Daimler warns that switching to electric cars could disrupt supply chains
According to Daimler’s latest annual report, the increasing demand for electric vehicles could cause disruptions in the company’s supply chain. Daimler, like other global car makers, has increased the production of electric vehicles, agreeing to update their engine management software, amid the sweeping electrification wave and climate change initiatives.
“Electric initiative right on track”
Daimler is among the most ambitious car makers leading electrification. The company recently pledged to electrify the entire Mercedes-Benz portfolio by 2022. The company began working on numerous e-mobility projects in 2017 and started building electric hubs for producing electric vehicles and batteries at various locations worldwide. Markus Schäfer, Member of the Divisional Board of Mercedes-Benz Cars, Production and Supply Chain stated that their “electric vehicles will be built in 6 plants on 3 continents”.
Currently, Daimler is addressing every market segment, starting from smart fortwo seaters, to large SUVs, by planning to invest € 10 billion in electrification. The company intends to offer more than 50 electric versions, via developing plug-in hybrids and introducing a 48-volt-system. Among these models, more than 10 models are expected to be fully electric cars, in all segments. Electrification of the fortwo Coupé and Cabriolet is already taking place at a smart plant in Hambach, while the production of the first electric vehicles of the new product and technology brand EQ, has yet to begin at a plant in Bremen.
Mercedes also plans to invest heavily in the optimisation of the global battery production network within the worldwide production network. The company will devote €1 billion to expand its global battery network.
“The electric initiative of Mercedes-Benz Cars is right on track”, implying that the company’s global production network is ready for e-mobility and electrifying the future.
Supply chain bottlenecks
Consequently, Daimler’s suppliers are forced to invest, in order to help electrify the Mercedes-Benz range by 2022. “Due to the planned electrification of new model series and a shift in customer demand from diesel to gasoline engines, the Mercedes-Benz Cars segment in particular is faced with the risk that Daimler will require changed volumes of components from suppliers. … This could result in over- or under-utilisation of production capacities for certain suppliers. If suppliers cannot cover their fixed costs, there is the risk that suppliers could demand compensation payments. … Necessary capacity expansion at suppliers’ plants could also require cost-effective participation”
Moreover, political crises and uncertainties could additionally create supply bottlenecks for certain raw materials, increasing price volatility. “Generally, the ability to pass on the higher costs of commodities and other materials in the form of higher prices for the manufactured vehicles is limited because of strong competitive pressure in the international automotive markets”.
Impact on profit
Daimler’s profit growth could be affected by spending on new technologies such as electric and autonomous vehicles. The annual report, released on Tuesday, showed that Daimler recorded provisions of €14 billion ($17.3 billion) at the end of 2017, or 2.1 billion more than in 2016.
The increase in provisions was caused by increased obligations from sales transactions, provisions for warranty obligations and legal proceedings provisions. The legal proceedings provisions are related to a class-action suit by owners of diesel-engine Mercedes Benz in the U.S., which blamed Daimler for manipulating emissions reduction via software. Other legal risks include a regulatory probe from raids at several car manufacturers and suppliers, regarding steel purchasing.