Mitigating the Impact of Tariffs in the Automotive Industry Context

The automotive industry is facing significant disruption from recent U.S. tariff policies, which have altered longstanding international trade agreements. The impact varies by industry and depends on factors such as reliance on taxed materials, price elasticity, and growth potential. Given the unprecedented scale of these changes, it may take time to fully understand their short- and long-term effects on the sector. However, industry observers and pundits indicate that the manufacturing and automotive sectors will be the most affected. As tariffs unfold, impacting the economy and demand, some level may become permanent.

Call to Action

In a highly volatile trade and tariff environment, the C-Suite needs to explore avenues for stabilizing the impact of tariffs on their enterprise, industry, and the market. Automotive industry executives should seek ways to drive price and cost efficiencies across the board—from sales and distribution to demand generation, manufacturing, and the supply of raw materials and components.

At Wipro, we believe a proactive approach is essential. We advise our clients to consider the following external and internal strategies to mitigate risks and enhance their competitive position.

External strategies can significantly upend industry relationships and partnerships that could lead to newer supply and business models.

1. Realignment of Vehicle Supply Sources

Almost every automotive OEM manufactures vehicles in China that are intended for import into the US market. With a 145% tariff on all imports from China, there is an urgent need for the OEMs to relocate vehicle manufacturing to other low-cost, lower-tariff countries like India and Korea. Many OEMs have historically had a manufacturing base in India, which makes it relatively easier for them to shift production from China to India.

With the Make in India initiative gaining traction and the Ease of Doing Business improving from the 142^nd rank in 2014 to the 62nd rank in 2019, India is well-positioned to facilitate this shift. OEMs that have recently exited the Indian market or scaled down their operations can, and will be able to, revive the local ecosystem and commence vehicle manufacturing in the near term.

2. Leverage partnerships in the US

Over the past decade, several OEMs have formed partnerships and joint ventures with other legacy OEMs and/or new-age EV OEMs. Ford has strong partnerships with Rivian and Volkswagen. Volkswagen can utilize Rivian and Ford’s EV manufacturing facilities to shift some of their EV production to the US.

General Motors and Honda have had a tumultuous partnership in developing electric vehicles. However, they can capitalize on each other’s technology and manufacturing strengths for mutual advantage, much like their collaboration in the Hydrogen Fuel Cell Joint Venture.

3. Supply Chain Realignment

The US manufactures only about 10% of the total automotive parts consumed in the country, while importing over 40% from countries such as Germany, Mainland China, Mexico, and Japan. Barring Mexico, which can mitigate benefits from tariff reductions under the USMCA agreement, imports from all other nations incur a 25% tariff. OEMs have the opportunity to increase their imports from Mexico and Korea to lessen the tariff burden. Additionally, India presents a viable alternative with its 15% tariffs and a robust automotive industry.

Many of the internal strategies discussed below have been addressed elsewhere. However, the size and scope of the tariff’s impact make it imperative for OEMs to elevate the discussion on these initiatives to the forefront.

1) Forecasting and Integrated Business Planning (IBP)

Some OEMs have a significantly higher inventory on the dealer lot (upwards of 100 days), which can prove very costly when combined with the tariffs on some of those models. Predictive modeling (accounting for black swan events such as the Great Recession and current tariffs) can enable OEMs to forecast vehicle sales with greater accuracy. The improved forecast, when combined with an enhanced sales and operations plan (aka IBP), can help OEMs dramatically improve their production scheduling and sequencing. This, in turn, can significantly reduce their dealer inventory.

2) Improve Manufacturing/Supply Chain Efficiency

Now is the time to identify and address inefficiencies in manufacturing and supply chains more than ever. Enhancing manufacturing throughput and optimization, along with robust energy management in manufacturing facilities, can lead to significant cost savings. Scenario based modeling and decision sciences-based scheduling and sequencing have significantly helped OEMs improve their output.

Advanced supply chain planning and optimization solutions powered by AI and analytics can assist automotive OEMs in enhancing efficiencies and providing greater visibility. With real-time options to adjust supplies and supply routes, OEMs can exert increased control over their manufacturing inputs and optimize tariff-induced supply costs.

3) Localize the supply chain

An essential aspect of localizing high-value components and sub-assemblies is determining which ones yield the greatest value when localized. OEMs should also consider other factors such as proximity to assembly lines, quality, and capacity constraints, in addition to the tariffed cost of the components. Human-AI collaborative supply chain planning can assist OEMs in identifying the specific components and sub-assemblies that can generate the most value in a short timeframe.

4) Reduce cost of sales

Vehicle incentives constitute a significant portion of OEM’s post-production cost of sales. In 2024, there was a sharp increase in vehicle incentives, approaching 8% of the ATP (Average Transaction Price). A large percentage of the vehicles shipped by OEMs are traded by dealers (also known as dealer-swap), which increases the inventory on dealer lots and drives up vehicle incentives. An AI and analytics-based distribution planning and dealer allocation solution can enhance vehicle allocation to dealers. This will ensure that the right vehicle is placed in the right store and at the right time, leading to lower vehicle incentives.

5) Reduce vehicle post-sale costs

Warranty costs have consumed as much as 4% of OEMs’ revenues. These costs arise from various issues, including engineering design deficiencies, lower manufacturing and supplier quality, and higher warranty claims processing expenses.

At the beginning of 2003, the car and small vehicle OEMs paid 75% of the industry's total warranty claims, while truck and large vehicle OEMs paid only 13% of claims, with their auto suppliers covering 12%. OEMs have an immediate and low-hanging opportunity to start working on initiatives that can increase supplier cost recovery and improve the bottom line. AI and GenAI solutions can identify causal parts and related suppliers, enabling a higher recovery of supplier costs.

The current cost of processing auto warranty claims is 28% higher as a percentage of revenue than in 2020. OEMs can initiate parallel initiatives to reduce the cost of processing auto warranty claims. Non-intrusive technology solutions can be implemented that do not require ripping and replacing their existing warranty management systems, leading to a low-pain, high-gain outcome.

Summary

In summary, tariffs imposed by the current US administration are expected to remain in some form. OEMs have an urgent need to move quickly to address and mitigate the impact through a range of external and internal initiatives. To reimagine the supply chains in response to changing trade complexities, Wipro’s AI accelerators are assisting our clients in building their supply chains with inherent flexibility and resilience, which will form the core of their competitiveness in the markets.

We encourage automotive OEMs to assess their current supply chain and demand chain systems and explore how AI-enabled advanced digital solutions can help them mitigate risks and enhance their operations.

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