How Automotive Suppliers Can Navigate Key Challenges In 2025

Following a period of recovery from the COVID-19 pandemic, the automotive industry is facing renewed pressure, particularly since the latter half of 2024. There are declining volumes across most markets and a significant degree of uncertainty, especially concerning the coexistence of battery electric vehicles (BEVs) and internal combustion engine (ICE) vehicles. According to our 2025 Automotive Report, this trend is expected to continue into 2025.

Automotive suppliers are disproportionately affected by this uncertainty. Average profit margins have consistently been lower than those of original equipment manufacturers (OEMs) since 2020. German suppliers, in particular, are experiencing markedly lower margins compared with their counterparts in the Americas and Asia. Economic forecasts suggest that 2024 was a challenging year, with little indication of improvement in 2025 (Exhibit 1).

Exhibit 1: OEMs face renewed pressure but maintain healthy margins

EBIT margins of OEMs and automotive suppliers globally, in %, 2017-2024

Line chart that depicts the margins of OEMs starting at 6.3% in 2017 and experiencing a dip in 2020 to 3.9%, before rising to 7.7% in 2021 with a projected decline beyond 2023. Suppliers globally began at 7.7% in 2017, declined to 3.9% in 2020, and reached 6.5% in 2023 with projected stability. Suppliers in Germany started at 7.6% in 2017, declined to 2.2% in 2020, and reached 4.1% in 2023 with a forecast suggesting slight decrease.

Challenging times for powertrain suppliers in Europe

The powertrain segment, which includes components such as the engine, transmission, driveshafts, differentials, and axles, has historically represented a lucrative opportunity for suppliers in Europe. These components work together to generate power and deliver it to the road surface, making them essential for vehicle operation. Between 2017 and 2023, margins in the powertrain segment exceeded those of non-powertrain suppliers by 1.5 percentage points. However, the ongoing BEV/ICE duality is eroding this historical advantage. In contrast, the Americas and Asia continue to offer promising market opportunities for this supplier segment (Exhibit 2).

Exhibit 2: Powertrain (ICE and BEV) are declining in Europe but rising in the Americas and Asia

Profit margins per region: Powertrain (ICE and BEV) versus no powertrain EBIT to revenue, in %, revenue weighted average

Line graphs showing supplier exposure in Europe, Americas, and Asia from 2017 to H1 2024. Two lines compare exposure: Powertrain and No Powertrain, with dashed lines indicating quartiles. Most regions show a big decline in 2020 and rise after 2021, with a slight decline after 2023.

Why automotive suppliers must operate in both BEV and ICE markets

To effectively navigate the current market landscape, suppliers must strategically position themselves to operate in both the BEV and ICE segments. This dual focus is essential for risk mitigation and for keeping pace with the diverse demands of various geographical markets. With thorough preparation and strategic foresight, suppliers can leverage the evolving market environment to create distinct competitive advantages and drive differentiation.

Three steps to help automotive suppliers navigate industry uncertainty

Improve business fundamentals

Many suppliers lack transparency in total costs and profitability by customer and technology.
The focus is often on revenue maximization instead of strategic profitability.
Short-term and unsustainable strategies are typical.
Claims management remains a weak area for many suppliers, lacking professionalism.

Enhance competitiveness

Many business models will not remain competitive against emerging Asian competitors.
Customers prioritize speed over quality, with potential later updates.
A globally aligned product portfolio does not work anymore; a local-for-local approach is essential.
Technical feasibility often takes precedence over customer needs in product development.

Plan for sustainable growth

Suppliers overly rely on traditional financing options versus exploring new options (e.g., debt funds).
Communication and strategies are misaligned with capital market expectations and requirements.
Suppliers fail to collaborate ("joining forces") to capitalize on the benefits of increased cooperation.

Automotive industry 2025 outlook — challenges and opportunities for BEV and ICE suppliers

In addition to managing a BEV and ICE duality to mitigate risks associated with varying transition speeds, it is imperative for distressed suppliers to consider strategic collaborations and alliances within the automotive industry in the foreseeable future. Various partnership models should be explored, including:

Horizontal partnerships: collaborations among automotive suppliers
Vertical integration: alliances with upstream suppliers
Direct OEM partnerships: engagements with original equipment manufacturers
Collaborations with technology providers: partnerships with tech companies

The advantages of these collaborative approaches are manifold, including enhanced innovation capabilities, improved product quality, cost efficiencies, and effective risk mitigation, just to name a few. With a well-defined strategy, automotive suppliers should be able to navigate and master the ICE/BEV transition.

If you’re an automotive industry player navigating an uncertain market or considering partnerships with other OEMs, suppliers, or technology providers, our team possesses the essential contacts, knowledge, and expertise to help you. Get in touch by completing this form, and we’ll provide you with a copy of the full report.