How automotive suppliers can drive profits in a challenging market

The automotive industry is at an inflection point. Shrinking margins and rising costs left both OEMs and automotive suppliers wondering how they can drive profits in this changing economic climate.

However, suppliers who proactively fortify finances, streamline operations, and innovate with digital tools can adapt to meet both today’s challenges and tomorrows. Keep reading to learn more.

Why are automotive suppliers facing profitability challenges?

Softer consumer demand, high interest rates and rising operating costs pose significant challenges for automotive suppliers. Strained finances and limited R&D budgets can be additional daunting pressures affecting profitability. Tariffs continue to increase prices on imported materials or products, and the industry’s longstanding labor cost issues also remain a factor.

How can automotive suppliers increase profitability?

Automotive suppliers are not helpless in the face of shrinking margins. There are steps you can take to counter these headwinds and protect profits. Here are four broad recommendations:

1. Strengthen financial resilience

Reevaluate your financial strategy to help ensure resilience in a high-interest, low-growth environment. This includes rigorous scenario planning (best-case, worst-case demand forecasts), budgeting for lower volumes and optimizing your cost structure.

Given that production growth is expected to be nearly flat in 2026, with only a 0.01% increase from 2025, according to AFS, a conservative approach to financial management is warranted.

• Conduct stress tests on your cash flow under scenarios such as a 10–20% drop in OEM orders or continued high interest rates.
• Scrutinize capital expenditures, prioritizing investments with clear near-term returns and delaying or staging-gate those that assume aggressive growth.
• Work to reduce debt levels or refinance to mitigate the impact of rising interest costs on your balance sheet and consider hedging against key input price swings where feasible.
• Revisit pricing strategies and contracts with OEMs to help ensure you have mechanisms in place to renegotiate if raw material prices or other costs surge unexpectedly.
• Lean on robust financial models and other financial optimization tools to help manage risk. For example, cash flow forecasting, working capital management and profitability analyses can identify areas where you can trim costs without harming your core business.

By taking a hard look at your financials now, you can avoid reactive cuts later and be certain you have the liquidity to seize opportunities (such as a competitor in distress or a new market opening) even in lean times.

2. Prioritize operational efficiency

In an affordability-driven market squeeze, operational excellence becomes a key differentiator. Suppliers should intensify their efforts to streamline production, eliminate waste, and enhance productivity. Adopting lean manufacturing practices, reducing scrap and rework, and optimizing labor use can directly boost the bottom line.

• Evaluate your operations for bottlenecks or redundant processes that add cost but no value. Even small gains matter. A reduction of just a few percentage points in scrap or downtime can yield millions of dollars in savings.
• Invest in employee training for increased efficiency, reorganizing factory layouts for improved workflow or outsourcing non-core activities to specialists if it’s cost-effective.
• Review your supply chain for cost savings. These could include consolidating purchases to negotiate bulk discounts, qualifying secondary suppliers for better pricing and near-shoring critical inputs to reduce freight costs and inventory carrying costs.
• In the current climate, many OEMs are also emphasizing on-time delivery and reliability (since they are managing tighter inventories than pre-pandemic). Thus, improving your supply chain resilience (e.g., buffering critical stock, diversifying sources) not only cuts costly disruptions but also strengthens your standing with customers.

In short, aim to produce each part more cheaply and reliably, so that even if sales volumes are flat, your per-unit profit improves.

3. Embrace digital transformation

Suppliers should leverage digital technologies and innovative thinking to navigate the affordability crisis. Digital transformation can unlock new ways to reduce costs and create value.

• Explore implementing industrial IoT (internet of things) sensors and analytics on your production equipment enables predictive maintenance, which minimizes unplanned downtime and costly repairs.
• Experiment with smart factories, using real-time production data and AI to optimize scheduling, quality control and inventory management. These tools help produce more with less, which ultimately supports affordability goals.
• Business intelligence dashboards and forecasting tools can help anticipate demand shifts (e.g., detecting if orders for certain high-trim parts are slowing) so you can adjust quickly. In the current market, being data-driven and responsive is a big advantage.

When creating your digital strategy, think in terms of targeted digital investments focused on solving specific business problems that you prioritize by ease of implementation or ROI.

4. Innovate in your product strategy

Innovation in product strategy is also key. Suppliers should stay close to their OEM customers’ evolving needs as consumer preferences change.

• With EV adoption proceeding more slowly than initially expected, many automakers are pivoting to a mix of EV, hybrid, and efficient internal combustion engine (ICE) models.
• Suppliers need to innovate accordingly — for instance, investing in R&D for “bridge” technologies like hybrid powertrain components, improved battery materials that lower cost or lighter-weight materials that can make vehicles (of any propulsion type) more fuel-efficient and cheaper.
• Aligning your engineering roadmaps with the reality that affordable sustainability is the mantra now. Technologies that can reduce vehicle cost or improve efficiency will be in high demand. Collaboration with OEMs in the design phase to engineer cost out (design-to-cost) can also set you apart. In short, use both process innovation and product innovation to thrive in this new landscape.

By embracing innovation, suppliers can increase efficiency today and position themselves for the market of tomorrow, all while maintaining a firm grip on profitability.

How Wipfli can help

Wipfli specialists’ deep understanding of the affordability challenges in the automotive industry enables us to help suppliers take a proactive, strategic approach to fortifying finances, streamlining operations and innovating with digital tools and new products.

We help suppliers continue to drive profitability while supporting their OEM customers in delivering the value and affordability that today’s consumers demand. Contact us to learn more about our diverse service offerings for automotive manufacturers.

Read more

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