The global automotive industry is currently embroiled in a fierce pricing battle as auto parts suppliers struggle to survive in the face of impending tariffs that could drastically affect their operations. This clash intensifies as car manufacturers engage in critical discussions with U.S. President Donald Trump, who is contemplating imposing a significant 25 percent tariff on most imported car parts starting on May 3. The outcome of these negotiations could have far-reaching consequences for the $1 trillion industry, particularly for smaller players who may find it increasingly difficult to navigate these financial challenges.

On Monday, President Trump indicated that there would be some form of help for the auto industry, although the specifics of this assistance remain vague and undefined. Jean-Louis Pech, the head of Fiev, the French trade body that represents car parts suppliers, stated that his members are gearing up for challenging negotiations with automakers, who are also facing their own pressures. Its going to be a terrible fight, Pech remarked, highlighting the difficult conditions all parties involved must navigate.

Earlier this month, leading French auto parts supplier Valeo reported that it had successfully negotiated an agreement to pass along the increased costs from tariffs to about half of its customers. However, not all manufacturers are on board. One major global car company has firmly resisted requests from its 150 suppliers who sought to invoke a contractual pause known as force majeure to halt price increases. Were not against each other, but were both in tough spots, a senior executive at the company explained, emphasizing the mutual challenges faced within the industry.

Executives across the sector are sounding alarms, indicating that carmakers are likely to push back against many parts suppliers attempting to transfer the additional costs imposed by tariffs. This reluctance is particularly concerning given that many suppliers already operate on razor-thin profit margins, often below 5 percent. Economic uncertainties, including fears of a recession and sluggish demand for vehicles, further complicate negotiations. A recent survey conducted by the EU trade organization Clepa and consulting firm McKinsey revealed that more than half of respondents would need to renegotiate their contracts to accommodate the new tariff framework.

Even prior to the looming tariff crisis, the European automotive industry was grappling with severe financial strains. A decline in vehicle demand had already led to significant job losses, which more than doubled last year. Several notable German suppliers, including Recaro, a producer of vehicle seats, and high-end car parts manufacturer Walter Klein, succumbed to bankruptcy amid the ongoing financial turmoil.

To combat these difficulties, Pech has urged the European Commission in Brussels to implement local content regulations for car parts, introduce subsidies for electric vehicle purchases, and establish an investment program similar to President Joe Bidens Inflation Reduction Act (IRA). We risk losing half of the existing [French] industry if nothing is done in the next five years, Pech warned, noting that approximately 56,000 jobs in France are tied to the car parts sector.

Industry leaders fear that the impact of these tariffs could surpass the challenges faced during the pandemic. During that time, the relationship between suppliers and their clients became increasingly strained as car manufacturers hesitated to fully absorb the rising costs of securing components, particularly semiconductors, which were in scarce supply. While suppliers struggled under the weight of diminished profit margins, carmakersespecially luxury brands like Mercedes-Benz and BMWtook the opportunity to raise their prices and expand their profit margins.

We cant absorb the costs again, lamented one executive at a German parts supplier, highlighting the precarious position many find themselves in. Benjamin Krieger, the secretary-general of Clepa, added a stark warning: If things stay as they are now, [bankruptcies] will be part of the picture: suppliers can either absorb the cost or lose market share.

French auto parts manufacturer OPmobility has already felt the repercussions of recent decisions made by Stellantis and other automotive companies to halt production at facilities in Mexico and Canada, opting instead to import vehicles to the U.S. When a client like Stellantis stops, we have no choice but to stop, stated chief executive Laurent Favre, underscoring the interconnected nature of the industry.

In contrast to Europe, experts observe that the consolidation among Japans auto parts suppliers has been mitigated by the corporate keiretsu network, which is characterized by cross-shareholdings with companies like Toyota and Honda at the core. Reports indicate that Toyota has committed to absorbing the added costs of tariffs for its suppliers; however, there are concerns about how long this support can be sustained. According to Tokyo Shoko Research, Japanese parts suppliers are already facing immense pressure, with the number of bankruptcies rising to an 11-year high of 36 companies in 2024.

Hideki Takamiya, the president of Starlite, a grille supplier based in Osaka that serves clients such as Mazda, Nissan, and Mitsubishi Motors, voiced the anxiety permeating the supplier community. He predicted a 10 percent drop in sales directly attributable to the tariffs imposed on finished vehicles and cautioned about a potential double punch effect from a strengthening yen impacting Japanese exports. I want to say that we can turn this risk into an opportunity but theres no opportunities here, just risks, he stated emphatically. If we dont establish new balanced partnerships between car manufacturers and parts suppliers, then we wont survive.