Case Study 5 - European Carmakers

Question 1

Elasticities of Demand (1.2.3)

How does price elasticity of demand explain Stellantis’s decision to offer discounts in the US?

Answer 1

• Elastic demand: Stellantis reduced prices to clear 430,000 unsold vehicles (Page 2), implying demand is price elastic (consumers respond to lower prices).
• Chinese competition: Cheaper Chinese EVs increase substitutes, making demand for European cars more elastic. Example: Stellantis’s operating margin fell to 5.5-7% (Page 1) due to price cuts.

Question 2

Business Growth (3.1.2)

How did the Fiat Chrysler-PSA merger aim to improve profitability?

Answer 2

• Horizontal integration: Merging two carmakers (Page 2) to achieve economies of scale (e.g., shared parts, cost cuts).
• Cost reduction: PSA’s CEO focused on “higher profit margins through cost cuts” (Page 2). Example: Stellantis targeted 100,000 inventory reduction (Page 2) to lower storage costs.

Question 3

Normal Profits, Supernormal Profits and Losses (3.3.4)

Why did Stellantis’s profits fall to “5.5-7% operating margin” (Page 1)?

Answer 3

• Shift from supernormal to normal profits: Rising competition (Chinese EVs) and discounts reduced margins.
• Losses: Free cash flow turned negative (€5bn–€10bn) due to weak demand and price cuts (Page 1).
• Diagram link: Profit drop shown in the cost-revenue diagram

Question 4

Contestability (3.4.7)

How did Chinese EV manufacturers increase contestability in the car market?

Answer 4

• Barriers to entry lowered: Chinese firms benefit from government subsidies and lower labor costs, enabling cheap EVs (Page 1: “low-cost EVs making inroads”).
• Impact on European firms: Stellantis’s sales fell in China due to “stiff competition from local rivals” (Page 1), reducing market power. Example: Aston Martin cut wholesale targets by 1,000 vehicles (Page 3).