Auto Supply Chain: Merge or Miss Out?

Industry disruptions present numerous challenges for auto suppliers of traditional powertrain and chassis systems.

For example, internal combustion engine (ICE)-components suppliers—who have primarily focused on mechanical components—must now manage the dual challenges of transitioning to electrified vehicles and  integrating software into their offerings. They need to make sizable investments in research and development, as well as collaborate with tech companies, to create innovative solutions.

With global free trade under attack, it is even more critical for these suppliers to develop in-house software solutions that can meet client needs, supporting their company’s organic growth and expansion.

Plenty of traditional auto suppliers are looking for life rafts as margins erode and the industry’s focus shifts to software. Although the transition to EVs and SDVs began well before 2020, these trends are reshaping consumer expectations over time. Today, buyers are increasingly looking for energy-efficient vehicles that offer advanced features, such as autonomous driving, connectivity, and enhanced safety.

In turn, traditional ICE suppliers are facing a diminishing marginal returns game — there’s not much more that can be wrung from fundamental components and systems in terms of functionality.  

Some may argue that mechanical innovation isn’t entirely dead — pointing to examples like BYD’s all-electric Yangwang U9, launched in February 2024. The vehicle’s proprietary DiSus-X Intelligent Body Control System(opens in a new tab) enables it to  perform manoeuvres like jumping over obstacles. But while such capabilities may seem like mechanical marvels, they are fundamentally enabled by software. While introducing DiSus system in 2023, BYD said it “offers collaborative control in body dynamics (lateral, longitudinal, and vertical motions), which provides a foundation for the future development of Advanced Driver Assistance Systems (ADAS)”.

This kind of integration—where physical performance is enhanced through sophisticated software—is a clear signal of what traditional OEMs and suppliers are up against. It also highlights how innovation is shifting away from foundational components toward intelligent systems that redefine how vehicles perform.

Auto supply chain disruptions caused by natural disasters, geopolitical tensions, or pandemics can severely impact production schedules. As a result, manufacturers are reconsidering their reliance on just-in-time (JIT) models—which have become increasingly risky and cost-inefficient—and exploring alternative sourcing strategies.

Some of the biggest OEMs now value strong relationships with a reduced number of suppliers who hold leading positions in their respective markets. In a volatile market, OEMs also expect their large suppliers to provide cost reductions while maintaining high standards for product quality.

To meet these requirements, suppliers are exploring new business models and revenue streams. Their strategies could involve entering new markets through strategic partnerships, diversifying their product offerings and mergers and acquisitions (M&As).

Some of the recent M&A deals such as American Axle & Manufacturing’s (AAM) acquisition of Dowlais Group(opens in a new tab)—which owns GKN Automotive and GKN Powder Metallurgy—and ABC Technologies’ acquisition of TI Fluid Systems(opens in a new tab) are driven by these unprecedented challenges the industry is facing. Both AAM and TI Automotive expect the acquisitions will allow them to expand their expertise and provide their customers with a diverse and powertrain-agnostic product range, across different regions, aligning with the automotive industry's shift towards EVs and SDVs.

The merger between Schaeffler and Vitesco Technologies(opens in a new tab), completed in October 2024, was also aimed at combining their strengths in powertrain technologies and electrification solutions, positioning the combined entity as one of the top suppliers of motion technology.

Both Schaeffler and AAM are also suppliers of chassis systems, which are undergoing transformation driven by technological advancements and increasing demand for enhanced vehicle dynamics. S&P Global Mobility forecasts highlight a clear trend toward the increasing adoption of active and semi-active suspension systems(opens in a new tab).