Cost reductions, China is put in focus

DETROIT – From the beginning of a union to create Stellantis in 2021, CEO Carlos Tavares has been on a cost-cutting mission. This is starting to pay dividends for the company and investors.

How the transatlantic automaker expects to maintain that momentum amid uncertainty surrounding all-electric vehicles and growing competition from Chinese automakers is expected to be in focus this week as Tavares chairs the automaker’s investor day on Thursday.

Tavares and other executives are expected to address Chinese competition, capital discipline, future products, software initiatives and potentially further cost reductions as the company aims to achieve ambitious financial targets by 2030.

When Tavares’ PSA Groupe merged with Fiat Chrysler in January 2021, the newly combined company decided to cut costs by 5 billion euros, or about $5.4 billion, a year. It’s a target the company says it will achieve in 2024, a year ahead of schedule.

Recently, Tavares has said that the parent company of brands like Ram and Jeep needs to shed 40% of its costs to be able to profitably produce and sell electric vehicles to mass-market consumers, citing the need for models of affordable despite higher vehicle manufacturing costs. .

“We’re not in a race to transition to EVs, but in a race to lower the cost of EVs,” Tavares said in late May during an investor conference at Bernstein.

The cuts are part of Stellantis’ strategic plan to boost profits and double revenues to 300 billion euros by 2030. The plan also includes targets such as achieving adjusted operating profit of more than 12% and free cash flow of industrial money of more than 20 billion euros.

Cost-saving measures have included reshaping the company’s supply chain and operations, as well as reducing the number of employees.

Several Stellantis executives described the cuts to CNBC as tough but effective. Others, who spoke on condition of anonymity because of the potential consequences, described them as exhausting to the point of excess.

Since the merger was agreed to in December 2019, Stellantis has reduced its workforce by 15.5%, or roughly 47,500 employees, through 2023, according to public filings. Additional job cuts this year involving thousands of factory workers in the US and Italy have drawn the ire of unions in both countries.

Meanwhile, the tied-up billions in operational savings have helped boost the automaker’s adjusted operating income by 31% from 2021 to last year. Its adjusted profit margin is also on the rise, rising 0.4 percentage points over that time period to 12.8%.

Stellantis Chief Technology Officer Ned Curic said the company is operating much more efficiently than before, including “proper system engineering” to ensure design and operation are optimized for its new vehicles.

Curic, who joined the company from Amazon in 2021, said the headcount reductions, including the layoff of about 400 U.S. engineers in March, come as the company wraps up many of its systems for the next decade.

“We’ve cut headcount, but we really don’t need that many,” he said in an interview last month, adding that the company still employs about 50,000 engineers. “To engineer the systems for our 10-year road map, it’s already been done.”

Tavares, asked last month if additional cuts would be needed in the U.S., said “we’ll see.” He said officials “still have work to do” when it comes to making electric vehicles as profitable as traditional internal combustion, or ICE, cars.

“There’s no silver bullet here. You have to throw in 40% of the extra cost because the middle class in the US as much as the middle class in Europe, they have to buy EVs at the price of ICE,” he said during a media briefing. round table in May. “That’s no surprise. You can check my reviews for the last five years. I’ve been running the same stuff for five years.”

Future cost-saving efforts may be part of the company’s stock market Thursday.

Executives on Thursday will outline developments across Stellantis’ regions and businesses, including its capital and operational disciplines, according to Stellantis CFO Natalie Knight.

“We want to help you better understand how we see the industry evolving, how we are leveraging outstanding technology, our core operational discipline and other competitive advantages that further differentiate us,” she told investors in April. “And how we’re building a robust and productive capital discipline that helps us preserve and maximize sustainable returns.”

Stellantis declined to reveal any specifics ahead of the event, which is taking place at its North American headquarters in Auburn Hills, Michigan.

Wall Street will be looking for executives to address the company’s growing U.S. vehicle inventory levels, upcoming product launches and plans for China.

In early May, Cox Automotive reported that daily supply of vehicles in Stellantis’ Jeep and Ram brands was more than double the industry average of 76 days.

Meanwhile, the threat of cheaper, Chinese-made electric vehicles looms large in the background.

Tavares has called the Chinese automaker his “No. 1 competitor” and said the company is taking an “asset-light” strategy. This includes plans to rapidly increase vehicle exports from the country through a joint venture controlled by Stellantis with China’s Leapmotor.

“The stock price reaction to [capital markets day] likely to be driven by how these short-term concerns are handled. We do not expect any new financial targets to be announced,” UBS analyst Patrick Hummel wrote in an investor note on Thursday.

Hummel and other analysts have noted a divergence in the performance of Stellantis stock compared to that of General Motors AND Ford Motor.

Shares of U.S.-traded Stellantis are down more than 6% this year and about 30% from an all-time high of more than $29.50 a share in March. By contrast, GM shares are up more than 30% this year, and Ford shares are essentially flat.

RBC Capital Markets analyst Tom Narayan notes that Stellantis, which has a market cap of roughly $68 billion, should return €7.7 billion to shareholders in 2024 – €4.7 billion in dividends and €3 billion in buybacks.

Redburn Atlantis analyst Adrian Yanoshik last week said in a note that largely muted expectations raise the potential for Stellantis to beat expectations.

– CNBC Michael Bloom contributed to this report.