A Challenging 2025 for Automotive Demands Bold Choices From Automakers

As the automotive industry enters 2025, there seem to be few reasons to expect the second half of the decade to be any more positive than the first. Having already navigated disruptions to demand, a shortage of critical components, and macroeconomic headwinds such as inflation and restrictive monetary policy over the last 5 years, automakers face significant challenges in 2025, especially with regard to geopolitics, a shifting policy framework for net zero, and minimal returns from long-term technology bets such as autonomous driving. In order to navigate this challenging environment, automakers must face up to new political realities and reconsider their strategies for electrification and automation, with a heavy focus on short to midterm, tangible revenue generation.

Changing Fortunes in China: Over the course of the past 15 years, China has been the engine driving growth within global automakers, as many of the brands that have defined the automotive industry for over a century found themselves benefiting from a large population, with a growing middle class, and a strong appetite to spend disposable income on cars, particularly luxury brands originating overseas.

However, what was once the automaker's dream has become a nightmare, as many global Original Equipment Manufacturers (OEMs) accustomed to selling more vehicles in China than the rest of the world combined find themselves thoroughly outclassed by domestic automakers that have emerged in recent years. A focus on developing Electric Vehicle (EV) technologies, partnering with the local technology giants that dominate the Chinese digital ecosystem, and a far more rapid time to market has seen local OEMs running rings around international alternatives. At the same time, local OEMs have increasingly pivoted toward working with local suppliers of key enabling technologies, including compute and connectivity. In some cases, this is due to a comparative technology advantage held by the local supplier, particularly in the EV domain, while in other cases, this reflects a tendency to de-risk the supply chain from growing geopolitical tensions.

The explosion in the number of Chinese OEMs, combined with a mild dampening in the fortunes of the typical Chinese consumer, has resulted in intense competition on price, which even lean Chinese OEMs and their suppliers find challenging, never mind slower moving and bloated global automakers. Overall, if global OEMs want to restore their volumes to those enjoyed in the closing years of the last decade, they need to become more competitive in China—developing plausible EV alternatives that are cost-effective, and delivering digital innovations more rapidly and on a regular cadence. Similarly, suppliers should abandon any commoditized technology opportunities in China, and focus on areas where technology leadership warrants the geopolitical risk.

Electrification Uncertainty: The global EV market is in a curious position going into 2025. Far ahead of where most had expected adoption at the mid-point of this decade, the market is nonetheless struggling outside of China. Regulation, mandates, manufacturing subsidies, and consumer incentives have all played a major role in shaping the direction of the EV market around the world. In the United States and Europe, long-term ambitions for full electrification are no longer being met with short-term incentives, as subsidies diminish and regulatory thresholds are pushed out to minimize the pressure on domestic automakers.

Meanwhile, OEMs what were pleasantly surprised by the rapid growth between 2020 and 2023 and confident of continued subsidies and clear adoption targets, had begun investing heavily in EV manufacturing capacity. Now, stalling consumer demand and a more muddled regulatory environment finds automakers with excess capacity. Although China remains a strong market for EVs, with over 50% adoption, protectionist measures adopted by the United States and European Union ()EU are limiting the ability of this mature market to scale adoption internationally.

Minimal Returns from Long-Term Technology Transformations: Electrification is not the only technology trend that is now lagging behind automaker expectations. The pivot toward Software-Defined Vehicles (SDVs) has seen automakers undergo disruptive organizational changes and invest heavily in software expertise, but with little to show in terms of attributable revenue at this juncture. Similarly, autonomous driving has fallen far short of the transformation that automakers expected, with robotaxi-based mobility services still only visible in green shoots, and traditional automakers having virtually no share in what little services are commercially available. Once again, geopolitical tensions are further complicating adoption, as deployers strive to secure completely independent supply chains for China and the rest of the world, anticipating that such a critical Artificial Intelligence (AI) application will soon become a focus for protectionism in key markets.

While none of the above challenges have easy answers, what is clear is that the industry cannot afford business as usual.

Global automakers are unlikely to secure the market share that they once held in China, but there are key steps that they can take to reverse their current decline. The most fundamental requirement is an EV platform that can compete with the capabilities of domestic rivals in terms of range, charging times, and price. No amount of brand prestige or history can overcome a lackluster EV platform, as demonstrated by the terrible performance of the Mercedes-Benz EQE in China. At the same time, global automakers must up their game in software-defined experiences and the digital cockpit, recognizing that that typical Chinese new car consumer is now much younger and much more interested in digital features than their American and European counterparts. One way to deliver on both of these objectives would be for global automakers to domesticate their Chinese supply chains, working with local partners and imitating the practices of their Chinese competitors to improve their time to market, and deliver experiences better aligned with local customer expectations.

For suppliers finding themselves excluded from China, the best strategic pivot in the short term is to reposition as the supplier of choice for rest of world markets. With Chinese OEMs largely excluded from the United States, and the conventional happy hunting grounds for Chinese OEMs (Latin America and Association of Southeast Asian Nations (ASEAN) markets) being relatively immature in their adoption of EVs, Autonomous Vehicles (Avs) and SDVs, suppliers should focus on Chinese OEMs exporting into European markets. With tariffs on Chinese EVs increasing in the EU, suppliers should prioritize larger Chinese automakers with the scale and margin to better accommodate the hit incurred from these tariffs, such as BYD, Zeekr and, to a lesser extent, SAIC. For more context, please see the ABI Insight, “The EU’s Lenient Tariffs on Chinese EVs: Good for Europe’s EV Transition, Decent for BYD, Bad for European OEMs.”

With respect to autonomous driving, it is high time that automakers take the difficult, but necessary decision to pivot from expensive and duplicative in-house development in favor of more turnkey solutions available from a number of third parties. This change in approach would save costs at a time when resources are better invested in EV platforms. Automakers should select suppliers capable of supporting some degree of differentiation, with a scalable platform that can adapt to address more relevant opportunities, including Level 2+ and highway Level 3.

Finally, for electrification, the focus must be on reducing costs, not through moonshot technologies such as solid-state batteries, but through a doubling down on conventional lithium technologies, such as Lithium Iron Phosphate (LFP), and improving the yield rates for these existing solutions.