Auto File - Supply chain déjà vu

Nov 25 - By Nick Carey, European Autos Correspondent

Greetings from London!

Happy almost-Thanksgiving to those on the other side of the pond, especially those in my former home, Detroit. Hopefully, you will have time to digest this before you tuck into your turkeys.

Sometimes, small parts of stories grab your attention. Like this one about plans by Taiwan’s Foxconn to spend up to $3 billion annually on AI.

What interested me was Chairman Young Liu’s comments about China’s EV sector, where he expects a shakeout “soon.” Depending on who you ask, China’s crowded market has north of 150 automakers, all fighting for survival amid a brutal price war that has been running for three years.

As Liu says: "They're not making money," adding that China’s car industry will be “much more stable” after a period of consolidation.

There’s probably a turkey-and-stuffing metaphor there somewhere.

Which brings us to today’s Auto File…

• More of the same supply chain problems

• Musk’s old pay package comes at a cost

• Magna’s European EV gig

Carmakers' familiar supply snags

After a semiconductor chip shortage slammed global car production during the coronavirus pandemic – further aggravated by a Japanese factory fire - the auto sector said, “that’s it, this time we’re really, really going to strengthen our supply chains so this doesn’t happen again”.

I am paraphrasing, of course. But going all the way back to the earthquake in Japan in 2011 that threatened global output, carmakers have promised every time there is a supply chain snafu that this time will be different.

But guess what? The crisis that engulfed Dutch chipmaker Nexperia's plant in Dongguan last month has exposed a blind spot. The sector never foresaw low-tech chips would become a lever for China against the West.

You can read more about it here.

From that Dongguan factory, Nexperia ships semiconductors used in everything from car brakes to electric windows. They sell for fractions of a penny each, yet the shortage forced Nissan and Honda to cut production and drove German supplier Bosch to curtail working hours.

The lesson for automakers is that China's dominance reaches beyond cutting-edge technology and rare earths to mundane-yet-critical components and how Beijing wields that power.

But as one consultant told Reuters, the auto industry will talk a lot about supply chain diversification and then “realize how expensive it is”.

Recommended reading:

• Europe’s car sales up, Tesla’s down

• Thailand shifts gears on EV policy

• China makes nice with Germany

Musk’s profit-eating pay package

Reams have been written about Tesla CEO Elon Musk’s recently approved $1 trillion pay package.

But as Reuters colleague Chris Kirkham reports, Musk’s 2018 pay package could eat the EV maker’s profits for years.

You can read more here.

The Delaware Supreme Court will soon decide whether to reverse a lower court ruling invalidating Musk's 2018 package. If Tesla’s appeal fails, it could trigger a $26 billion hit to profits over two years to account for the replacement stock-compensation package it has promised Musk – at today’s much higher stock price.

For comparison, $26 billion would equal more than half of Tesla’s total net income since becoming profitable in 2019.

Even if Tesla prevails in court, its profits could be squeezed over the next decade if Musk hits performance goals in his trillion-dollar pay package, with each goal triggering billions in payouts and accounting expenses.

Magna goes electric

Magna looks to be setting itself up as a contract manufacturer for EV makers – in particular Chinese ones who want to avoid EU tariffs on their electric cars and not have to build a costly European factory.

As well as making cars for EV maker Xpeng, as Reuters colleague Nora Eckert reports, Magna will now also produce EVs for Chinese automaker GAC at a plant in Austria. You can read more about it here.

It is an asset light strategy that enables Chinese EV makers to get tariff-free production to market in Europe much faster and more cheaply than if they tried to build their own factory.

Expect more of this as a growing number of Chinese automakers set their sights on European expansion.

Russia’s gloomy car market

Once seen as one of Europe's most promising markets, with potential sales of up to 4 million cars a year, Russia has been battered by the exit of Western manufacturers after the invasion of Ukraine in 2022, years of high interest rates and a poor economy.

As Reuters colleague Gleb Stolyarov reports, more pain looms for car buyers. You can read more about it here.

From December 1, Russia will sharply raise the recycling fee - a protectionist measure to support domestic producers such as Avtovaz - for powerful and expensive cars, mainly imported by individuals for personal use. From January 1, the fee for all cars will rise by about 10% in line with inflation.

A poor car market in Russia is about to get worse, with sales in January and February expected to be down 5% to 10%.

Fast Laps

A U.S. bankruptcy judge ordered an independent investigation into auto parts maker First Brands to probe allegations of fraud involving the company's use of third-party financing for customer invoices.

Renault will produce two new cars in Brazil in the second half of 2026, using the vehicle base of Chinese partner Geely , as it further expands in a high-growth market.

Chinese EV maker Nio’s compact car brand Firefly is seeking growth in tariff-free, right-hand drive markets and is preparing to ramp up deliveries to those destinations next year.

Ford maintained its annual pretax profit guidance of $6 billion to $6.5 billion for 2025 following another fire this week at aluminium supplier Novelis' New York plant.

Germany’s Volkswagen plans to export cars developed and made in China to more overseas markets as it looks to leverage its growing knowhow to compete with Chinese rivals abroad.

Saudi Arabia’s government is exploring setting up car production, with world No. 4 automaker Stellantis and Saudi auto products and services conglomerate Petromin Corporation.

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