Suppliers to Tesla Inc. (TSLA.O) are preparing for heat from Elon Musk and his crew to further reduce their costs after the electric car pioneer aggressively reduced vehicle prices in a sluggish economy, according to industry insiders who work with the manufacturer and its suppliers.
The comments made by Tesla Chief Financial Officer Zach Kirkhorn the previous month that the automaker was tackling every other area of costs, including the supply chain, and would engage closely with suppliers, were interpreted as foreboding by the suppliers. Musk suggested that a recession may result in significant drops in almost all of Tesla’s input prices during the company’s earnings phone conference last week.
When automakers lower vehicle pricing, it is never good for suppliers because the tension mounts, according to Dan Sharkey, a lawyer who represents providers to Tesla and other automakers.
The co-founder and brains behind Brooks Wilkins Sharkey & Turco remarked that there won’t be any space there. Many vendors are having financial difficulties.
Due to confidentiality agreements, the majority of Tesla’s suppliers, including battery manufacturers Panasonic (6752.T), LG Energy Solution (373220.KS), or CATL (300750.SZ), inclusive of Italian casting machine manufacturer IDRA Group, refrain from discussing the automaker in public.
After dramatically lowering vehicle pricing last month, Tesla is now attempting to slash costs. This has prompted Tesla’s American rival Ford Motor Co (F.N) to do the same. Tesla’s profitability, which is the highest in the sector, is in danger of declining as a result.
The pressure put on suppliers as a result to lower their prices is not new, but an executive at a Tesla source who asked not to be named claimed that during the COVID-19 outbreak, the EV leader had prioritised delivery over affordability and was even willing to pay more to receive parts faster.
He is concerned that could change in light of remarks made on the earnings conference call from last month.
Further information regarding Tesla’s suppliers was requested, but Tesla did not react right away.
While suppliers were unable to fully pass through greater costs and saw their margins decline, unlike Tesla and other automakers, which benefited from higher vehicle pricing and strong profitability during the pandemic.
In the third quarter of 2022, automakers’ profit margins were roughly 3 percentage points greater than those of suppliers.
More price reductions would hurt in a market where some suppliers are now having trouble, according to industry insiders.
For instance, the statement by Steven Wybo, the chief restructuring officer of a Michigan-based manufacturer of the well-selling acoustic bodies and headliners for car ceilings—Gissing North America, that had Tesla as one of its biggest clients, said it filed bankruptcy last year in part as a result of high labour costs and commodity prices.
There are some things that might get easier, but since labour costs are a part of everything’s pricing, it’s unlikely that they will ever get easier, according to him.
The supplier’s lawyer, Sharkey, issued a warning that none of the suppliers are non-profit organisations. If they don’t make any money, they will be in serious financial trouble.
Industry insiders believed Musk would try to convince suppliers that any possible losses they might incur from lower prices will be compensated by higher volume.
Nevertheless, some vendors are raising their pricing as a result of rising material costs.
NXP Semiconductors (NXPI.O) announced on Tuesday that it is raising the prices it charges clients due to rising input costs. Although NXP has not publicly acknowledged that it is a supplier to Tesla, analysts claim that the disassembly of a Tesla vehicle confirms this.
In all honesty, the automakers aren’t really pushing back much, NXP CEO Kurt Sievers revealed on Tuesday.
An ex-Tesla executive said that the company might force suppliers to decrease costs through “shared” improvements or by coercing them into giving up some of their profit.
The executive, who requested anonymity, said Tesla will now follow the same practices as every other automaker has done for years.
Industry insiders caution that Tesla will encounter opposition.
To lower prices, they will face a lot of resistance from suppliers, according to Laurie Harbour, an industry analyst who works with suppliers.