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Navigating the ongoing storms of disruption in the auto industry: tariffs, slow EV adoption, China competition

Automakers and their suppliers are navigating technological leaps, changing consumer preferences and global economic shifts. These changes, compounded by inflation, high interest rates and lingering supply-chain disruptions, present a challenging landscape.

Original equipment manufacturers (OEMs) and suppliers are also faced with disruption on multiple fronts, including:

Uncertain tariffs and emission regulation following statements by President-elect Trump.
Sustainability under shifting policies.
Uncertain market acceptance of EVs and new technologies.
Software-defined vehicles reshaping consumer expectations.
Fierce competition from innovative, cost-effective Chinese manufacturers.

This could be a lot to manage for auto executives, who were already anxious about the long-term prospects of their businesses. However, leaders that effectively plan for these challenges will likely be able to generate the cash flow and capital funding required to weather these market disruptions.

Looking ahead to 2025 and beyond, there are strategies industry leaders can adopt to improve both the top and bottom lines. At the same time, companies should stay on pace to accelerate the transition to electric vehicles while streamlining operations to be able to compete with Chinese manufacturers. Let’s break down each of these disruptions and look at key actions to address them.

Proposed Trump administration tariffs expected to disrupt supply chains

President-elect Trump has vowed to roll back vehicle emissions standards and reduce government support for electric vehicles. He’s also proposed tariffs aimed at bolstering domestic manufacturing.

However, any short-term relief from eased mandates and protectionist trade policies may be at the expense of global competitiveness. Proposed measures — including tariffs of 10% to 25% on goods from Canada and Mexico, up to 60% on imports from China, and significant tariffs of 100% to 200% on vehicles manufactured in Mexico — could result in higher prices for US consumers and disrupt the US automotive supply chain. Trump’s late-campaign proposal for a broad 25% tariff on all Mexico-origin goods entering the United States adds to the range of measures that could have a major impact on companies reliant on Mexican maquiladora operations. Collectively, these tariffs and the resulting disruption could also add to the headwinds affecting auto companies’ profitability and cash generation.

Key actions

Companies can start navigating this environment by modeling the potential impact on company revenues of tariffs and other regulatory changes. Estimate increased US tariff exposure based on various potential changes to US tariffs for China, Mexico, and the rest of the world. Then, evaluate production and sourcing strategies to reduce tariff impact, integrate customs and tax planning to improve operations, and stay alert to geopolitical developments, including potential retaliatory tariffs. Fortifying supply chains to withstand shocks will also be vital to maintaining flexibility in this evolving landscape.

Automotive OEMs and suppliers have been profitable but have struggled to generate economic profit over the last 5 years

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Balancing sustainability goals amid policy changes

The regulatory landscape around emissions and electrification could see major changes with the Trump administration. A rollback of Biden-era climate policies seems likely, and key initiatives like the Inflation Reduction Act, which provided tax incentives for green energy projects, might be scaled back or even repealed. This could put some emissions-reduction projects on hold and shift focus back to traditional energy and domestic production. Support for EV adoption might also take a hit as policies prioritize other areas.

That said, OEMs and suppliers aren’t operating in a vacuum. State and international regulations often diverge from federal policies, creating a complicated mix to navigate. And while uncertainty is in the air, many companies are sticking to their sustainability goals, not just to manage risks but also to meet growing consumer demand for greener products and align with global standards.

Key actions

Even with US regulatory changes on the horizon, OEMs and suppliers should stay focused on their sustainability goals. Keeping carbon reduction and electrification targets on track can help companies align with global market expectations and stay competitive. At the same time, it’s smart to prepare for potential policy shifts — like new tariffs or eased emissions standards — by running scenario planning. Look at how changes might disrupt your supply chain, costs and operations, and think about adjustments that can help manage risks while uncovering new opportunities for growth.

Uncertain market acceptance of new technology and the shift to EVs

OEMs and suppliers have made a big bet in recent years that the transition to EVs will increasingly progress through the end of this decade. (See graphic).

Despite major investments, consumer adoption of EVs has been slower than expected. Beyond affecting profitability and cash flow, this also creates compliance risks as the level of EV sales needed to meet regulatory targets falls short.

Key actions

While navigating EV market volatility, auto manufacturers should see that their current business operations are as efficient as possible to support cash flow and profitability. This includes regionalizing and improving the supply chain to enable resilience and considering divesting non-core assets to free up resources. Companies can also support accelerating the market adoption of EVs by making them more appealing to consumers through competitive cost and pricing, incorporation of advanced technology, and improved charging infrastructure.

The rise of software defined vehicles

The automotive industry is moving toward designing vehicles with features and functionality increasingly defined by software, which will enable constant upgrades and new features over the vehicle's lifecycle. This represents a significant shift from traditional vehicle development, as outlined in our recent article on software-defined vehicles (SDV). Many traditional OEMs are also behind in this space compared to Chinese and tech-forward OEMs, who are already designing their vehicles with a software-defined approach. Closing the gap with Chinese and tech-forward OEMs presents a significant hurdle for traditional OEMs given product portfolio complexity. For example, traditional OEMs often have 40 to more than 100 models in the market based on multiple platforms, which makes development and deployment of a software-defined approach across their product portfolios both time consuming and capital intensive. To succeed, traditional automotive companies will need to adapt to their product development processes and business models to effectively compete with China and tech-forward OEMs.

Key actions

SDV capabilities are an integral part of the future of vehicle development. To compete, companies will need to develop an SDV architecture and streamline development and deployment of software technology in their product portfolio. Leaders should decide where and how to play in the SDV value chain and implement the operating model changes required to compete. Additionally, the allocation of capital to other product development activities needs to be rebalanced to increase efficiency to avoid significant increases in product development costs.

Increasing competitiveness of China

Traditional OEMs and suppliers are struggling with increased competition from their Chinese counterparts, who have worked to develop electric vehicles and the necessary infrastructure over the last 15 years. As a result, Chinese OEMs and suppliers have made significant advancements in the engineering, design, development and manufacturing of EVs. Most traditional OEMs have struggled to maintain competitiveness with Chinese OEMs, and Chinese OEMs are aggressively competing in markets outside of China — at a significantly lower cost, often more than 25% lower than their traditional OEM counterparts.¹

^{_{1. “China's Electric-Vehicle Makers Face EU Antisubsidy Probe” The Wall Street Journal, Kim Mackrael and William Boston, accessed on Factiva 12/13/24.}}

Key actions

Automotive companies should invest in advanced technologies and innovation to keep pace with the rapid advancements made by Chinese firms, particularly in EVs and related infrastructure. Reducing production costs is also crucial as EVs need to be competitive compared to both Chinese EVs and ICE vehicles without compromising quality. Competitive pricing and quality should encourage EV adoption while avoiding market share erosion.

In addition, traditional OEMs should sustain profit and cash flow generation from ICE vehicles to provide a return to shareholders, a source of cash flow to support business transformation and to navigate the uncertain pace of wide scale EV adoption.

Pitfalls to avoid

There are several strategies auto industry executives can adopt to improve both the top and bottom lines and stay on pace to accelerate the transition to electric vehicles, but there are some significant stumbling blocks out there as well.

Here are some critical mistakes to avoid:

Attempting to maintain traditional capital allocation and product development strategies while simultaneously investing in electrification, software and other technologies can dilute efforts and resources. A focused capital allocation framework that prioritizes core assets and strategic collaborations can enhance capabilities and competitive positioning.

Chasing after competitors without a clear, committed vision that leverages the OEM’s strengths can lead to inconsistent and ineffective strategies.

Making investment decisions that limit future flexibility can be detrimental, especially in times of uncertainty. Keep your options open.

Not improving existing business operations to generate cash for transformation can hinder the ability to invest in new technologies.

Failing to enable flexibility can make it difficult to adjust to market changes and maintain profitability.

Preparing for tomorrow

The auto industry has a tough task ahead, as even well-designed and executed plans can be undermined by geopolitical, climate and economic events that are beyond your control. Your business needs to be not only resilient but grow amid external pressures. Finding alternative suppliers and markets is one way automotive companies can stay agile and adapt to changing geopolitical landscapes.

Ongoing LMC research is looking at other ways auto leaders can address critical immediate operating challenges while making no-regrets investments for the future.

Sharpen your focus

Leaders may avoid these mistakes by highlighting the importance of strategic focus and resource allocation while maintaining flexibility.

Focus on introducing new capabilities and building new business models to accommodate the mainstreaming of EVs, which is progressing slowly, but nevertheless progressing. Doing so will require developing plans and strategies for the near, middle and long term while mitigating effects of macroeconomic headwinds including inflation, rising rates, supply chain issues and recessionary pressures.