Automotive Suppliers: What to Expect in 2025?

With the world’s EV transition happening slower than expected, especially in Europe & the US, many OEMs are now experiencing a hangover of over-investing and over-hired for many years straight.

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This has now led to hiring freezes, layoffs, and fewer project deliveries.

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It’s not all bad news, however. Crisis creates opportunity. In the long term, automotive is still positioned to be one of the world’s most valuable ecosystems, so now is the best time for suppliers to prepare for 2025 and beyond.

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Automotive Suppliers: What to Expect from OEMs in 2025

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Today’s OEMs quickly realize that they are less in the car business and more in the tech business.

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Being a tech company means building your own software, integrations, and more from the ground up to be able to deliver a consistent experience.

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The hardware in a car is only as impressive as its software, and this part of the development is something that OEMs will want to own fully.

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Whether they will succeed in doing this is still uncertain. The main blocks are the legacy background and the wrong workforce. 

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To fix the workforce problem, OEMs have ramped up software hiring a lot in the past 5 years, many times without a solid structure or goal, which has caused the software units to under-deliver and are now being re-examined as new cars are released late or not at all due to software issues.

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We predict OEMs to do the following things in 2025:

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• Try to in-source their core capabilities (which will include software) to not rely on individual software components from traditional suppliers
• Reduce permanent software headcount due to over-hiring in the past 5 year
• Partnerships or joint-ventures with new entrants to access their software stack (e.g VW partnership with Rivian)

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How is Big Tech Affecting the Tier1 Supplier Business?

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As cars become large devices on wheels, there’s a big incentive for big tech companies to establish in automotive (Google, Apple, Microsoft, Amazon, ARM, Huawei etc.). 

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In the past, we have already seen huge cloud contracts, native infotainment, and even big tech building their own cars.

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Previously, what happened inside the car belonged to the Tier1s with profitable turnkey solutions that could easily be plugged into and sold millions of cars.

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However, as cars become large computers, legacy Tier1s are suddenly noticing that they don’t anymore have the core expertise in software and tech, at least compared to the level of big tech.

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Big tech is, therefore, able to play an increasingly larger part in the overall value chain of the vehicle.

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We predict big tech is, therefore, going to affect the Tier 1 supplier business in the following ways in 2025:

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• Big tech will increasingly win significant cloud & service contracts
• Apple and Google will see their share of vehicle and customer data increase, as they integrate deeper with Apple Carplay and Android Auto, and further cementing their position as the main user interface vehicle owners interact with
• Chinese big tech companies will continue making large car debuts (like Huawei) when they realize that vehicles are just becoming large smartphones on wheels
• Tier1s with turnkey software solutions are increasingly going to lose product contracts to big tech, and have to either focus on the lower-margin hardware or find new solutions

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It’s not all bad news yet, though. Big tech will certainly increase their share of the pie, but also unlock new value ecosystems and make the pie bigger for existing Tier1 suppliers. The time to get into these new-value ecosystems is now.

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Is the Tier1 Service & Testing Business Being Disrupted?

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The Tier1 service & testing business of maintaining and upgrading software is probably here to stay for some time. 

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The reason for this, is that although OEMs would ideally like to insource this capability, they most likely won’t have the right talent base to do so, as the talent base is tied up to large Tier1s and engineering services companies.

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Big tech on the other hand, will be too busy building their own high-margin software products, and won’t allocate their own staff for this purpose.

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This means that for the time being, the large servicing, testing, and validation contracts will still be up for grabs.

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However, this part of the ecosystem is also where the margins are the lowest and the competition is the fiercest.

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We predict that the following will happen around the service & testing contracts in 2025:

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• Thanks to their talent pool, software engineering services providers will still have lots of work. However, they will see their margins significantly squeezed 
• Traditional Tier1s will largely experience the same, but will still have hardware to fall back on to. 
• Tier1s will have to innovate with new high-value products to avoid being too reliant on the service and testing business

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Final thoughts

Sitting still and thinking business will continue as normal is a recipe for a slow death for current automotive suppliers.

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Instead, Tier1s need to come up with products that take part in the new-value ecosystem of big data and tech, or risk falling behind with low-margin service contracts and hardware.

They also need to disrupt their existing business models by integrating with new solutions and startups.

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As a final fitting quote to take with you into into the new year: “Never waste a good crisis.” 

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Now is the best time to plan how to take advantage of this new reality and build a strong foundation for 2025.

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