Automakers are facing the biggest threat in history. At a time when their margins are falling

You can also listen to the interview in the audio version.

The latest news from the domestic car industry sounds more than optimistic – car production has grown by 28 percent year-on-year this year. The current optimism is also confirmed by Petr Novák, director of the JTEKT Europe automotive division in the Inside Talks program.

According to him, more than 1.3 million cars could be produced in the Czech Republic this year, i.e. only 80-100 thousand less than in the “last normal year” 2019. “It looks positive. The manufacturers are sending us their recalls for the next months and those are high numbers. Of course, no one can say with certainty that there won’t be another crisis, a lack of materials or an unforeseen event at one of the suppliers that will stop the entire supply chain,” adds Novák.

However, the profitability of car companies is no longer looking positive. According to an international study by the consulting company EY, worldwide sales of the largest car companies increased by 19% this year, but EBIT grew by only 6%. And the pressure on lower margins of final producers also applies to the Czech Republic. This year, cars are produced more expensively than last year – not only do manufacturers have high production costs and wages for their people, prices from suppliers are also higher this year.

“A lot of final producers have so far managed to delay the price increase. But now the suppliers have to raise their prices. They have no other option – they are in losses,” Novák explains, adding that while people in the Czech Republic believe that inflation will slowly disappear, car companies are currently facing it in full. “The inflationary spiral is catching up with us. The suppliers are bleeding and therefore there are huge pressures between them and the final manufacturers,” adds the expert. And he adds that the amount of the margin will depend on how much the car prices increase – and that depends on the customers. But due to the high prices, new cars are bought – even more often than before – by companies in particular. Individual customers have lost interest.

If the price does not rise, the profitability of cars will logically go down. At the same time, it has recently risen to record levels. “The market will decide, but what we’ve seen in recent years – the record profitability, the double-digit numbers, that might not be the case in the future,” adds Novák.

While in the past the margins of final producers were around five percent, in recent years profitability has jumped into double digits. “There was indeed a big increase in profitability, but we are talking about the final products. On the contrary, some suppliers are now even on the edge of profitability, positive zero or in the red. It is necessary for the scales to become more balanced,” adds Novák, adding that car companies are already looking for ways to preserve margins. One way may be to sell cars directly – without a service network.

However, the ramp-up of full-throttle production also brings problems for suppliers – there is a lack of people. “We ourselves are now facing a period when we have to switch from three-shift operations to non-stop modes. The same is the case with our suppliers. After the covid period, many suppliers reduced shifts and suddenly they have to solve how to produce the required volume as quickly as possible,” adds Novák.

The automotive industry also seems to have banished the biggest current threat – EURO 7. “Eight countries believe and are lobbying for this standard to be changed and there are several modifications. One is the postponement of this standard, then there are also the technical parameters.

But while European automakers are exhausting themselves with the fight against covid, parts shortages, the energy crisis and European laws, giant competition is growing for them in China. According to the latest figures, China has become the largest car manufacturer in the world and is increasingly establishing itself on the old continent as well.

According to a recent analysis by Allianz, within a few years, affordable Chinese cars could take seven billion euros (163.5 billion crowns) from the European market annually. And specifically, Chinese competition could deprive the Czech economy of 0.4 percent of the gross domestic product.

“It’s definitely a huge threat. Everyone in the car industry takes this very seriously. We have to say that China was very visionary in seeing the huge potential in electromobility. Various government programs were signed up there, and today they are able to produce a high-quality car at a lower price. For us, this is clearly the number one threat at the moment,” says Novák, adding that at the moment it is a matter of moving the production of Chinese companies to Europe, which would facilitate expansion.

“If we look back, it was the same with Japanese cars. First they were imported and then they established themselves by creating their own factories here and starting to produce in Europe,” adds Novák and says that there are already initial indications that Chinese investments should come soon.

“I still believe in the European car industry. But Chinese automakers have a huge advantage in the supply chain. Forty percent of the car’s value is the battery, and the world’s two largest manufacturers are from China. Another factor that speaks to them is digitization. When we look at the cars that they are able to offer, we have to admit that they are really very far away,” adds Novák, adding that the labor force is significantly cheaper in the communist superpower.

According to Novák, Europe should defend itself against Chinese brands. “Turkey has introduced a 40 percent tax on car imports from China. Whether to follow this path as the EU is being discussed. Today, however, Chinese cars imported into Europe are entitled to European incentives. I think that Europe lacks what the USA did, for example, which supported its industry,” adds Novák and suggests that the solution would be to remove incentives and impose tariffs on the import of cars from China.