Stellantis (STLA.US) The US market is facing a crisis. Can production cuts and price cuts solve the inventory problem?

The Zhitong Finance App noticed that after the profit warning issued at the end of September, Stellantis NV (STLA.US) CEO Carlos Tavares said at the Paris Motor Show that “for personal reasons” he would not seek re-election as CEO.

Tavares told reporters, “I'm the head of the company, so I'm here to bear the blow.”

Shares of Stellantis, the world's fourth-largest automaker, have fallen by nearly 45% this year, partly due to a profit warning issued at the end of September, which shocked investors accustomed to high profit margins (thanks to the lucrative sales of American pickups and jeeps).

Stellantis 2024 profit reduction guidance

Tavares said Stellantis's problems in the US market were due to a “risky” second-quarter marketing plan drawn up by the market's regional manager.

“I know it's dangerous,” Tavares said. “I could have stopped it. But I didn't do that, so it didn't work either.”

Tavares led the Peugeot Citroen Group to revive and oversaw its merger with Fiat Chrysler to establish Stellantis. Previously, people thought he was invincible, but he was in an unfamiliar field when he began hype in the media.

In an interview with Radio France, Tavares said that in the face of increasingly intense competition from Chinese competitors, weak demand, and rising costs, he plans to restore Stellantis's fortune during the remaining 18-month term, but he is under tremendous pressure, and he does not rule out the possibility of layoffs.

He also said that to keep up with Chinese rivals and remain profitable, it may be necessary to close factories or divest brands, adding that which brands have a future depends on the group's customers.

He also said that Stellantis's problems in the US should be resolved before the end of this year. “It's essentially an overstock issue. I can say for sure that this issue will be resolved before Christmas 2024.”

Tavares told reporters that the latest situation may be announced before Christmas.

Data from analysts and interviews with industry insiders show that Stellantis's major operational mistakes in the US raised prices to levels that exceeded customer budgets, and then slow to respond to discounted models, causing tens of thousands of cars to be stranded in dealers' parking lots.

Erin Keating (Erin Keating), an analyst at the research agency Cox Automotive, said, “They have been holding on the pricing issue for too long.” According to his data, Stellantis's inventory issues are pervasive.

“When America is your cash cow, ignoring it seems like an oversight.”

Dealers complained that, in addition to being overpriced, Stellantis had phased out entry-level cars and underinvested in popular models, while rivals such as Ford and GM were improving their models.

Ford, in particular, is eating away at the Jeep market with its Bronco (Bronco) SUV.

In a letter to Tavares on September 10, Stellantis National Dealer Committee Chairman Kevin Farish complained that the pursuit of short-term profits meant “rapid degradation” of the Jeep, Dodge, Ram, and Chrysler brands, adding: “You caused the problem.”

David Kelleher (David Kelleher), president of David Auto Group, owns a multi-brand store in the suburbs of Philadelphia. He said that when Stellantis was founded in 2021, he sold an average of 165 new cars every month. This year, that number dropped to 89.

“We need a CEO who knows the North American market,” Kelleher said.

Tavares faces tough choices, and he may clash with the American Federation of Auto Workers (UAW) to resolve Stellantis' problems. The Auto Workers Federation of America threatened a strike to delay the investment, which prompted Stellantis to sue the union for breach of contract.

Experts say that in the long run, Stellantis will have to decide whether it needs four separate US brands.

Overpriced, disengaging from the audience

In the early 80s of the last century, when Lee Ecoca led Chrysler to reverse the downturn, Stellantis is now often the first company among the Detroit Big Three to be affected because its product costs are lower and customers are more sensitive to prices.

Today, Stellantis has a different problem.

Like its rivals, Stellantis raised prices during the pandemic due to a shortage of new cars due to supply chain failures. But then it refused to lower the price.

Pat Ryan, CEO of car shopping app CoPilot, said Stellantis increased prices by 50% between 2019 and 2024, while inflation increased 23%.

“Stellantis' pricing really exceeds their historical market,” Ryan said.

According to data provided by CoPilot to Reuters, the Ram 1500 pickup and Jeep Wagoneer have far longer delivery days than their closest competitors, which indicates that Stellantis's inventory problems are widespread and serious. Ryan said that although every company has inventory issues, Stellantis's situation is particularly serious.

“Everyone has inventory issues, but nowhere are they as long or serious as Stellantis,” Ryan said.

Due to slow response, even if the 2025 model was launched, Stellantis had a higher share of the 2023 model (with a larger sales discount) in the hands of dealers than most competitors.

According to Cox Automotive data, as of early October, Stellantis 2023 models still accounted for 19.3% of Dodge cars, 8.3% of Chryslers, 2.3% of Rams, and 1.3% of Jeeps. Meanwhile, 2025 models already account for 36.6% of Ram's inventory, while other brands account for between 11% and 14.5%.

Despite Stellantis's “aggressive” incentives for its US portfolio, the company's sales in the US fell 20% in the third quarter.

According to Cox data, Jeep's incentives rose to 9% in September from 5.3% in May, and incentives for Ram pickups rose from 6.3% to 9.6%.

According to CoPilot's data, Stellantis provided $4,500 in cash back for a Ram 1500 pickup, but Stellantis might need to double the discount to cut inventory.

It could also cut production.

“They just need to reduce production... get the dealer's inventory back to normal,” said Brian Sponheimer (Brian Sponheimer), an investor at Stellantis and an analyst at Gabelli Funds.

Experts say that apart from the current crisis, Jeep and Ram, particularly Dodge and Chrysler, have few models, but each has independent, costly marketing, branding, and design teams.

“Stellantis has a lot of brand work to do in the US,” Keating said. “It's going to be painful.”