The damage is evident everywhere. In 2024 the world’s top 30 suppliers suffered a drop in free cashflow of around a third compared with the year before, according to AlixPartners, a consultancy. European suppliers announced 54,000 job cuts worldwide last year, with around 12,000 going at Germany’s Bosch, the biggest of the bunch. On June 24th Continental gave further details on a plan hatched last year to spin off its parts division from its tyremaking business, which has faced less disruption (EVs still need tyres). On June 11th Marelli, a Japanese auto supplier whose troubles have been made worse by debts and President Donald Trump’s tariffs, filed for bankruptcy in America.
Supplying carmakers was once a much better business. In the years before the covid-19 pandemic, suppliers were, on the whole, far more profitable than their customers. The big “tier 1” firms, which deal directly with carmakers, would bid for contracts for larger components made up of smaller parts from suppliers further down the chain. Economies of scale came from supplying many firms with similar products, while bargaining power came from there being fewer suppliers for most parts than carmakers.
A pandemic-induced chip shortage, however, shifted power to carmakers. They cut production to prioritise making pricier, more profitable cars. Meanwhile, suppliers faced a slump in sales volumes, and were unable to raise their own prices because of long-term contracts. The gap in profitability between carmakers and their suppliers, as measured by their returns on capital, narrowed significantly (see chart).
Worldwide car production has since bounced back to its pre-covid level, but is now stagnant. What is more, suppliers are grappling with other challenges. First, although EVs are taking a greater share of global sales, they are not doing so as quickly as carmakers had expected. Many Western suppliers, however, had invested heavily in capacity to build parts for them, some of which now sits idle.
A second challenge comes from the rise of software. The old way of building a car—by integrating lots of parts from big suppliers, each with their own chips and software—is giving way to more centralised computing. This will help carmakers assert more control over the software that will define the driving experience and differentiate brands in the future, much of which is now being built in-house or with specialist partners. For some suppliers, the fear is that they will become makers of commoditised “dumb hardware”, says Andrew Bergbaum of AlixPartners.
These shifts have also opened the door to new entrants. Batteries supplied by firms such as China’s CATL and South Korea’s LG Energy Solution account for a good chunk of the cost of an EV. The electric motors, inverters and control units they connect to can also be provided by manufacturers from outside the traditional auto industry, such as Japan’s Nidec or NXP Semiconductors, a Dutch firm.
Ascendant Chinese carmakers are also giving a boost to local suppliers, which they may take with them as they expand production abroad. For their part, Western carmakers are choosing to partner with nimble Chinese suppliers and software companies to better compete on the mainland—as Volkswagen has done with Horizon Robotics and Mercedes-Benz with Momenta, to help build self-driving cars. Firms that adopt Chinese technology may decide to use it everywhere, notes Pedro Pacheco of Gartner, another consultancy.
It is not all doom and gloom for Western suppliers. Business is brighter for firms that make parts which are not specific to evs or do not contain much software, such as tyres, seats and glass. And the big companies still have the time and money to turn their businesses around. Even so, they may be veering towards a future of lower margins and dwindling profits. ■
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