Navigating the road ahead: Automotive industry trends for 2025

The automotive sector is in a transformative period, adjusting to slower sales growth and ongoing margin pressures while also navigating the transition to electric vehicles. The acceleration of software-defined technology developments, tight global competition and evolving industrial policies add to the shifting market dynamics. Facing all these changes, automakers and suppliers need to adapt their operations and investment strategies, identify new growth drivers, and rightsize production levels and product mixes. All of this will enable companies to continue innovating, stay competitive and drive profits.

A changing market

Softer sales, growing inventories and moderating pricing indicate a gradual return to a buyer’s market. With central banks beginning to cut interest rates, we can expect easing borrowing costs to unlock pent-up consumer demand, supporting sales in the coming year. Still, higher inventory levels, increasing discounting and continued capital investment needs are expected to pressure margins across the value chain.

Sales growth in the automotive sector has slowed over the past year, affected by elevated prices, costly financing and moderating consumer spending on discretionary high-ticket items. The seasonally adjusted annual selling rate for light vehicle sales registered 15.78 million in September. Although sales have recovered from pandemic lows driven by supply chain disruptions, growth likely won’t return to pre-pandemic levels in the current market conditions.

And while supply chains have mostly normalized, the sector will continue to face risks from potential disruptions, whether from workers’ strikes, trade restrictions, geopolitical tensions, slower economic growth or natural disasters. This means supply chain visibility is ever more critical to building resilience, managing risks and addressing stakeholder concerns around transparency and sustainability.

Rising car inventories—driven by slower sales and resolved supply shortages—are another source of concern. Companies are using promotional incentives to help clear excessive inventories, and vehicle price increases have paused (though prices are still significantly higher than pre-pandemic levels). And following a period where cars were sold at or even above the manufacturer's suggested retail prices, the sector is seeing a return to sales discounts and promotional incentives to help move vehicles off lots. 

Labor dynamics

The sector is also facing changing labor dynamics. Following last fall’s historic strikes and contract renegotiations between the Detroit Three automakers, the United Auto Workers and Unifor in Canada—resulting in significant pay increases and improved benefits for workers—the sector is seeing a continued push for unionization and rising wages at nonunion plants. At the same time, original equipment manufacturers (OEMs) and suppliers are adjusting their workforces, cutting hours and announcing layoffs to align operations with softer sales and a slowdown in their EV transition plans. 

Despite the cooling labor market, the sector will continue to see a shortage of tech-savvy workers who are adept at operating new technologies for software-defined vehicles and EV production. As the industry competes with other tech-driven sectors for top talent, auto producers need to develop strategies to attract, engage and develop the workforce.

In addition, the sector faces an increasing number and scale of cybersecurity incidents. Considering the growing reliance on digitally connected systems across suppliers, OEMs and dealerships and the associated cyber risks, companies should be proactive in developing comprehensive cybersecurity practices that can prevent and address cyber incidents.

EV transition

Recent EV-related headlines have focused on slower sales and manufacturers scaling back their electric lineup goals, but the long-term outlook remains positive. Three main factors have contributed to slower EV growth in 2024:

• High interest rates. Without question, elevated borrowing costs slowed vehicle sales across the board, with an even bigger impact in the EV space given the higher price point compared to vehicles with internal combustion engines.
• A lack of fresh models. While new EV models have started to roll off production lines, there has not been much diversity among the EV models sold in the United States.
• Early adopters making way for mainstream demand. At this point in the adoption cycle, early adopters have already purchased an EV, and manufacturers are now selling to a new audience. Simplicity, price parity and education will all play major roles going forward.

Looking ahead to 2025, affordability is just one of the factors that will drive future growth. Manufacturers will also need to adjust their critical mineral and battery supply chains to ensure vehicles qualify for the current $7,500 tax rebate and monitor possible changes in this area under the incoming administration.

The lack of a unified charging infrastructure and charger availability is another factor that has complicated EV adoption and led to some consumer confusion, but this is improving on several fronts. Most major manufacturers have adopted the North American Charging Standard as of 2024, and as more existing chargers convert to that standard, adoption will become easier for the average consumer. 

Recently, companies have been hesitant to proceed with large EV investments due to uncertainty around charging capability, but there is a significant cost associated with running lines producing multiple powertrains. Even considering the slower 2024 growth rate, Bloomberg NEF still projects explosive EV sales growth as we enter the second half of the decade.  

Trade policies

The United States and Canada have proposed several measures this year targeting imports of Chinese EVs, as well as their key materials and components. The U.S. administration imposed a 100% tariff on Chinese EVs and a 25% on EV batteries, minerals, steel and aluminum, with Canada introducing similar tariffs. The U.S. Commerce Department in September proposed banning Chinese and Russian software and hardware used in connected vehicles, starting with 2027-year models, identifying them as a national security concern. The Canadian automotive industry pleaded with the government for similar restrictions on the import of Chinese automotive technologies.

These policies aim to protect the competitiveness of the domestic automotive sector and provide time for the development of EV technologies and supply chains. However, in the short term these measures will likely create frictions in established supply chains and add costs that companies need to plan for.

There are also trade uncertainties on the horizon with potential tariff increases on imports from China and elsewhere expected under the incoming U.S. administration. The United States-Mexico-Canada Agreement is also scheduled for review in 2026, well after the U.S. and Canada elections. Current tariffs don’t address vehicles built by Chinese companies in Mexico, so that will likely be a topic of focus during that review.

In any event, given the highly integrated North American automotive supply chain and the highly competitive environment globally, it is essential that the renewed trade arrangement continue to provide for a frictionless, fair and cost-efficient framework for producing and trading vehicles across the region.

The takeaway

Any shifting trade or industrial policies should not make businesses complacent. In the current dynamic market, companies should focus on innovation, productivity-enhancing technologies and product development that would bring to the market cost- and quality-competitive models that meet consumers’ expectations.

As interest rates ease and the U.S. job market remains solid, the sector can expect sustained demand and long-term opportunities from the EV transition, autonomous driving and connected vehicle technologies. But succeeding in this environment requires thoroughly understanding market trends, technological changes and regulatory shifts, and adapting operational models accordingly.