Stellantis CEO says easing chip crunch could reduce pricing power

MILAN -- Stellantis posted record results for the first half thanks to strong pricing and high-margin vehicle sales, but rising production as the chip shortage eases could hit the industry's ability to raise prices in 2023, CEO Carlos Tavares warned.

The industry has benefited from what Tavares called a "sweet spot" where a lack of core parts like semiconductor chips has hurt production, but high demand for vehicles has allowed automakers to charge more and raise profits despite high energy and raw material costs.

If production rises "the pricing power of the industry will be somehow reduced, which means you may have pressure on the margins," Tavares told reporters on Thursday. "We do not want to be squeezed in a situation where transaction prices are under pressure and inflation costs are still there."

Stellantis' adjusted earnings before interest and tax rose 44 percent on a pro-forma basis to 12.4 billion euros ($12.7 billion) in the January-June period. Stellantis, whose brands include Chrysler, Dodge, Jeep, Ram, Citroen, Peugeot, Fiat, Maserati and Opel, does not report quarterly financial results.

First-half margin rose to 14.1 percent from 11.4 percent a year earlier, with a record 18.1 percent in North America, where the group made almost half of its sales in the six months, and a double-digit result for all of the group's five regions.

Tavares said steel prices were already falling because of fears of a global recession, but energy costs remained high.

Stellantis' "stellar" order book was currently running at three times the rate the automaker had seen before the global coronavirus pandemic hit in 2020, he said.

First-half results put its breakeven point at 40 percent of revenues, "so we can bear any event, including a recession," Tavares said.

Net pricing accounted for over 5.8 billion euros of the overall operating income in the first half, Stellantis said in an earnings presentation.

Foreign exchange also supported the results, with Chief Financial Officer Richard Palmer saying a stronger dollar contributed to the first half adjusted EBIT to the tune of around half a billion euros.

The strong first-half performance was supported by sales of high-margin vehicles, including electrified models, Palmer said.

Stellantis this year rolled out an ambitious plan to double annual revenues by 2030 and turn its range from traditional combustion engines to electrified models.

"We are ahead of Tesla in Europe in electric vehicle sales, and not far from Volkswagen," Palmer said.

Stellantis is developing four new electric architectures are expected to each underpin the production of up to 2 million vehicles annually.

Palmer said that the group, though its range of premium vehicles, was well placed to cope with the global rise in inflation. "We will look to pass rising inflation costs to customers on the market until feasible," he said.

Europe, N.A. markets to shrink

Stellantis confirmed its full-year outlook for a double-digit margin and positive industrial free cash flow, but significantly lowered its predictions for growth in several key markets.

It now expects the wider European and North American markets to shrink 12 percent and 8 percent this year, after previously seeing a 2 percent decline and stable sales, respectively.

The company’s global unit sales fell 7 percent to 2.93 million vehicles in the first half as persisting supply-chain issues including the semiconductor shortage curbed production.

Scarcity of chips "will continue to be an issue for the industry through the end of the year," Palmer said. "I think it’s improving but it’s a slow process."

Palmer took aim at what he called "bullish" forecasts of improvements in semiconductor supply in the second half by some rivals, saying Stellantis has no evidence of that and will remain prudent.

The company had just under 4 billion euros in extra costs in the first half, including 3 billion euros from higher prices for raw materials. 

Bloomberg contributed to this report