Sourcing Re-Evaluation Underway

This new operational reality impacts several facets of the business: sales, production, design and sourcing.

April 21, 2025

Michael Robinet

The events of the last few months (re: tariff structures) underscore that the world is becoming more insular. Last month’s column (on re-regionalization) outlined that major markets like China, the U.S. and the EU already have or are increasingly building a moat around their markets. Whatever the economic strategy, OEMs and suppliers have to adapt and thrive in this emerging ecosystem. This new operational reality impacts several facets of the business: sales, production, design and sourcing. As an extension, this new dynamic has us questioning the future number and relative scale of OEMs on a global basis.

In multiple cases over the decades, global OEMs have been born from a home-grown company that extended its reach to markets abroad to increase volume and diversify demand. Often, to drive jobs, there was a federal or regional government that offered support through incentives or trade assistance for the establishment and subsequent growth of a home-grown OEM and its surrounding supplier ecosystem.

The list is long of OEMs that can trace their lineage back to some level of governmental support that allowed for the enterprise to reach the next level. Over the years, several of these OEMs expanded beyond their home region to grow sales and production abroad. Through this process, many OEMs could utilize a variant of the hub and spoke model – building high-volume vehicles abroad while filling in their global portfolio of lower-volume variants with production. Larger OEMs such as Toyota, Volkswagen Group, and Hyundai Group employ a strategy of building most of their requirements in the regional market, then augmenting the portfolio with lower-volume entries built in scale back home. This model worked for decades, but the emerging insular economic approach in the U.S. is now challenging the underlying structure.

While larger OEMs may be able to efficiently diversify their sourcing strategy for a major market through co-located production in-region and sprinkling in low-volume entries sourced from the home market, smaller OEMs and distinct global brands face a different challenge. How do global, lower-volume, mass-market OEMs and luxury/performance brands compete in this environment? While the dynamics may be different in these cases, several questions need to be posed:

Do we have enough scale economies to co-locate a plant outside our home market, build 1-2 of our high-volume vehicles there, and augment the portfolio from our home market and be competitive?

Is it possible to collaborate with a larger OEM already in-market to build select variants and escape most of the tariff impacts?

Will we need to pare our portfolio outside our home markets due to competitive dynamics and our relative cost position?

These and many other issues need to be investigated as the industry conforms to whatever longer-term trading dynamic exists for automotive in North America. From the supplier side, tough decisions also emerge. Co-location offers several challenges, the benefits of diversifying the regional and global customer base, while taking currency shifts and tariffs out of the risk equation has its benefits.

Nonetheless, smaller OEMs and distinct global luxury/performance brands will need to think out of the box if increased tariffs in the U.S. are part of the long-term equation. Decisions of automotive sourcing and portfolio size cannot be knee-jerk in nature. A long-term expectation for a trade structure and economic environment is critical to success. OEMs and suppliers are ill-advised to make important sourcing decisions requiring capital and resources unless a stable structure is forecast. This is especially important with smaller OEMs where more is at stake. Yet another challenge facing our beleaguered industry.