Suppliers cut thousands of jobs in face of unprecedented disruption
Across Europe in 2023, job losses in the sector have outnumbered jobs created
Industry looks to cope with disruption from electrification as car makers move parts creation in-house
The European automotive supplier industry, for so long an engine of global innovation, is having to shed jobs and reshape its business to cope with disruption from electrification and the desire for car makers to make more parts in-house.
The most recent job cuts come from Germany’s Bosch and Continental, globally two of the biggest automotive suppliers. Bosch said it will cut 1500 positions by 2025 at two German sites, one of which makes high-pressure pumps and components for exhaust treatment.
Meanwhile, Continental has announced thousands of job losses as it looks to make “significant” cost cuts totalling $400 million (£344m) annually in its automotive division, again by 2025.
Across the European automotive supplier industry, job losses have outnumbered jobs created over the quarter to the end of September, automotive supplier association Clepa said in a recent report. In fact, since 2019, the supplier industry in Europe has shed 96,870 jobs while creating only 53,850 new positions.
Also indicating generational shifts in the industry was the move in October by German supplier Schaeffler – a key engine part manufacturer - to merge with more EV-focused parts maker Vitesco by buying out its shares. About 40% of Schaeffler sales are related to the combustion engine, banking firm UBS wrote in a note, meaning the company is effectively reducing its exposure to a dwindling technology.
European suppliers have been hit hard recently after a period when they essentially became indispensable to car makers. Back in 2007, car manufacturers accounted for two-thirds of all automotive research and development spend, with suppliers making up the other third. By 2020, that ratio had been reversed, with suppliers outspending car makers on new technology by two-thirds to a third.
But then came Covid and the subsequent disruption to the supply chain that left car makers unable to fulfil pent-up demand for their products because of a shortage of mainly semiconductors. While car makers were able to push up prices to compensate and subsequently racked up record profits, the reduced production volumes badly hit suppliers, who didn’t have the same pricing levers available.
That’s now getting better as supply returns to normal. Last year, a Clepa survey indicated that 76% of all European suppliers were recording profits below the point where they could sustain long-term investment. That figure in the same survey in 2023 is now down to half of suppliers canvassed, with almost one in five posting profit margins of over 10%.
However, while some form of production normality has returned, there are “darker clouds on the horizon” for the supply industry, according to a recent report from UBS.
The bank analysed teardowns of what it sees as key electric models – including the BYD Seal from China, the Tesla Model 3 and the Volkswagen ID 3 – to draw conclusions about the future for global parts suppliers, and they didn’t look good.
The report showed that while legacy OEMs like Volkswagen are still highly dependent on their traditional supplier relationships, newcomers like BYD and Tesla aren’t nearly so much.
For example, 89% of the value of a German-built VW ID3 comes from outside suppliers, UBS concluded, compared with just 35% for the BYD Seal. BYD, even more so than Tesla, is striving to not just build the car, but also more of the parts that go into it. UBS identifies the battery, powertrain and electronics as areas where BYD specialises, all parts that are crucial to both cost-cutting and technological advancement. “Mostly standard components that do not make a difference to the vehicle's cost and integration are outsourced,” UBS concluded.
This mindset is common to newer car companies, either Tesla or the Chinese, which is bad news for traditional suppliers.
However, as more legacy car companies look to track the successful strategies of the likes of Tesla and BYD to cut costs in the expensive shift to electrification, they too are looking to in-source more parts that might otherwise have gone to suppliers.
JLR, for example, will assemble electric drive units (electric motor, inverter and transmission) at its Wolverhampton engine facility. “We've been in the situation where we've been dependent on a supply base for overall transmissions and that's come with some advantages and quite often some disadvantages,” Richard Molyneux, JLR (formerly Jaguar Land Rover) chief financial officer, told journalists during the company’s most recent financial results call. “This switch around in the industry does give us the chance to look at where we play in the value chain.”
Ford is another trying to do more in-house, with CEO Jim Farley citing batteries, inverters, drive units and gearboxes, and castings as areas of focus. “On our next-generation utility vehicles, vertical integration will increase by nearly 50%,” Farley said on the company’s third-quarter results call. “This level of integration… will allow us to significantly reduce material cost.”
One advantage to the car maker is that in-sourcing replaces jobs lost in combustion engine assembly, which was one part they had generally kept in-house.
Some parts are always likely to be bought in, given that a supplier can generate economies of scale by making almost the same component for multiple car makers.
However, the willingness of the likes of Tesla to break the traditional OEM-tier one supplier relationship and with the Chinese busy establishing their own supply base, the likes of Bosch, Continental, ZF Friedrichshafen and Magna are seeing the value of their long-time relationships shrink.
“Most legacy suppliers generate less than 10% of their current sales with the fastest-growing car makers,” the UBS report pointed out. As Tesla and the Chinese grow, this will become a bigger problem. Back in 2000, legacy car makers controlled 97% of the world’s production. In 2022, that had fallen to 82%, UBS figures show.
Big global suppliers are trying to increase their exposure to Chinese companies but also many others are pulling away. In the Clepa survey, 71% of suppliers who responded said they were “actively working to reduce their dependence on the Chinese market”, while only 29% were looking to expand there.
Those that are doing business with the Chinese are having to be cautious amid a volatile market. "There are probably too many players still in China,” Forvia chief financial officer Olivier Durand told analysts on the company’s third-quarter earnings call, “We are quite focused on diversification because you are not sure about which ones will win.” China represented 23% of Forvia’s sales in the third quarter of 2023, the company said,
The shift to EVs is causing a problem for those who are still heavily exposed to combustion engine supply. However, as more pivot to electric, they’re finding competition is much tougher as more companies aim for the same space. The Schaeffler-Vitesco deal was the “first signal of concentration within EV-exposed suppliers”, UBS said. “We have long argued that there are too many players in this field and consolidation is required to improve the long-term profitability potential of the related parts,” UBS analyst David Lesne said.
The competition is pushing down prices. That’s good for car makers and their customers, but less good for suppliers. Electric drive units, or e-drives, are particularly cut-throat. “We could grow the e-drive business significantly because we have the capability, but the profitability in the e-drive market is non-existent today,” Liam Butterworth, CEO of GKN Automotive parent company Dowlais, told Autocar back in May. GKN’s customers for e-drives include Fiat for the electric 500. GKN's main driveshaft business is mostly agnostic to the electrification shift.
The main focus right now for suppliers is winning contracts to supply parts for platforms with high volume and growth potential. And they need to keep spending on research and development to create the technology that helps car makers deliver long-range, lightweight, efficient and reduced-cost electric cars. Then they have to supply that tech to a timescale that matches that of the Chinese. And all the while cutting their own costs while doing it. The pressure has never been greater.