Navigating the future of localization in automotive

The automotive industry is at a critical juncture, transitioning from a long-standing globalized model to a more localized approach. This shift was driven by a combination of geopolitical events, protectionist policies and the need for greater supply chain resilience. For decades, the industry has benefited from global free markets, achieving high volumes at low costs by leveraging international supply chains. However, recent events such as the trade tensions between the US and China, the global pandemic and the Russian invasion of Ukraine have disrupted this status quo, compelling auto companies to reassess their operational footprints and move toward more localized models.

The move toward localization isn't just a reactive measure but a strategic imperative. Automakers must adapt by investing in local production facilities, building stronger relationships with local suppliers and embracing advanced technologies to maintain competitiveness. For example, the Inflation Reduction Act (IRA) of 2022 includes tax credits of up to $7,500 on eligible North America-produced electric vehicles (EVs), aimed at bolstering domestic EV production and reducing reliance on Chinese supply chains. Similarly, the CHIPS and Science Act, signed into law in August 2022, allocated $54 billion to promote domestic semiconductor production, reducing automakers' dependency on foreign suppliers. These government initiatives are driving the localization of supply chains and promoting domestic production of critical components.

To navigate this evolving market landscape, we recommend several key strategies. Automakers must focus on scenario planning to adjust to reduced volumes and identify break-even points for sustainability in a regional presence. They should analyze their current business models and determine whether to maintain them or make significant changes, considering the accretive value to shareholders and the potential risks and opportunities in existing and new markets. Substantial investment in local supply bases is crucial, whether through establishing their own suppliers or incurring higher costs to support local supply chains. Additionally, maintaining vehicle affordability is a significant challenge, and companies must explore efficiencies through AI and automation to achieve cost parity with global sales.