Production relocation – New challenges and implications for European suppliers

Munich, July 2023

Production relocation - New challenges and implications for European suppliers

Munich, July 2023

ow suppliers can rise to the challenge of carmakers moving production out of Europe. Macro-economic shocks are prompting Europe’s OEMs to shift production capacity towards North America and China. The region’s suppliers must respond rapidly and flexibly to remain globally competitive.

In 2022 the auto industry was buffeted by a series of macro-economic shocks, including turbulence on global raw materials and energy markets and the steepest hikes in interest rates for more than forty years. As a result, vehicle production forecasts have fallen. At the end of 2021, it was predicted that 91.9 million vehicles would be produced globally in 2023, but by the end of 2022 this forecast had been downgraded to 85.3 million vehicles. Going forward, the forecast for global vehicle production in 2029 has slipped from 102.7 million to 96.4 million units.

While this downward trend is worldwide, European car manufacturers are under exceptional pressure because various regional competitive disadvantages appear to be setting in for the long term.

Europe’s competitive disadvantages

One major problem in Europe, and particularly in Germany, is high energy costs. For example, electricity prices before taxes and levies on European energy exchanges remained more than double the level of equivalent prices in the US, even though the steep hikes have ended. In Europe, energy expenditure by OEMs can reach up to three megawatt hours per vehicle in production, putting the region’s manufacturing sites at a clear disadvantage. This issue is compounded by the continuing rise in the proportion of electricity in the energy mix adopted by OEMs to fulfil national and EU sustainability requirements. The higher regulatory conditions which the industry is subject to in Germany and Europe also create a competitive disadvantage, especially in comparison with North America.


Source: Berylls Strategy Advisors, IHS, Bloomberg, Datenstand Prognose 11/2021 & 11/2022
Electricity prices: Europe with average of major markets, North America with U.S. prices as proxy

European OEMs are also affected by manufacturing subsidies introduced in other leading industrial countries such as the 2022 US Inflation Reduction Act. After a short time-lag, the knock-on effect on European vehicle production forecasts is now visible. Since the end of 2021, projections for Germany and Europe between 2023 and 2029 have become considerably more pessimistic, especially in comparison with North America and China. It is striking in this context that German manufacturers’ share of global vehicle production declines during this period from 5.8% to 5.3%, suggesting that the current political and economic climate is encouraging the car industry to pull out of the very country where the automobile was invented (See Figure 1).

Production relocations increase the challenges for suppliers

The growing number of production relocations by European OEMs presents considerable challenges for the region’s automotive supply chain, and for suppliers in particular. When OEMs decide to move some production out of Europe, suppliers can suddenly find themselves in a tight spot if the manufacturer’s projected output in the region is shifted or if production of a whole model series is shifted to a different non-European location. 

At the same time, the car industry is still in the transition to electromobility which is presenting the suppliers with more familiar problems such as margin pressure, lower volumes and higher investments. On top of this, production relocations mean that European suppliers must adjust their footprint, or at least examine it regularly. This impacts production sites and production-related functions, such as product and technology development.

Product portfolio and company size affect the scale of the challenges

The effects of production relocations on suppliers can be generally classified on the basis of the product portfolio and size of the company. Direct effects for suppliers arise when relevant production volumes or whole model series are relocated. In the short to medium term, the growth market for electric vehicles is particularly relevant, because the model portfolio and production sites are developing so rapidly. Yet in this crucial sector, between 2021 and 2022 the forecast electric vehicle production volume of Germany’s three leading OEMs for the period 2023-2029 fell from 13.2 million units to 13.0 million units. Meanwhile, electric vehicle production in North America is set to increase from 1.4 million to 2.0 million units, including the production of new model series.

Consider BMW’s iX3, which according to the most recent forecasts will now be manufactured in Mexico as well as China. So far only the 2-Series and the 3-Series have been produced by BMW in Mexico for the North American market. Germany cannot keep up with this and is set to lose a volume of nearly 79,000 vehicles until 2029. A high localisation rate of more than 90 percent highlights the challenges for suppliers who do not have a presence in the relevant region.

The size of the company is another important influence factor. Larger suppliers are less affected than small and medium-sized companies because they already have a global network with multiple production plants and therefore more flexibility. Additional challenges for smaller suppliers are local recruitment and the security of production start-ups at new international locations.

An overarching risk in production relocations is represented by all necessary investments and the resulting capital requirements. In recent years, the auto industry has invested massively in the transition to electromobility, but this expenditure occurred in an era of historically low borrowing rates which has now suddenly come to an end. Amid worldwide inflation and an uncertain economic outlook, financial investors are demanding considerably stricter conditions when lending to suppliers, increasing the difficulty of meeting the challenges presented by OEMs relocating their production.

Key strategies for suppliers to remain competitive as OEMs relocate away from Europe  

There is no standard solution for these challenges that will work for all suppliers. As we have noted, a company’s product portfolio, existing production network and overall size have a bearing on the right approach to adopt. However, for many market participants, active and forward-thinking management of their portfolio will be crucial. Apart from this, company takeovers, cooperations and strategic partnerships can help to reduce capital needs, optimize their footprint and manage risk more effectively.

In conclusion, the question arises as to whether delays in production volume in combination with a worsening interest rate environment will accelerate consolidation in the field of combustion components. Here too, a proactive approach without taboos will be necessary to maintain or develop a competitive position.

Dr. Alexander Timmer


Stefan Schneeberger

Project Manager

Dr. Alexander Timmer

Dr. Alexander Timmer (1981) joined the Berylls Group, an international strategy consultancy specializing in the automotive industry, as a partner in May 2021. He is an expert in innovation and market entry strategies and can look back on many years of experience in the operations environment.
Dr. Alexander Timmer has been advising automotive manufacturers and suppliers in a global context since 2012. He has in-depth expert knowledge in the areas of portfolio planning, development and production. His other areas of expertise include digitalization and the complex of topics surrounding electromobility.
Prior to joining Berylls Strategy Advisors, he worked for Booz & Company and PwC Strategy&, among others, as a member of the management team in North America, Asia and Europe.
After studying mechanical engineering at RWTH Aachen University and Chalmers University in Gothenburg, he earned his doctorate in manufacturing technologies at the Machine Tool Laboratory of RWTH Aachen University.