Suppliers face ‘treacherous environment' in 2025 amid EV uncertainty, looming tariffs

Uncertainty surrounding trade policy and auto makers' electrification plans could make 2025 a rocky year for suppliers looking to increase sales and profit margins, analysts said.

"It's a very treacherous environment right now for the supply base," said Michael Robinet, vice president of forecast strategy at S&P Global Mobility. "Suppliers need to be flexible and as nimble as possible in their decision making."

Parts makers this year are likely to continue dealing with last-second changes to auto makers' electrification plans, particularly if federal EV incentives are scaled back. At the same time, the threat of tariffs—and the costs associated with them—loom large over the supply base, particularly for those that ship or import large numbers of Canadian and Mexican components.

Those factors are combining to make it difficult for suppliers to know where to place their bets on which vehicle programs to supply. Many parts makers are already dealing with stranded capital because of EV parts programs that have not panned out to the degree as they hoped.

Picking winners and losers is easier said than done in this uncertain environment, analysts said.

"The level of capital risk that's been embedded into our industry with respect to shifting emissions regulations and tariffs is incredible," Robinet said. "It really does change the competitive dynamic for North American suppliers and OEMs."

Those risks come as suppliers look to increase profit margins, which have generally fallen behind what they were from before the pandemic and subsequent supply chain challenges. Less than 10 percent of suppliers have risen from below-average to above-average profitability in their segments during the post-COVID period, according to a December analysis by Bain & Co.

At the same time, suppliers are increasingly anxious about many of the vehicles they support. Poor sales in vehicle programs they supply was the most common concern cited by suppliers in a December survey by industry trade group MEMA, pacing ahead of worries about U.S. trade policy and the strength of the economy.

"There's nervousness about stability of [production] schedules," said Mark Wakefield, global automotive market lead at AlixPartners. "The ICE to EV transition has whipsawed, and people are trying to get used to the mix and figure out where it's going to land."

Many suppliers have spent significant capital retooling their factories, opening new plants, training workers and developing new EV technologies to match auto makers EV growth projections. But auto makers have scaled back as sales fell short of expectations, often leaving suppliers without the return on capital they were banking on.

"Paying off debt [from investments] further down the road won't be good for their bottom line or for investors," said Sam Fiorani, vice president of global vehicle forecasting at AutoForecast Solutions.

Still, auto makers are launching more EV models every year. That could limit certain models' production volumes, and thus parts sales for suppliers, as EV makers face more competition, Fiorani said.

"The pie is being sliced across multiple models that just weren't there six or 12 months ago," he said.

Suppliers are also bracing for the potential impact of tariffs implemented by the incoming Trump administration. President-elect Donald Trump has pledged to implement 25 percent tariffs on goods imported from Canada and Mexico, among other tariff threats.

Should he follow through, there would be major ramifications for the automotive supply chain, which relies on the flow of parts and vehicles over both borders. Tariffs would add significant costs to the production of parts and vehicles and hurt the bottom lines of suppliers.

"If tariffs are substantive, let's say over 10 or 15 percent, it's going to be pretty tough for the industry to be able to move forward," Robinet said. "That's going to be difficult in the current interest rate and profitability environment for most suppliers to withstand, even over the short term."

Auto makers and suppliers alike are likely to take a cautious approach before making decisions on products and investments. They will first look at what the trade and regulatory environment will look like during the second Trump administration.

"Everybody's just kind of waiting into the second quarter at the earliest if they're going to make major capital decisions and which direction they're going to go," Robinet said.