Automotive suppliers in Europe, the Middle East, and Africa (EMEA) are likely to face the same headwinds this year as they did in 2024, namely, subdued automotive production, slow and volatile adoption of battery electric vehicles (BEVs), and the rise of Chinese original equipment manufacturers (COEMs).

At the same time, new hazards, such as trade tariffs, could reduce operating visibility and further reduce profitability and rating headroom. With about 50% of rated European auto suppliers on a negative outlook, S&P Global Ratings sees an increasing risk of downgrades in 2025 (see chart 1).

We believe that diversified auto suppliers with the least exposure to the powertrain transition, stronger balance sheets, and better positions with COEMs will fare best in 2025.

Most European auto suppliers have limited financial flexibility for large debt-financed acquisitions and may have to rely on disposals to restore rating headroom.

In this Credit FAQ, we answer questions from investors about the nature of the hazards that European auto suppliers are facing and their possible implications for operating performance and ratings.

Frequently Asked Questions

What developments does S&P Global Ratings foresee for European auto supplier credit ratings in 2025?

We see an increasing risk of downgrades for rated auto suppliers in EMEA, as evident from the higher proportion of negative outlooks at the end of December 2024 versus December 2023. So far in 2025, about 50% of our rated auto suppliers in EMEA have negative outlooks.

Chart 1

In our view, suppliers that are more at risk are those that operate with persistently low EBITDA margins and rely on volume growth to generate positive cash flows. Since we expect global light vehicle production to remain flat in 2025, these suppliers are more vulnerable to market turbulence, whether it's due to supply chain issues, inflation, or trade tariffs. The median EBITDA margin for our rated suppliers in Europe has deteriorated steadily in recent years, and we think that a major recovery is uncertain (see chart 2).

Chart 2

Other suppliers at risk are those that have limited room to cut research and development (R&D) spending and capital expenditure (capex) to protect their earnings and cash flows even in difficult times because they must adapt their product portfolios to automotive megatrends. These suppliers typically include manufacturers of powertrains and advanced driver-assistance systems and electronics.

In addition, suppliers with higher leverage due to previous debt-financed mergers and acquisitions (M&A) could find it difficult to restore leverage to levels that are more in line with the current ratings due to low growth expectations for light vehicle production, ongoing labor cost inflation, integration costs, and elevated interest rates. Moreover, original equipment manufacturers (OEMs) are battling their own challenges, and so we anticipate that negotiations between suppliers and OEMs could become even tougher.

Last year, many suppliers, including Forvia SE, Schaeffler AG, Valeo SE, Continental AG, and ZF Friedrichshafen AG, announced job cuts focusing on Europe. These should help suppliers adjust production capacity to demand, especially as we expect light vehicle production in Europe to stay below pre-COVID-19 levels for longer (see chart 3). That said, the restructuring costs associated with these job cuts will weigh on the suppliers' profitability and cash flow in 2025-2026, whereas the savings will materialize only gradually.

Chart 3

Could U.S. President Donald Trump's trade tariffs threaten European auto suppliers' earnings?

Although European auto suppliers tend to be local and produce parts close to their customers' facilities, we think that a 25% tariff on exports from Mexico to the U.S. would have a negative effect on most of them, either directly or indirectly.

We estimate that the direct effects--the extra costs on suppliers from tariffs on shipments of their own parts--are likely to be less impactful than the indirect effects--the loss of volumes resulting from potentially higher U.S. car prices or temporary production disruptions linked to supply chain adjustments. We expect that auto suppliers with direct exposure will look to recoup the monetary impact from their customers, but the magnitude and timing of the cost pass-through are uncertain.

We do not incorporate into our base-case scenarios trade tariffs on auto parts that rated suppliers export from Mexico to the U.S. since we have low visibility on OEMs' countermeasures and on how these would cascade down to the suppliers. Mexico has historically been an important hub for autos in the Americas because of its geographical proximity to the U.S. At the same time, skilled labor is more readily available and cheaper in Mexico than in the U.S. (see chart 4).

Chart 4

How are COEMs reshaping European auto suppliers' operations in Asia?

Historically, European suppliers have partnered with European and U.S. OEMs to fulfil their growth ambitions in the Asia-Pacific and Chinese markets. In 2023, we estimate that, on average, European suppliers generated close to 30% of their sales in Asia and less than 20% in China alone.

We view this region as highly strategic because of its superior long-term production growth prospects and typically higher margins than other regions thanks to lower labor costs, particularly in labor-intensive segments such as seating and interiors. The region also has simpler supply chains and shorter development times, creating cost savings. For example, Forvia's average operating margin in Asia was 10.4% from 2018 to the first half of 2024, compared with 3.7% in EMEA and the U.S. We also believe that exposure to the highly dynamic Chinese auto ecosystem is crucial if European suppliers want to win orders in the international markets that the COEMs have targeted for their expansion.

In 2025, we anticipate that international OEMs will continue to lose ground in China such that it will represent only about 30% of local production. This follows a progressive decline to about 35% in 2024 from 55% in 2018. We therefore see a risk that the European suppliers' profits in the region could erode if they are not able to shift their customer mix to mostly domestic COEMs.

Based on our rough estimates, Valeo, Schaeffler's automotive technologies division, and Forvia (excluding lighting and electronics) reduced their exposure to international OEMs to 40%-50% of Chinese sales in 2024, but still lagged behind the overall market (see chart 5). This explains why most European suppliers reported negative revenue growth in the region in the first nine months of 2024, while Chinese auto production grew by about 3% over the same period (see chart 6).

Chart 5

Chart 6

As a result, European suppliers are actively seeking to increase their business with COEMs, with their most recent order books indicating greater penetration among these new players. Valeo and Forvia both estimate their share of orders with COEMs at about 60% in 2024. Given the faster car development times in China, we believe that European suppliers have an opportunity to progressively rebalance their client mix in the region as they work through their order books.

However, we think that this repositioning will remain subject to competition from new Chinese auto suppliers. There is also a risk that the COEMs may continue to fulfil some of their supply chain needs internally, in contrast to international OEMs. In addition, the rise of COEMs has led to much greater market fragmentation due to the emergence of several new electric vehicle (EV) players (see "China EV Startups Struggling To Stay Afloat," published on May 28, 2024, on RatingsDirect).

This could reduce visibility on future orders and mean that auto suppliers will have to continue to adapt to potentially rapid changes in OEM market shares. Partnering with the new leading COEMs will remain particularly important as auto suppliers' profitability is highly sensitive to volumes due to their typically high fixed development and production costs.

We also anticipate that local COEMs and international OEMs will maintain aggressive pricing behavior until they achieve further market consolidation in China. This could have a knock-on effect on suppliers. In December 2024, Chinese auto manufacturer BYD was said to be looking to negotiate a 10% price reduction on all its contracts with its suppliers in an attempt to keep its cost base as competitive as possible.

European suppliers' pursuit of business with COEMs could therefore be risky for the suppliers' profits in this higher-growth region if they prioritize volumes over margins without generating meaningful cost efficiencies. However, in our view, the region remains highly strategic, because a solid foothold with the leading COEMs locally could help the auto suppliers secure orders in the regions they are targeting for international expansion, including Southern Asia, Europe, and Latin America.

How much is BEV adoption shaking up auto suppliers?

We believe that prolonged volatility in BEV production in 2025 would be disruptive for auto suppliers, given their high R&D investments in recent years and the high fragmentation of this new market (see chart 7).

Chart 7

The electrification of automotive production was slower than we expected in 2024 in Europe and the U.S. In Europe, the percentage of BEV production declined to about 16.3%, from 16.6% in 2023. This resulted from lower BEV sales, which we mainly attribute to the instability of incentive schemes, the high total cost of ownership, the lack of charging infrastructure and a convenient charging experience, and the relatively limited choice of models. We expect that this could continue to constrain consumer take-up of BEVs in 2025. This is despite a wave of new model launches planned throughout the year, which the tighter CO2 regulations in Europe are encouraging.

In the U.S., potential changes by the Trump administration to consumer and production tax credits under the Inflation Reduction Act could slow down BEV penetration, which, at less than 10% in 2024, still lags far behind Europe and China.

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For auto suppliers, this means that the high upfront R&D and launch costs that they have incurred to develop their portfolio of BEV components in recent years could take longer to generate returns, with production volumes lower than we expected.

In addition, we view the market for e-components as still highly fragmented (see charts 8 and 9). This is because suppliers are still adapting their product portfolios to the powertrain transition to capture higher-value content (such as Valeo, Robert Bosch GmbH, ZF Friedrichshafen, Schaeffler and its subsidiary Vitesco Technologies in Europe, BorgWarner Inc. in the U.S., and Denso Corp. in Asia-Pacific). In addition, some OEMs are keeping the development of some key technologies in house for now.

Chart 8

Chart 9

We therefore see a risk that auto suppliers' capacity utilization and profitability at the EV part plants will remain low until the market consolidates further and BEV sales pick up materially in Europe and the U.S. The more uncertain path toward EV adoption also complicates product development and R&D spending priorities, as well as capex planning.

In some cases, suppliers may be eligible for contract repricing or compensation from their OEM customers if volumes on certain platforms are materially lower than they planned (typically starting from a 15%-20% deviation). However, although such compensation may be part of the contract, more often than not it requires suppliers to engage in ad-hoc negotiations with their customers. Moreover, compensation does not usually cover the revenue loss and all fixed costs in full and claims typically include other items such as cost-inflation pass-through.

Compensation can take different forms, including lump sums, increases in piece prices, or new business awards. This often means that the cash benefits only materialize after a delay. As OEMs increasingly scrutinize their own cost bases amid heightened global competition and less favorable pricing, we see a risk that suppliers' negotiations with OEMs could remain unrewarding. In an increasingly competitive environment, suppliers' strategy could be to swap lower cost recovery for future business to the detriment of their margins.

Overall, we believe that auto suppliers with the highest share of mission-critical, value-added, and single-sourced components will be in a better position to achieve some cost recovery even if OEMs adopt a more aggressive sourcing strategy and look to share the burden of producing more affordable BEV cars with their suppliers.

Could internal combustion engine (ICE) and hybrid platform sales offset slow BEV adoption?

Legacy ICE or hybrid powertrain component sales typically have higher profitability than their BEV equivalents, and this could partly offset the lower profitability of BEV-related parts (see chart 10). The slower adoption of BEVs has led to a lifetime extension of some existing ICE and hybrid car platforms where no or limited additional R&D is needed and where suppliers are in a better position to renegotiate cost-inflation pass-through with OEMs. In addition, these market segments tend to have fewer suppliers. We believe that this also helps suppliers achieve more favorable contractual terms with OEMs, resulting in stronger margins.

Chart 10

For example, Forvia reports a higher EBIT margin from its Clean Mobility segment--8.6% on average over 2018-2024 compared with 5.4% for the group total. This segment sells emissions filters for exhausts and only competes with a few other players, such as Tenneco Inc., Futaba Industrial Co. Ltd., and Marelli Corp. Garrett Motion Inc. generates significantly higher EBITDA margins than average for European suppliers, which we partly attribute to the leading position of its main turbocharger business. Garrett Motion and its main competitor, BorgWarner, each have about a 30% share of the turbocharger market according to S&P AutoTechInsight. This translates into materially higher concentration than average for other auto parts markets (see charts 11 and 12).

Chart 11

Chart 12

However, we think that the so far resilient volumes on ICE platforms will likely only be a short-term hedge that will diminish when electrification regains momentum in Europe and the U.S. While the new Trump administration is unlikely to incentivize faster BEV adoption in the next four years, we believe that the regulations in Europe will continue to enforce a ban on ICE-only light vehicles in the long term, even if governments postpone this ban by a few years. In the Chinese market, the share of ICE powertrain component sales is already in marked decline, versus BEV equivalents, at a little less than 50% of sales. It will shrink further as emission regulations in the country will tighten from 2026.

As a result, we believe that the profits that legacy ICE or hybrid components offer will reduce over time and only offer a temporary cushion to suppliers exposed to the powertrain transition. This means that suppliers will need to swiftly reallocate the cash flow from these more profitable products to the development of alternative solutions, which typically involve intensive R&D or have uncertain market-adoption prospects.

Based on our observations, the portfolio transition is not yet at full speed. In the first half of 2024, Forvia reported orders of €700 million for its hydrogen-storage solutions, which translated into a relatively weak book-to-bill ratio of 0.28x compared to overall Clean Mobility sales during the period. Garrett Motion still aims to deliver about $1 billion of sales from its zero-emission products by 2030, including battery electric and fuel cell products, compared with total sales of about $4.5 billion in the 12 months to September 2024. It aims for zero-emission products to account for about one-third of total sales by 2033.

Which suppliers are in the best and worst positions to navigate the powertrain transition?

We view auto suppliers that offer products completely agnostic to the powertrain transition as best placed to face prolonged volatility in BEV adoption. Such products include safety systems, seating, interiors, automotive bodies, electronics, and advanced driver-assistance systems. This is because these suppliers have to invest less in R&D and capex to replace components that are set to disappear, and they do not have plants or production lines that are fully dedicated to BEV platforms.

Within the powertrain-exposed category, we group all components that are used in ICE, hybrid, and electric powertrains without distinction. We also include thermal management systems for Valeo, although some components in that category, such as air conditioning solutions, are not as sensitive to the powertrain type.

Within our rated universe, we view Gestamp Automocion and Grupo Antolin-Irausa S.A.U. as the only suppliers that have product portfolios with no exposure to the powertrain type. We estimate that Garrett Motion, Schaeffler, and Valeo have the greatest exposure to the powertrain transition (see chart 13). These suppliers already have a product line-up for BEV platforms, but this has come at the cost of above-average R&D intensity. High development and product launch costs for new components make the breakeven point harder to reach. They also weigh on these suppliers' overall profitability as the production volumes required to absorb the fixed costs have been lower than we expected.

Chart 13

While Valeo, Forvia, and ZF Friedrichshafen have made the highest investments, we also attribute part of this to their presence in the R&D-intensive electronics and advanced driver-assistance systems markets, and not only to the powertrain transition (see charts 14 and 15). In addition, we believe that diversification into commercial vehicles or other industrial end markets can partly cushion auto suppliers' powertrain exposure because these segments typically follow different cycles to volatile global auto production and are generally more profitable.

Chart 14

Chart 15

The commercial vehicle market is also under less pressure from stringent regulation in the short term. This allows manufacturers to spread investments in new technologies over a longer time horizon. The existence of an aftermarket business also typically provides a good hedge against the high cyclicality of global auto production. Replacement components have much longer sales lifetimes than original equipment sales. These sales also typically have higher margins, since suppliers have already spent and absorbed most of the R&D and tooling costs. We estimate that Schaeffler has the largest aftermarket business (about 14% of sales), followed by ZF Friedrichshafen, Valeo, and Garret Motion, with about 10% each.

Could we see a wave of consolidation or M&A in this challenging market environment?

The challenging market conditions mean that we see most European suppliers as having limited financial flexibility to pursue another round of large debt-funded M&A in the next few years (see chart 16). We are more likely to see carveouts and disposals, such as Continental's plan to carve out its automotive business or ZF Friedrichshafen's plan to sell its passive safety division. However, unfavorable valuation multiples across the auto industry could continue to constrain timing and execution (see chart 17).

Chart 16

Chart 17

In 2025, we think that European auto suppliers will continue to focus on costs and efficiencies, while maintaining conservative financial policies. Nevertheless, they might fail to deliver credit metrics in line with our previous expectations due to market headwinds, potentially leading us to reassess their financial risk profiles downward (see chart 18).

Chart 18

We think that European auto suppliers will suffer more than American auto suppliers because the former have less room to navigate difficult market conditions due to their lower average operating profitability. We attribute this to Europe's higher labor costs and higher share of smaller cars (such as A- and B-segment cars). Cars in these segments typically have fewer high-value features or components compared to larger cars like SUVs.

In the past five years, many suppliers have made sizable acquisitions to fill technological gaps in their product portfolios or improve their diversification. These were mainly debt-financed acquisitions and have resulted in higher leverage and lower rating headroom.

For instance, ZF Friedrichshafen acquired Wabco, a producer of brakes and transmission systems for commercial vehicles, thereby reducing its exposure to passenger cars. Valeo's acquisition of its joint venture with Siemens was part of the company's strategy to extend its product offering in e-mobility. Forvia's acquisition of Hella, a manufacturer of lighting and electronics components, gave Forvia access to higher value-added products. More recently, Schaeffler acquired Vitesco to support its transition to e-mobility and reduce its reliance on ICE technology.

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Related Research

• Uncertain Tariff Policies Could Create Ratings Risks For North American Automakers And Suppliers, Feb. 18, 2025
• Impact Of U.S. Tariffs On China's Auto Sector: Watch For Second-Order Effects, Feb. 10, 2025
• Industry Credit Outlook 2025: Autos, Jan. 14, 2025
• Auto Industry Buckles Up For Trump's Proposed Tariffs On Car Imports, Nov. 29, 2024
• China EV Startups Struggling To Stay Afloat, May 28, 2024