European automakers lowered their forecasts due to supply difficulties

Since the middle of the 20th century, German cars have earned a reputation for quality, performance and reliability. But almost all new technological developments are focused on the internal combustion engine. Most European automakers expect to phase out production of vehicles with internal combustion engines over the next decade.

Recently, German automaker Volkswagen announced a $700 million investment in Chinese electric car maker Xpeng to jointly develop electric vehicles in China to boost sales in the world’s largest market. Under the agreement, the deal will give Volkswagen about a 4.99 percent stake in Xpeng, as well as an observer seat on Xpeng’s board of directors. Some analysts see this as a sign that Volkswagen is trying to reverse the ongoing decline in its car sales in China’s electric car market.
At the same time, most European automakers are lowering their forecasts due to lower demand in Asia and increasing total operating costs due to supply chain challenges and rising operating expenses.
One of the key challenges facing European automakers is the steady supply of chipsets. The impact of the coronavirus pandemic on the semiconductor industry and its supply chain has forced many factories to close due to the lack of chipsets for basic automotive functions. This has cost automotive companies billions of dollars in lost revenue, prompting them to build better supply systems by partnering with different semiconductor companies such as Intel, NXP, Infineon, and TSMC.

In addition, automakers are currently looking elsewhere for alternatives. TSMC, the largest chipset maker, is increasing its presence in the U.S. and Europe and announced a new plant in Dresden, Germany, with an initial investment of $3.8 billion, which will grow to more than $10 billion with government support.
Europe’s efforts to boost its local chip industry also reflect Europe’s desire to reduce its dependence on imports of Chinese technology. Last month, Germany released its first strategic policy paper on China, saying it would reduce the economy’s economic dependence on China and technology dependence by increasing government support for high-tech and strategic industries.
In addition, many European automakers, including Volkswagen, BMW, and Mercedes-Benz, are building and investing in new battery production facilities in different countries. Unfortunately for them, China is a major source of some materials and raw materials for making lithium-ion batteries for electric vehicles.
Most European automakers expect to phase out production of vehicles with internal combustion engines over the next decade.
Impact on German automakers
Recently, China began restricting sales of some processed materials, including critical minerals, to European manufacturers. Without these materials and components, automakers’ electrification roadmaps face an uncertain future.
In addition to sourcing materials and components for factories, German automakers are also facing increased costs due to rising electricity costs and the Russian-Ukrainian conflict.
The procurement of raw materials has become more difficult, and transportation routes have changed, adding additional costs. In addition, materials such as steel, which previously came from Ukraine, are now difficult to predict their production and availability.
In addition, most German automakers have factories in countries such as Poland, Slovakia, Hungary, Turkey, India and China. All of these factories are under intense pressure because of the conflict in their immediate vicinity and the potential for Western sanctions.
For most German automakers and other manufacturing companies, the consequences of these plants not being able to operate are unthinkable. In addition, most of their suppliers source most of their components in these countries and operate factories in these countries. Decoupling from the East’s supply chains can take years and be costly.
China is the largest producer and exporter of automobiles
Recently, BYD (BYD), China’s largest electric vehicle and bus manufacturer, submitted a $1 billion investment proposal to work with a local Indian company to produce electric vehicles and batteries in India, which is currently the world’s third-largest market. The long-term plan is to create a full range of BYD brand electric vehicles, from hatchbacks to luxury models.
Because China has a controlled supply chain for the materials needed to make EV batteries, Chinese companies have gained a huge advantage over Western automakers, at least for the foreseeable future.
In addition, the market share of Japanese leading automobile companies in China has also been replaced by Chinese local brands, because the growth rate of the electric vehicle market of local Chinese brands is greatly ahead.
Last month, Mitsubishi Motors suspended production at its joint venture in China due to sluggish sales. Mazda sold about half of its vehicle sales in China last year as much as the same period a year ago. Nissan expects to sell 800,000 vehicles in China in the year to March, 330,000 fewer than it predicted about three months ago.
In addition, China is the world’s largest supplier of electric buses, with sales of 138,000 units in 2022. These buses require more than ten times the battery capacity of electric vehicles. By 2025, the number of pure electric buses in China will increase to more than 600,000. As Chinese electric bus manufacturers continue to grab materials and production capacity, this will have a significant impact on the electric bus battery market.
European automakers need to become more competitive
Since the middle of the 20th century, German cars have earned a reputation for quality, performance and reliability. But almost all new technological developments are focused on the internal combustion engine.
As a result, automakers such as Volkswagen, Audi, BMW, and Mercedes-Benz are currently engaged in an “arms race” to develop technologies for the full electrification of their vehicles. This puts them in direct competition with companies such as Tesla and Chinese suppliers such as NIO and BYD Auto, which have developed advanced electric vehicles and software.
In addition, the Asian market is transitioning to electric vehicles at a much faster pace than the US and European markets (except Norway), which greatly affects the demand for internal combustion engine vehicles.
To compete in this fast-growing market, German and other European automakers must invest heavily in EV technology, including batteries and software. In addition, they must upgrade factories and supply chains, and most importantly, facilitate collaboration within the industry, develop new products and share knowledge.