delivery over pricing during the pandemic.
This meant that Tesla was willing to pay a premium to acquire parts at a faster pace. Following the Q4 and FY 2022 earnings call, the Tesla supplier is reportedly worried that this trend will change. Tesla, for its part, has not issued a statement about the matter as of writing.
Carmakers such as Tesla saw notable margins during the pandemic. But while this was the case, some suppliers reportedly were not able to fully pass along their higher costs, resulting in lower margins. Bain, a consultancy firm, estimated that in Q3 2022, the profit margins of automakers were almost 3% higher than suppliers. With this in mind, suppliers would likely experience even more pressure as carmakers like Tesla lower their prices.
Some Tesla suppliers are already experiencing a lot of headwinds. Gissing North America, a Michigan-based company that produces acoustic systems and headliners for car ceilings, counted Tesla as its largest customer. Yet last year, the company filed for bankruptcy due to high commodity prices and labor costs. Steven Wybo, chief restructuring officer, noted that he does not really see things getting easier anytime soon.
“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,” Wybo said.
Industry officials, for their part, have noted that Tesla might aim to reassure its suppliers by highlighting that the potential losses from lower prices will be more than made up for in higher volumes of orders. This would definitely be beneficial for Tesla and its suppliers, especially considering the electric vehicle maker’s efforts to ramp to 20 million vehicles per year by the end of the decade.
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