The Costs Associated with EVs Could Lead to Plant Closures, Says Stellantis’ Tavares

•    Higher production costs of electric vehicles threaten some plants, according to Stellantis.

•    Carlos Tavares says it costs 40 percent more to produce an electric vehicle.

•    In February, the Stellantis plant that produces the Jeep Cherokee will be shut down.

No one who has shopped for a new vehicle recently has failed to notice it:  prices of new vehicles has jumped in recent months. There are many reasons it this, but one of the major ones  is the large amount of money that manufacturers are having to spend to make the transition to electric vehicles. 

At the Consumer Electronics Show (CES) in Las Vegas last week, Stellantis boss Carlos Tavares made some interesting statements, which led Autocar to provide an interesting analysis of the challenges facing automakers today. 

Asked about Stellantis' decision to permanently shut down the Illinois plant where the Jeep Cherokee is produced (effective as of February), Carlos Tavares explained that electric cars cost 40 percent more to build than their gasoline-engine counterparts. He said manufacturers must find a way to absorb the costs, or the models will be unaffordable for most buyers. If that happens, the market will suffer a significant decline, which will threaten jobs. 

“Anywhere you introduce technology that is 40% more expensive than the previous one you need to work hard in improving your business model through fixed and variable costs,” said Tavares. “If the average transaction price increases because of the EV sales mix increase, then you have risk that the total market shrinks.” He added that this is already happening in Europe.

He also issued this warning: plant closures are inevitable if automakers can't absorb the higher costs of electric cars and the market shrinks as a result.

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Jeep Grand Cherokee 4xe | Photo: Jeep

Stellantis, like other manufacturers, has raised pricing on its vehicles over the last 18 months to cover the higher costs of manufacturing EVs, this as the shortage of semiconductors has reduced the number of cars they can build.

While many companies have sold fewer models over the past two years, most have managed to increase their profits by reducing discounts and other marketing-related expenses. Stellantis, for example, made a net profit of 8 billion Euros in the first half of 2022, up 34 percent from the same period a year earlier, for a profit margin of 14 percent.

With production returning to a more normal pace in the coming months, consumers will be faced with more choices and shorter waits for vehicles. As a result, manufacturers will have to spend more to attract customers (promotions, rebates, price cuts, etc.). 

This will result in lower profits, Tavares warned. “You lose pricing power because you rebalance supply and demand. Then you need to work faster on reducing costs to protect margins.”

Tavares says Stellantis is equipped to weather any storm, and he promised that it would still be profitable even if sales were to fall by half from current levels.

Since taking over the new Stellantis in 2021, Tavares has protected plants within the global production network and focused instead on improving productivity.

The decision regarding the plant where the Cherokee is produced, however, shows that there is a limit to this protection, as Stellantis continues to cut costs. 

“There is no other option today other than absorbing the additional costs of electrification. That means some unpopular decisions will need to be made. If you stop working on cost in this industry you go from hero to zero in three years.”

- Carlos Tavares, Stellantis CEO