As we progress further into 2025, it is crucial for automotive suppliers to recalibrate their strategies and focus on key areas that will not only keep them competitive but also position them as leaders in this evolving market.

Based on our experience with US automotive suppliers, this year we will concentrate on three key areas: profitability management, liquidity optimization, and regulatory uncertainty.

Profitability management that protects margins and cuts costs

For multiple reasons, operational efficiency and cost reduction will be crucial for automotive suppliers in maintaining their profitability and fending off competition, especially when production volumes in North America and Europe are slated to decline in 2025.

1. Tariffs

The US imported $98.9 billion in vehicles and $82.5 billion in auto parts from Mexico in 2024, to give just one example of the scale of the country’s reliance on foreign suppliers. Those figures indicate how significant changes in US trade policies, including a new tariff regime, could disrupt automotive supply chains and raise costs for imported components and raw materials like steel, aluminum, and copper, as well as battery materials such as lithium, nickel, cobalt, and graphite. At the same time, the tariffs and other related economic and geopolitical factors could boost demand for American-made vehicles. 

2. Overhead expenses

Selling, general, and administrative (SG&A) expenses rose by 1.4% for European suppliers and 1.3% for North American suppliers as a percentage of revenue between December 2023 and December 2024 (see Exhibit 1), suggesting that suppliers may need to optimize overhead costs in light of declining revenues.

Optimizing liquidity by mastering cash flow and investments

Managing liquidity will be key to overcoming current headwinds in 2025.

1. Working capital

The cash conversion cycle (CCC), which measures the time from material purchase to finished goods to sale to cash received, has remained long for North American automotive suppliers and has lengthened significantly for European suppliers since 2023 (see Exhibit 2). This phenomenon can be attributed to several factors, including supply chain strains, semiconductor shortages, and shifts in consumer demand.

To address working capital management challenges, suppliers should invest in advanced forecasting and inventory management technologies that improve their responsiveness to market fluctuations and minimize the risk of inventory accumulation. Additionally, cultivating strong relationships with customers and financial institutions will be crucial for maintaining liquidity and ensuring that suppliers can meet their operational requirements without compromising financial stability.

2. Capital expenditure investments

Over the past few years, consumers have been voting with their dollars to buy more hybrid, electric, and plug-in hybrid vehicles (see Exhibit 3). This transition requires suppliers to prioritize allocating budget to capital expenditures such as research and development, manufacturing facilities, and supply chain enhancements. Suppliers who choose to maintain their focus on internal combustion engines should invest in technologies such as enhanced engine efficiency and reduced emissions, ensuring their products meet evolving regulatory standards and consumer expectations.

3. Debt maturities

A substantial portion of corporate debt for public automotive companies — approximately 31% (or $36 billion) — is set to mature in 2025 (see Exhibit 4). Automotive suppliers will be confronted with the challenge of refinancing this debt at potentially much higher interest rates (see Exhibit 5), which could significantly impair their financial health and operational flexibility. To navigate this challenging landscape, automotive suppliers should proactively collaborate with lenders and bondholders to strategically manage interest expenses and tailor amortization schedules for their upcoming debt maturities.

4. Cash on hand

The challenges associated with refinancing are exacerbated by the cash position of automotive suppliers. Although cash as a percentage of assets has remained at historically high levels over the past four years, it is now reverting to the 15-year average of approximately 12% (see Exhibit 6). This trend indicates that the need for refinancing could become increasingly pressing as cash reserves diminish and highlights the critical importance of strategic financial planning and risk management in 2025.

Turning regulatory uncertainty into competitive advantage

The regulatory landscape for automotive suppliers is becoming increasingly complex and uncertain, presenting both challenges and opportunities that require careful navigation.

1. EV tax credits uncertainty

The potential termination or modification of tax credits and other incentives in the US could significantly impact consumer demand for EVs in the short and long term, such as the recent surge in EV purchases in fear of the new administration revoking the EV tax credit, which in turn would influence production volumes, sales prices, and the demand for related components. Therefore, it is crucial for suppliers to closely monitor these policy shifts and adjust their strategies accordingly, whether that means diversifying their product lines or modifying their supply chain.

2. Green infrastructure investments

The future level of funding for green infrastructure remains unpredictable. Suppliers engaged in charging infrastructure or related technologies should take this uncertainty into account during their planning processes. For example, they might consider developing partnerships with public and private entities to secure funding or explore innovative financing models to support their projects. To mitigate potential risks, diversifying their offerings may be a prudent strategy, allowing them to adapt to changing market conditions.

Call to action for auto suppliers — prioritizing resources in 2025

To help automotive suppliers prioritize resource investment, we have developed a framework that helps suppliers benchmark themselves against their peer groups. It categorizes suppliers based on two key metrics: Last Twelve Months (LTM) revenue growth and the Oliver Wyman Adjusted Defense Interval (the number of days the company could continue business as usual if all cash inflows stopped). Exhibit 7 shows a snapshot of the top 30 public automotive suppliers in the US utilizing this framework.

We provide initial recommendations of areas to focus on based on which quadrant an auto supplier’s performance falls in:

1. Expansion-focused (top right)

These are companies experiencing continued revenue growth and possessing a strong cash position, giving them the flexibility to invest in new technologies, pursue strategic acquisitions, and weather market downturns. There are several moves to focus on to maintain and improve their success.

• Identify capacity expansion areas and potential mergers and acquisitions (M&A) targets.
• Optimize their balance sheets to reduce debt burden and maximize return on invested capital (ROIC).
• Review vendor and payment terms to improve the costs of production.
• Review the price book for products to maximize profitability.
• Invest in continuous improvement programs and leading technologies.

2. Capital-focused (top left)

This is a group of companies that are growing rapidly but are vulnerable to cash flow and liquidity constraints. Managing working capital and raising new financing, made possible by their high revenue growth, should be their primary focus.

• Assess products and the market to invest in higher-margin products.
• Assess market positioning to mitigate threats to revenue.
• Aggressively manage pricing of products to ensure continued growth.
• Renegotiate supplier/customer terms and explore joint ventures and strategic partnerships.
• Renegotiate terms with lenders and raise additional equity.

3. Exploration-focused (bottom right)

Suppliers in the lower right quadrant have a strong financial foundation but may be facing challenges in generating top-line growth. They should consider deploying capital expenditures to diversify their product portfolio and explore new markets to reignite growth.

• Invest in continuous improvement initiatives, including automation.
• Identify production expansion areas (including vertical integration).
• Identify M&A/joint venture (JV) targets, especially with higher-growth firms.
• Invest in emerging technology and research and development (R&D) to bolster revenue growth.
• Invest in marketing and branding to improve competitive positioning.

4. Foundations-focused (bottom left)

Companies in the lower left quadrant face the most significant challenges. They may need to take immediate action to improve operational efficiency, reduce costs, and explore all available financing options to enhance their liquidity and stabilize their business.

• Reduce fixed costs aggressively using zero-based budgeting — this will help relieve pressure on the company’s liquidity situation.
• Rationalize stock-keeping units (SKUs) and product lines to reprioritize any SKUs that may have revenue growth potential.
• Form partnerships with original equipment manufacturers (OEMs) to enhance liquidity where possible.

Equipped with the peer benchmark understanding, suppliers can identify areas to investigate further and develop a tailored action plan that addresses specific challenges and capitalizes on strengths to successfully achieve strategic goals while navigating the uncertainties anticipated in 2025.