Cost cuts, China in the spotlight

DETROIT – Since spearheading a merger to create stellantis In 2021, CEO Carlos Tavares has been on a mission to reduce costs. This is starting to pay dividends for the company and investors.

This week's focus is expected to be on how the transatlantic automaker hopes to maintain that momentum amid uncertainty surrounding all-electric vehicles and growing competition from Chinese automakers, as Tavares leads investor day from the automaker on Thursday.

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

When Tavares' PSA Groupe merged with Fiat Chrysler in January 2021, the newly combined company aimed to reduce spending by 5 billion euros, or about $5.4 billion, a year. It's a goal the company says it will reach in 2024, a year ahead of schedule.

More recently, Tavares has said that the parent of brands such as Ram and Jeep needs to eliminate 40% of its costs in order to profitably produce and sell electric vehicles to mass-market consumers, citing the need for affordable models despite the higher vehicle manufacturing costs. .

“We are not in the race to transition to electric vehicles, but in a race to reduce the costs of electric vehicles,” Tavares said in late May during a Bernstein investor conference.

The cuts are part of Stellantis' strategic plan to increase profits and double revenues to €300 billion by 2030. The plan also includes goals such as achieving an adjusted operating profit of more than 12% and free cash flow industrial sector of more than 20,000 million euros.

Cost-saving measures have included reshaping the company's supply chain and operations, as well as staff reductions.

Several Stellantis executives described the cuts to CNBC as difficult but effective. Others, who spoke on condition of anonymity because of possible repercussions, described them as exhausting to the point of being excessive.

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

Meanwhile, the associated billions in operating savings have helped increase the automaker's adjusted operating income by 31% from 2021 to last year. Its adjusted profit margin also increased, rising 0.4 percentage points over that period to 12.8%.

Stellantis Chief Technology Officer Ned Curic said the company is operating much more efficiently than before, including “proper systems engineering” to ensure optimization of the design and function of its new vehicles.

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

“We've been cutting staff, but we don't really need that many,” he said during an interview last month, adding that the company still employs about 50,000 engineers. “Designing the systems for our 10-year roadmap is already done.”

When Tavares was asked last month if additional cuts would be needed in the United States, he 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 engine, or ICE, vehicles.

“There is no miracle solution here. We have to throw away 40% of the additional cost because the middle class in the United States, as well as the middle class in Europe, needs to buy electric vehicles at the price of internal combustion engine vehicles,” he said during a press conference. round table in May. “This is no surprise. You can check my reviews for the last five years. I've been running the same thing for five years.”

Future cost-saving efforts could be part of the company's Thursday capital markets day.

On Thursday, executives will outline developments in Stellantis' regions and businesses, including its operating and capital disciplines, according to Stellantis Chief Financial Officer Natalie Knight.

“We want to help you better understand how we see the industry evolving, how we are leveraging outstanding technology, our leading operational discipline and other competitive advantages that further distinguish us,” he told investors in April. “And how we are building a powerful and productive capital discipline that helps us maintain and maximize sustainable returns.”

Stellantis declined to disclose details ahead of the event, which will take place at its North American headquarters in Auburn Hills, Michigan.

Wall Street will look for executives to address the company's growing vehicle inventory levels in the United States, upcoming product launches and plans for China.

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

Meanwhile, the threat of cheaper electric vehicles made in China looms in the background.

Tavares has called Chinese automakers his “number one competitor” and said the company is adopting a “light-handed” strategy. That includes plans to rapidly increase the country's vehicle exports through a joint venture controlled by Stellantis with China's Leapmotor.

“The reaction of the share price to the [capital markets day] It will likely depend on how these concerns are addressed in the short term. We do not expect new financial targets to be announced,” UBS analyst Patrick Hummel wrote in a note to investors on Thursday.

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

Stellantis' U.S.-listed shares are down more than 6% this year and about 30% from an all-time high of more than $29.50 per share in March. In contrast, GM stock is up more than 30% this year and Ford stock is essentially flat.

RBC Capital Markets analyst Tom Narayan notes that Stellantis, which has a market capitalization of about $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 said in a note last week that largely muted expectations raise the potential for Stellantis to beat expectations.

—CNBC Michael Bloom contributed to this report.