Tighten the belt for tough times! Stellantis demands strict control over external expenses

According to media reports, one of the world's largest car manufacturers, Stellantis, is taking "stringent measures" to strengthen its financial position, including internal austerity measures known as the "doghouse" to more strictly control external expenses.

At the same time, Stellantis filed a lawsuit against the United Auto Workers (UAW) in federal court this week, accusing the union of baseless threats of a strike. There are disagreements between UAW and Stellantis over factory investments promised last year, including reopening a dormant plant in Illinois.

In the market, Stellantis' US stocks fell by about 17% this week, marking the largest weekly decline since late February 2022.

"The Doghouse is Back!"

According to the Wall Street Journal, in an email last week, Stellantis Chief Financial Officer Natalie Knight, with the subject line "The Doghouse is Back!", instructed her finance team to rigorously review procurement requests from external suppliers to curb expenses.

The email explained that the "doghouse" is a code for stricter scrutiny and control of procurement requests. It stated, "If we can be more disciplined, we can save the company huge expenses."

Knight also mentioned that these guidelines had been used by the company before but did not specify when. Stellantis stated that the term "doghouse" is not new and in the past referred to projects that required special review.

Stellantis stated that this policy will not affect existing procurement requests, purchase orders, or invoices.

Analysts believe that this move indicates Stellantis is taking increasingly stringent measures to protect its cash reserves as the company is taking costly steps to reduce car production and boost sales through promotions.

A few days after the CFO's directive, Stellantis lowered its financial expectations, warning that the challenging conditions in the car market and the expensive measures to reduce high inventories in the North American market will have a greater impact on profits than previously expected.

Stellantis also significantly reduced its outlook for industrial sector free cash flow, an important indicator of the company's ability to pay dividends, repurchase shares, and reinvest in the business. The company expects industrial free cash flow in 2024 to be between negative 5 billion euros (approximately $5.6 billion) and negative 10 billion euros, compared to the previous guidance of positive cash flow. However, the company's investor relations chief told analysts on Monday that despite the "significantly negative" industrial cash flow in 2024, the company will still have sufficient cash reserves by the end of the year.

Stellantis is also facing pressure from the UAW, which accuses the company of reneging on investments to create jobs as promised in the 2023 labor contract. UAW President Shawn Fain threatened to strike against these plans, claiming they had earned such rights in last year's negotiations In the federal lawsuit filed on Thursday, Stellantis stated that the union has no legal basis for a strike, citing the contract's flexibility for the company to adjust plans according to market conditions.

"Darwinian Times"

Fern's letter to union members on Friday described the lawsuit as "the latest move in a series of desperate actions taken by the embattled executives," referring to the embattled Stellantis CEO Carlos Tavares. Strikes are costly for automakers, especially after a strike lasting several weeks last fall affected some production at its U.S. factories.

Knight emphasized in the email the challenges the company faces, the need to conserve cash, and the necessity to reject any non-essential expenditure requests. "This requires taking tough measures to ensure our financial performance is optimal in 2024, 2025, and beyond."

The email also mentioned "Darwinian times," a term Tavares used to describe the immense pressure his company and competitors face in transitioning to electric vehicles.

Stellantis' cash burn stems not only from reduced profits but also from its efforts to reduce excess inventory at U.S. dealers. The company announced on Monday that it will reduce shipments of 200,000 vehicles in North America by the end of the year. According to Bernstein analyst Daniel Roeska, this move could bring about approximately $4.4 billion in short-term cash flow pressure.

The company reported on Wednesday that U.S. third-quarter sales fell by 20%, continuing a streak of poor performance over several months.

Stellantis also stated that reducing its excess inventory is the right move in the long run, helping to better match vehicle production with demand.

Tough Situation for European and American Automakers

Stellantis is not the only automaker in distress, as Volkswagen, Mercedes-Benz, Aston Martin, and BMW have recently lowered their financial forecasts.

Analysts believe that European and American car companies are facing a tough economic situation, with high interest rates suppressing demand and electric vehicle projects consuming significant funds. Many European and American companies are troubled by climate policies that hinder economic output or make the manufacturing process overly expensive.

Looking at the broader automotive market, the MSCI World Automobiles Index, which includes major automakers such as Tesla, Toyota, Ferrari, General Motors, Mercedes-Benz, Honda, Ford, Stellantis, BMW, and Volkswagen, has been stagnant over the past two years, below its peak at the end of 2021.