Tesla is continuing its cost-cutting efforts and pushing rivals to reduce prices and cut costs, which puts pressure on suppliers.
Tesla reduced the prices across its entire lineup this month, with some reductions as large as 20%. We’ve already alerted you about the growing impact of these price cuts on the global automotive market, in general, and now we have details about how Tesla’s changes are putting pressure on automotive suppliers.
Some folks are reporting that Tesla has started a price war. However, thus far, only a few other brands have followed the US EV maker’s lead to significantly reduce prices. When a rival like Ford reduces the price of its EVs to better compete with Tesla, it likely means increased sales, which means production must also increase.
Thanks to many upgrades to its existing factories in 2022, as well as two new factories, Tesla is in a position where it can ramp up production to meet sales. Even though it has reduced its prices and demand is reportedly surging, delivery times are still not far off. After recently lowering the price of its Mustang Mach-E electric crossover to better compete with the Tesla Model Y, Ford announced that it will ramp up Mach-E production from 78,000 units a year to 130,000 a year.
As reported by Teslarati, during Tesla’s recent Q4 2022 earnings call, company executives noted that the company will be working to cut costs from every angle. It’s expected that as Tesla reduces costs, demand soars, and it sells many more cars, it will likely turn to suppliers as one way to reduce costs.
A lawyer for automotive suppliers, Dan Sharkey, who’s also a co-founder of Brooks Wilkins Sharkey & Turco explained that suppliers are already struggling, so Tesla’s price cuts, and those of other brands following suit, are going to bring more tough times to suppliers. He shared:
“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.”
“My message is, there’s not going to be any room there. Many suppliers are financially struggling.”
An unnamed Tesla supplier recently shared that the US EV maker was focused more on its deliveries than its prices or costs during the COVID-19 pandemic. This suggests Tesla would pay high-dollar prices for some parts if it meant it could get them more quickly and produce and deliver more cars.
Tesla also enjoyed exceptional margins during the last few years. However, as some suppliers get locked in on pricing, they may not have seen such success, and now brands like Tesla are hoping to cut costs further going forward. Interestingly, Teslarati mentions a Michigan-based supplier that considers Tesla its largest account, and while the EV producer prospered, the supplier filed for bankruptcy.
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There is some hope for suppliers, however. Even though Tesla and some of its peers may push for lower prices, volume is expected to increase notably. With the lower prices across the EV segment, demand is rising, and brands are selling more cars. As suppliers may have to settle for price cuts, they could make up for it in volume.