Stellantis has 5 years to absorb 40% EV cost hike, avoid job cuts, CEO says

Breana Noble
The Detroit News

The maker of Jeep and Ram has five years to absorb the roughly 40% increase in costs that electrified vehicles represent before Stellantis NV could face restructuring and job cuts, CEO Carlos Tavares said Wednesday.

Tavares and experts have held that not every automaker will be able to make the historic transformation to electric vehicles under pressure from government regulations in a competitive marketplace. It requires billions of dollars in capital investment and new talent: Stellantis said earlier this month it will spend about $35.5 billion by 2025 on electrification.

Stellantis NV CEO Carlos Tavares, sitting in front of a three-row Jeep Grand Cherokee L at the company's proving grounds in Chelsea, tells the Automotive Press Association that the company has five years to make up for the 40% in additional expenses electrified vehicles represent.

That comes after the transatlantic automaker's formation in January from the merger of Fiat Chrysler Automobiles NV and French rival Groupe PSA, a tie-up Tavares previously has called a "shield" to job cuts. The new company has the scale and resources hopefully needed to achieve the cost savings required in this transition, Tavares said.

"We have the opportunity to come to Stellantis with a significant amount of synergies, which is the best engine to generate the productivity that we need to compensate for the 40% of additional costs coming from electrification," Tavares said from the company's proving grounds in Chelsea during an Automotive Press Association webinar.

"We are lucky, and we are blessed that we are creating Stellantis at this precise moment where we are facing this challenge.

"Keeping our two companies in a standalone position was extremely risky given the challenges that were ahead of us. This is exactly the reason we created Stellantis."

He added that the company is looking to refurbish plants making engines and transmissions for EV parts. For example, it plans to transform an engine plant in Termoli, Italy, to make EV batteries.

Tavares didn't provide a figure for where the automaker stands on achieving the $5.9 billion in annual cost savings it projected from the merger. He, however, did say the company is ahead of its plans and could perhaps increase its expected cost savings in 2022.

"We are moving very fast," Tavares said. "We are blessed we have a bottom-up flow from our teams who are proposing to us many more ideas than the cross-company teams who took care of the merger were able to imagine."

Of course, Stellantis has to produce vehicles to meet those goals or at least prioritize its most profitable SUVs and trucks. That's become a challenge amid the global semiconductor shortage resulting from the COVID-19 pandemic that recently has paused production of Ram 1500s in Sterling Heights and Jeep Grand Cherokees in Detroit.

"I think the semiconductor crisis from everything I can see, and I cannot see everything, it is going to drive into 2022 easy," Tavares said. "The visibility is not great, and we are not bullish on this."

The company is working on the changeability of the microchips used in consumer electronics, including vehicles' infotainment, driver assistance features, heated seats and more. Newer generations often have greater capacity, but this process can take 18 months to re-engineer, Tavares said.

The supply constraint has lowered inventory levels at dealers across the country and around the world. Average transaction prices in June were above $42,000, according to Kelley Blue Book.

Tavares says he also is watching inflation, which he sees on a daily basis on raw materials and other prices. Economists tell him that inflation is not yet structural and affecting the greater economy. Tavares says it is important to protect the middle class's ability to purchase new vehicles, including EVs.

"The supplier base and OEMs have a huge challenge to generate the productivity that will compensate, not only with the volume scale effect, but the current excess of cost for the purpose of protecting the middle class in new car sales," he said. "If we don’t protect that, then we have a big problem in size of the customer base, and we have problem with the size of companies, and we have a big problem of jobs. That is what we are trying to avoid."

Order books at this point are not a problem following more than a year of the COVID-19 pandemic, though, Tavares noted: "People understand the value of being free to move. People are buying cars like hell."

In Europe, brands like Peugeot have to achieve cost parity between their EVs and internal combustion engine vehicles, but that is with the help of government subsidies supporting EV sales. Those won't last forever, said Sam Abuelsamid, e-mobility analyst for market research firm Guidehouse Inc.

"Beyond 2025, the volumes start to grow, especially if in Europe they move forward with banning ICEs," he said. "You're going to have to sell so many EVs in that time frame. If you haven’t gotten your cost down to parity, margins are going to shrink dramatically."

During his remarks, Tavares also teased a number of new partnership and strategic announcements expected to come before the end of the year. That includes its partner in manufacturing EV batteries in the United States and possibly Canada. In China, it also has signed a deal with an unnamed partner to manufacture vehicles. Stellantis on Tuesday also validated an investment for solid state batteries, which it says will come to market in 2026, with an unnamed supplier.

"We see the maturity of the technology," Tavares said of solid-state batteries that are expected to be able to charge faster and offer longer ranges. "We are just now looking at what part of the lithium battery manufacturing equipment that could be reused for solid state. We don’t have an answer yet. That is what we are going to focus on."

Twitter: @BreanaCNoble