Responding to The China Threat

SITUATION REPORT 6/27/2024

By: John McElroy

Legacy OEMs deeply worried how they will compete with Chinese OEMs who have 30% lower costs. Drastic, uncomfortable decisions lie ahead.

Carlos Tavares set the bar: sell China-made cars from Leapmotor in global markets. If tariffs block the way, build Leapmotor cars in Stellantis plants around in the world. Tell existing suppliers to cut prices 30%, or else. Avoid sourcing parts directly from China, to protect against geopolitical disruptions (Taiwan invasion), and source as much as possible from “best-cost” countries: Morocco, Turkey, Algeria, Egypt, South Africa. Look for Chinese suppliers to locate in these countries.

All legacy OEMs must react to what Tavares is doing. They can’t cede a 30% cost advantage to Stella.

But this threatens legacy players, their employees, and the communities they operate in. Invites labor/political/public backlash.

How can legacy OEMs and suppliers respond?

Critical to cut cost ASAP, with software defined cars and components. Simulation is key: iterate quickly to best design; eliminate as many prototypes as possible (zero prototypes?); integrate as many parts as possible.

Innovation through first principles approach—not just with vehicle, components or manufacturing, but also with corporate organizational structure. Legacy organizational structure simply can’t move fast enough.

Collaboration needed between OEM and Tiers to get max parts consolidation. OEMs need to use system design, not collection of best parts. Early supplier involvement critical, which will dictate sourcing decisions before design starts. But that’s not enough. Also need collaboration between Tiers who are part of a module/system to achieve max parts consolidation. But that’s not enough either. Need collaboration between OEMs to achieve across-the-board parts consolidation and max manufacturing volume in areas invisible to end customer.

No more time to study the problem. Action needed now!