Even before the EU’s tariffs on Chinese electric vehicles (EV) and the new US automotive tariffs were thrown into the mix, many automotive industry OEMs and suppliers were under immense economic pressure. 2024 saw patchy consumer demand across multiple markets and, in a blow to the electrification transition, EV sales stalled in some, particularly as government incentives were phased out and consumers delayed purchases awaiting more affordable EVs.
2024’s muted sales volumes had an impact throughout the year, with cost cutting measures implemented across the industry, including plants being idled or closed and job cuts. The fallout has continued into 2025 with further job cuts announced in places like Germany and growing excess production capacity in countries like Italy.
This, of course, comes at a time where continued investment in the EV transition remains critical, as both the EU and the UK have reaffirmed their timetables for the phasing out of sales of new ICE and hybrid cars. Remaining static is not an option and OEMs are cognisant of the risks of falling behind, particularly as they witness Chinese EVs tempting customers with their advanced technology and attractive pricing.
With the need for action and investment despite the challenging environment, it is unsurprising that OEMs have increasingly looked towards collaboration as a way of reducing costs and obtaining new technologies whilst also staying in the race to bring affordable EV models to the market within touching distance of the competition.
Exemplifying this, 2024 saw the launch of the US$5.8bn joint venture between VW and Rivian aimed at reducing EV development costs, speeding up innovation and increasing scale. Elsewhere, and off the back of their Horse Powertrain partnership, Renault and Geely recently announced a deal which will see the production and sale of Geely BEVs and hybrids in Brazil using Renault’s existing industrial footprint and sales network in country. This model—providing a local footprint for one partner whilst helping the other share its fixed costs of production—is something that may prove an increasingly necessary solution for under-utilised plants and an effective route to market for new entrants.
Collaboration has also been witnessed within the wider trend of OEMs investing in the EV supply chain. The creation of this new value chain is very capital intensive which makes partnership a logical move for many. Recent examples include Stellantis and CATL’s joint venture for a US$4bn EV battery gigafactory in Spain and VW’s China subsidiary and CATL’s intention to collaborate in developing EV batteries for VW cars in China and more broadly.
At present, most OEMs are just trying to get through the next quarter and hope that President Trump changes his mind
Of course, collaboration is not the only option. While it has since been aborted, the prospect of a potential merger between Nissan and Honda towards the end of 2024 demonstrates that large-scale consolidation in the industry remains possible. In this regard, the Chinese government has identified the challenges facing its domestic auto industry, and is actively encouraging tie-ups between its legacy state-owned OEMs, with Dongfeng Motor and Changan Auto said to be in merger talks. Amongst component makers, particularly legacy ICE suppliers, consolidation is also set to increase and we have seen private capital join the fray with Carlyle’s 2024 acquisition of Worldpac in the US and its creation this year of an automotive parts platform in India by taking controlling stakes in Highway Industries and Roop Automotives.
The first quarter of 2025 has seen further unwelcome developments with the industry finding itself front and centre of the unfolding US trade war. Whilst tariffs alone would be more than enough additional disruption for the industry at this time, the uncertainty is also creating a significant obstacle to effective long-term investment and business planning.
At the time of writing, there is a 25% import tariff on all cars manufactured outside of the US, which (subject to any future changes) will also extend to most major auto parts from 3 May. This is seismic for the industry, with European and Korean OEMs the most exposed. 50% of all vehicles sold in the US in 2024 were imported and 60% of all auto parts were imported.
For now, the strategy of many OEMs is short-term only and to hold fire for a couple of months. Their inventory in the US will allow most of them to hold cars at ports for that period. Some, such as Mercedes, have said they will then absorb the impact of the tariffs (easier to do with a premium model than a compact model). Others, such as VW, have said they will add an import fee. Some of the additional tariff cost will be borne by US dealerships as the wholesale price is likely to increase by more than they can increase the sticker price. However, component suppliers are making it clear they will expect to pass on the price impact of the tariffs in full which will hurt OEMs, including their cash flow.
50% of all vehicles sold in the US in 2024 were imported and 60% of all auto parts were imported
In the medium term, expect to see those with production facilities in the US maximise local production, divert more of that local production for sale in the US and, potentially, the production of a few additional models in the US. At present most OEMs are just trying to get through the next quarter and hope that President Trump changes his mind.
How this will play out longer-term is unclear. Under the Biden-era IRA the US had already secured significant promises of foreign investment for the automotive industry and more recently Hyundai announced an additional US$21bn investment in the US including US$9bn to expand its US production capacity.
Despite the current turmoil and unprecedented levels of disruption, the remarkable fact is that the EV transition is continuing to fare well. By way of examples BYD sold one million EVs in Q1; over 50% of cars sold in China were EV; and the UK continues to witness a fast-growing share of EV sales. With judicious continued investment, governmental support (both in terms of funding/incentives and policy support) and strong execution by OEMs in delivering attractive, quality new models to market the EV revolution can and will yet come to fruition.
About the author: Roddy Martin is Partner and Global Head of Automotive at Herbert Smith Freehills
