If you want a single, powerful example of the unpredictability of the automotive industry (and the sector that supplies its parts), look no further than the failure of U.S. consumers to switch wholesale to battery electric vehicles (BEVs). 

“OEMs thought [consumers] were going to jump onboard with BEVs, but not everyone is crazy for a $80,000 pickup,” says Guido Vildozo, associate director, consulting at S&P Global Mobility. 

The slower-than-expected growth in the U.S. BEV market, along with an unexpected spike in interest rates, has had deep consequences for auto suppliers, shifting the balance of power away from suppliers that have devoted high levels of capital to this technology and forcing them to alter their business strategy.

Additional, secular changes are likely in store for the automotive parts supplier business.  These changes may happen quickly or slowly but will nevertheless be significant. That’s why staying ahead of the curve with accurate, timely and comprehensive industry data is more important than ever.

Although the industry is in the spotlight from time to time, it has not historically been subject to sudden changes. That seems to no longer be the case, particularly as new tariffs on Canada and Mexico rattle the North American automotive ecosystem.

“If you step back into history, the North American auto industry has been rationalized and optimized for more than half a century,” says Michael Robinet, vice president, forecast strategy at S&P Global Mobility. 

Car manufacturing and distribution has been integrated between the U.S. and Canada since the signing of the Automotive Products Trade Agreement of 1965, better known as the Canada-U.S. Auto Pact. Mexico has been included in this highly complex ecosystem since the North American Free Trade Agreement (NAFTA) came into force in 1994, which then morphed into the U.S.-Mexico-Canada Agreement (USMCA) in 2020. 

In essence, these agreements created a much larger market where economies of scale made auto manufacturing far more efficient and profitable while keeping prices down. 

As a result, for decades, there’s been very little change in where auto parts and products are made — wiring harnesses in Mexico; energy-hungry aluminum in Canada, where the hydroelectricity is, and so on. 

These are long-lead decisions that take years to pull together, Robinet says, as well as to fund, to build, to orchestrate and to make sure all the logistics are worked out, upstream and downstream. 

“Vehicle manufacturers start planning sometimes five years in advance, to get the engine, the transmission ready, to plan for scale. You’re talking about orchestration of literally thousands of parts and systems, with production plans reaching out for 15 years with minimal intervention. The only business with longer lead times might be defense or aerospace,” Robinet says. 

“That gets into why things are the way they are. So when someone says I’m going to put a tariff on a vehicle or component, we say let’s put it into a new structure so that, the next time I decide to put a factory in Canada or Mexico, it works in terms of long-term structure.”

All the same, the automotive manufacturing industry is now being forced to think more often over the short term, Robinet advises. And it’s not just trade wars and tariffs that are on the agenda. 

“Sure, there are going to be some changes in the USMCA, but nothing spectacular that would cause somebody to close an assembly plant tomorrow and build a new one somewhere else,” he says. 

It’s more that other trends are causing concern, including higher interest rates that have made borrowing for capital expenditure much more expensive, and therefore bets on new technologies or manufacturing locations more risky. 

Then there’s the adoption — however slow — of BEVs. “If I’m a supplier, the OEM told me it would be 40% of the market, and that’s not materializing, so now I have to decode where my OEM client is going in terms of electrification,” says Vildozo.

Robinet agrees it’s hard for suppliers to predict, whether in North America or globally. “We don’t know what the regulatory environment is going to be, or what’s going to happen with the European Union’s market. And then China is moving into the BEV market. The Europeans want to do so, too, but with a heavy emphasis on affordability, and the U.S. is saying: We don’t care,” he says. 

So all of these considerations have to be taken into account as auto suppliers strategize going forward. Trade tariffs are a consideration, no doubt, Robinet says, but only one of them.

“There’s so much what-if going on right now that’s outside the norm. If I’m a supplier for Ford and GM, everything after 2027 is really up in the air, in terms of timing, change of scope, engineering, capital invested — everything. It’s huge,” Robinet says. “This is the big problem they’re having right now. The planning environment has almost never been so poorly defined.”

And generally, Vildozo says, the world has shifted drastically over the last few years in terms of profit margins. “Most suppliers are running on very narrow margins — maybe 2%,” Vildozo says. “As a supplier, I’m pinched, and I see that [the OEMs] are going in that direction too. When these shocks happen, we have to ask: How are we going to war-room this out?”

The best way to handle it all is to stay as informed as possible — both in terms of current market trends and possible changes — in order to run multiple, complex what-if scenarios, Vildozo and Robinet say.

Short, Medium and Long-Term Strategies

Vildozo and Robinet propose that suppliers break down their strategies into three buckets: short-term (18 months), mid-term (four years), and long-term (over 6 years): 

• Short-term strategies focus on operating within narrow margins and anticipating external elements beyond regulation and labor costs, such as market spikes in raw materials and changes in consumer tastes and habits. 

• Mid-term strategies consider political shifts, potential administrative changes and regulatory directions. Suppliers are likely to see increased pressure to assess OEM strategies as well.

• Long-term strategies aim for price parity between fossil fuel-power and electrification, and adjusting to overall rebalanced industry dynamics, such as the rise of another country’s auto industry, beyond China.

Vildozo and Robinet say suppliers face additional pressures due to different operational laws within specific regions. For instance, closing facilities can be achieved more quickly in the U.S. than in Mexico, where wages are lower, but labor laws are more strict when it comes to laying workers off. 

Getting a detailed understanding of where products and clients are heading in terms of electrification, unions, logistics, raw materials, and regulations in any country or region, also, is crucial. For example, Europe’s commitment to EVs may falter, and the rise of manufacturing in China may stall because of rising wages or a crackdown on human rights issues by their export customers.

Another consideration is logistics. When the COVID-19 pandemic forced auto suppliers to rethink their supply chains because they couldn’t move product around as quickly as before, there was a sharp increase in nearshoring from China to Mexico. That had unintended consequences. 

“We saturated the railroad. We didn’t think about expanding capacity; same with the ports,” says Vildozo. “We still haven’t fully moved away from that. First it was border closures, and now it’s the strain on infrastructure. It’s not just about what goes into the vehicle, but logistics, which is constrained, and logistics operators are asking for more money.”

In rethinking their business plans, suppliers should continue to play to their strengths, Vildozo says. “There’s a reason why suppliers were leading in margins,” he says. “They manufactured really well, at high quality, and they mastered just-in-time supply. They understood that crystal clear, and I applaud them. Despite the supply chain disruptions and other shocks we’ve seen, they were never defeated. The track record is behind suppliers. They’ve always won this battle.”

But the industry must evolve, remaining agile and understanding consumer demands, which sometimes means staying ahead of OEMs. This includes stepping out of comfort zones, staying as informed as possible, reassessing long-established practices, and adapting to dynamic market conditions. 

“The consumer is the elephant in the room,” says Vildozo. He says suppliers also need to challenge the OEMs, asking how sustainable their margins really are, as well as their market share and volumes. With this information they can plan for the medium-term while also taking into account industry “unicorns” that have emerged in the form of Tesla and BYD.

Suppliers also need to become agile and adept negotiators when faced with all these challenges, Vildozo adds. Those what-if scenarios are going to be more critical than ever, going forward. “You have to understand what is falling in the blind spot of your rear-view mirror, so if I see X situation, I can pull out plan Y.”

Resource Link: www.spglobal.com/mobility