The automotive industry is under massive pressure on multiple fronts e.g., technology, geopolitics, Chinese competition, operating models, and regionalization of customer needs. These profound challenges put the European and US auto industry at risk. They also expose these regions’ economies given the industry’s share of their GDPs, in the tune of 7% for Europe (14 million jobs) and 5% for the USA (10 m jobs). Furthermore, the auto sector has a significant multiplier effect on other industries, e.g., steel and services at large, as well as on other economies given their global supply chains.

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Addressing these multiple challenges in parallel requires significant capital. Yet, OEM’s profitability is suffering as the Chinese market has flipped from cash cow to cash drain for several players, EV growth expectations have not realized, and EU and US markets remain below pre-Covid levels. 

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What do these various challenges comprise, how do they impact the European and US auto industry, and what can OEMs, suppliers and other players do to address them?

 

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Technological Disruptions on Multiple Fronts

The deepest tech disruption probably comes from the energy transition which impacts automotive as it does many other sectors. Consequences are visible not only in the design of new vehicles, but also in the upstream (e.g., battery, power electronics) and downstream (recycling) supply chains, in the energy infrastructure switching from refueling to charging, and in the service space. 

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The transition from ICE vehicles to EVs has proven not to be linear, forcing OEMs to restart ICE development programs and invest in new architectures such as ICE-based EV range extenders.

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The omnipresence of software is also deeply transforming how vehicles are designed, built, experienced and serviced. The shift to software-defined vehicles (SDV) is accompanied with a profound redesign of the electrical / electronic architecture, with a handful of abstracted high performance computers replacing dozens of closed, feature-specific ECUs. This SW-heavy disruption is also visible in the increasing deployment of ADAS as well as the emergence of autonomous driving.

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Artificial intelligence provides many potential benefits all along the value chain from minerals mining, design and engineering, to manufacturing, sales, user experience, and service. For instance, several OEMs have already deployed Gen AI in their digital assistants and most players across the industry are testing AI to assess potential efficiency gains. See my Feb 2025 article “The AI-Driven Future of the Auto Industry” for a review of these various benefits.

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Companies have no choice but to embrace these various technological disruptions in parallel, which can be resource intensive. To achieve this while optimizing cash outlay, industry players can partner for non-differentiating technologies, e.g., operating system, battery, compute hardware, or the charging infrastructure. They must also build up regional capabilities to cover the complete battery supply chain. Lastly, they must leverage AI wherever possible to gain efficiency.

 

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Geopolitics and macroeconomics in turmoil

The Covid crisis created massive disruption across the industry’s supply chains, which led to efforts to decouple regional economies and reshore (or near-shore) some sources. The crisis also caused volumes to drop significantly. They have not recovered to 2019 levels in the USA or Europe adding on existing pressure to reduce fixed costs.  

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In addition, EV growth took a hit in both regions in 2024 after years of 30-50% annual growth rates, leaving capacity underutilized and R&D costs under-absorbed. The path to electric mobility will remain bumpy in the coming years although the trend is clear and will not be reversed.

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The barrage of tariffs recently introduced — against all economic logic — by the new US administration is by far the most disruptive event the industry is currently facing. For the time being, all vehicles imported in the USA are hit with a 25% import tax except those coming from Mexico and Canada provided they meet the USMCA criteria. While I write this article, some imported parts are to be tariffed as well by early May, impacting the cost of US-made vehicles. Retails prices will go up!

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The uncertainty about how these tariffs will evolve overtime is causing many companies to stall major investment decisions in a wait-and-see position. To what extent should the decades-old, fine-tuned, complex supply chains be reconfigured? How much will markets drop in the coming months as tariffs trickle down to retail stickers?

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Independently from this US-Government inflicted pain, supply chains were already transforming profoundly to localize battery manufacturing and upstream supply chains in both Europe and the USA. This continues although several projects have been cancelled or postponed in the USA due to the actions and messaging of the new administration. Nevertheless, electrification is underway.

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The various geopolitical and macroeconomic forces stated here lead to at least three strategies. One, agility must be at the core of the industry’s supply chain, although this is easier said than done. Two, efforts to lower industrial breakeven must continue to withstand high volume variations. Three, powertrain mix flexibility should be increased between BEV, PHEV, EREV, HEV, and ICE.

 

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China Has Become an Automotive Powerhouse 

China used to be a massive contributor foreign OEMs’ bottom line. No more! Several western brands recently had to subsidize their Chinese dealers in order to keep them afloat as volumes shrunk. Local brands absorbed over 60% of the Chinese market in 2024 vs. less than 40% in 2020.

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Dozens of privately owned OEMs have emerged in the Middle Kingdom over the past decade. However, only a handful of them have become significant players besides publicly owned incumbents such as SAIC, owner of MG. BYD and Geely are not only volume leaders (4.3 and 3.4 million units in 2024 respectively), but also tech powerhouses with high vertical integration. BYD is #2 battery producer with 17% of the global market in 2024 and the global BEV leader with 1.8m units last year.

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Gains in domestic market share result in large part from technology leapfrogging. Chinese OEMs have developed an edge in battery tech, software, user experience, vehicle development cycle, and more. An interesting example is Xiaomi’s SU7 with its class-leading, integrated UX: 135k units sold in 2024 despite being launched in May and being the company’s first car ever. 

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The impact of this Chinese acceleration is largely felt abroad. The country is now the largest car exporter with close to 6m vehicles in 2024, up from 1m in 2020. It also dominates the global battery supply chain from mining (some minerals), mineral processing, to producing electrodes and batteries (over 70% global market share). Chronic overcapacity has led to a price war which limits the ability for non-Chinese players to make the economics of new projects work in a make-or-buy decision.

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Foreign OEMs acknowledge the technology gap and intend to close it. VW Group will use SDV tech from Xpeng for the local market and a Stellantis-led JV is distributing Leapmotor’s vehicles outside China — both OEMs also invested in their Chinese partners. The latest Renault Twingo EV was developed by a Chinese engineering company. Toyota, Mercedes and Nissan partnered with Momenta for their ADAS tech. 

 

These OEMs should not only gain operational benefits from their partnerships in the short term but also learn from them to accelerate their own transformation. In addition, it is key for them to accelerate product cost reduction in order to increase competitiveness. See my February 2025 article for a more detailed analysis on the Chinese transformation. 

 

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The Operating Model and Workforce Must Evolve

As disruptive technologies emerge on multiple fronts, OEMs and suppliers have realized it is most effective in many cases to partner with startups to bring new tech to market quickly and efficiently. The classic sourcing structure by tiers has been partially replaced by joint developments, relying in some cases on companies with only a few dozen employees. Agility here is key to maximizing value creation for all parties.

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As stated above, industry players can also partner with peers to industrialize non-differentiating technologies in order to minimize both risk and cash outlay. This can apply not only to new tech (e.g., batteries or compute hardware) but also to mature tech such as internal combustion engines and their transmissions. The powertrain JV between Renault, Geely and Aramco, Horse Powertrain, is a great example as it reduces diversity, syndicates development costs, and consolidates capacity.

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The automotive industry’s workforce is heavily influenced by the disruptions assessed earlier. This impact relates to employee localization as supply chains migrate, their skill sets as new tech is introduced, and the sheer size of the workforce as AI delivers efficiency gains. The transition and reskilling of certain categories of employees is paramount. Broad programs not only within the automotive space but rather across entire economies must be developed to address this key issue. 

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One could add to this list of major transformations the increasing regionalization of customer expectations. This applies to infotainment and the seamless integration across devices, personalization, the appetite for EVs, vehicle sizes, and more. Accordingly, automotive players should boost regional capabilities to develop region-specific customer experiences on global platforms and increase agility with more local decision-making power.

 

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The current era presents a unique set of challenges and opportunities for the automotive industry across the globe. The stakes are very high. We should expect a wave of consolidation as some players will not be able to take up this massive challenge. This will likely be necessary to ensure the automotive industry is strong in the future.