Overview

2025 will require flexibility, innovation, and adaptation in the automotive industry, as it navigates economic pressures, regulatory shifts, and evolving consumer expectations. By leveraging advancements in Electric Vehicles (EVs), Software-Defined Vehicles (SDVs), and manufacturing technologies, Original Equipment Manufacturers (OEMs) can position themselves for success in a competitive and rapidly changing market.

This article will focus on the integration of software into both manufacturing processes and the products themselves as a key factor in addressing some of these challenges.

Weak global sales growth amid challenges

Global vehicle sales are forecasted to grow by just 2.7%, reaching 98.7 million units in 2025. Economic pressures, such as high vehicle prices, consumer debt, and potential policy shifts, are expected to constrain demand on big ticket items such as vehicles. Key risks include tariff imposition between major markets (for example US-China-EU relations), and election-related trade disruptions which stand to increase prices and dampen demand.

Impact of US tariff policies

The incoming US administration is predicted to introduce higher tariffs, affecting international automotive trade, particularly with China, Mexico, and Canada. The subsequent increase in component costs and vehicle prices has the potential to weaken consumer demand in export-heavy regions. Any retaliatory trade measures would further strain global supply chains.

Emerging Markets drive EV growth

Emerging Markets (EMs) are becoming central to global EV adoption, spurred by urbanization, government incentives, and economic growth. Investments in EV infrastructure and battery technology are enabling wider adoption, with eight of the top ten fastest-growing EV markets in 2025 predicted to be in EMs (Chile, Turkiye, Taiwan/China, Qatar, New Zealand, Czech Republic, Ecuador, Panama, Greece, Argentina). Local manufacturing and innovation, such as cost-effective EVs and off-grid charging stations, are fostering economic development in local EV industries of emerging markets.

Stricter emission standards

Global emissions regulations, led by the EU’s 2025 CO₂ reduction targets, are pressuring OEMs to accelerate adoption of zero-emission technologies. Compliance with these regulations is critical to avoid penalties and maintain market competitiveness. The EU's regulations, which aim to reduce average CO₂ emissions from new cars to 93.6 grams per kilometer in 2025, are among the most crucial and challenging for automakers to meet. Battery Electric Vehicle (BEV) producers may benefit from these regulations through the pooling of emissions, where lower-emitting BEVs can offset higher emitting vehicles within a manufacturer’s fleet. Countries such as Australia, Canada, and Thailand are also implementing stricter standards, requiring automakers to innovate in production and technology.

Flexibility in manufacturing for EV transition

OEMs are adopting flexible manufacturing platforms to accommodate a mix of internal combustion engine (ICE), hybrid, and BEV production. Hybrid vehicles, including plug-in hybrids, are gaining popularity as BEV demand stagnates in key markets. This trend is predicted to continue in 2025¹.

Flexible manufacturing platforms are helping OEMs adapt more efficiently to changing market dynamics, such as regulatory changes and evolving consumer preferences. Partnerships with Chinese EV makers (e.g. Volkswagen-Xpeng, Stellantis-Leapmotor) will enable legacy OEMs to leverage advanced EV technologies, cost-effective production methods and the established supply chains offered by Chinese OEMs. This might facilitate the transition of legacy OEMs to electrification. 

Capital allocation remains a critical challenge for OEMs, as they navigate how much to invest in BEVs versus hybrid and ICE models. The slower-than-anticipated transition to electrification has added to this complexity. Volkswagen, for example, has demonstrated a flexible approach, dedicating one-third of its investment to ICE platforms while channeling the remainder into electrification and digitalization.

Sale-and-Leaseback

In order to fulfill both the stricter emission standard and the flexibility in manufacturing for EV transition, OEMs as well as component suppliers could opt for a sale-and-lease back strategy. As manufacturers face US tariffs, fierce Chinese competition and stagnating economies, the need for free capital increases. Besides free capital, running costs through developing and maintaining factories could be outsourced. As such, Renault´s new sale-and-leaseback deal in Germany contains a newly built state-of-the-art logistics site that fulfills sustainability requirements. A sale-and-leaseback could also strengthen operational flexibility and explain why this approach is developing into a serious trend across European and North-American carmakers.

Momentum for SDVs

The rising consumer demand for connected and personalized vehicles is driving investments in SDVs. SDVs enable over-the-air updates, enhanced user experiences, and advanced autonomous driving features. Regulatory challenges, such as Euro NCAP’s push for physical controls and stringent cybersecurity standards, will shape SDV development.

Integration of software into manufacturing processes and products themselves

Generative AI has shown the potential to improve productivity by 20-30% trough data-driven enhancements in automotive manufacturing. Artificial Intelligence (AI) technologies, like machine learning and predictive analytics, streamline production lines by reducing defects, optimizing operations, and ensuring quality control through automated inspections and real-time data analysis. AI tools enable more efficient and innovative design processes, leveraging simulation and modeling to create vehicles that are safer, more efficient, and better aligned with customer preferences. AI can improve supply chain efficiency by forecasting demand, managing inventory, and ensuring timely delivery of parts, significantly cutting costs and delays. However, the breach of the CDK software system demonstrates vulnerabilities in dealer management systems, highlighting the growing potential for attack in highly connected environments - and the importance of cybersecurity.

Integration of software into products: Connected vehicles and SDVs

The automotive industry is transitioning from standalone machines to sophisticated connected ecosystems. Driven by consumer demand, technological innovation, and strategic collaboration, connected vehicles integrate advanced communication protocols, AI, and the Internet of Things to enhance driving safety, efficiency, and user experience. Key enabling technologies include V2X (Vehicle-to-Everything) communication and autonomous driving features. In a survey² conducted by TATA as part of their market report, over 40% of respondents identified vehicle connectivity as critical to their business strategy. Enhanced driver safety ranked as the top advantage, followed by improved vehicle performance and monetization opportunities through data. However, adoption remains in its early stages, with only a fraction of vehicles equipped with advanced connectivity. Integration remains complex due to fragmented standards, technical compatibility issues, and regulatory hurdles. Cybersecurity risks and high implementation costs are prominent concerns, requiring consistent investment and vigilance.

The role of AI and emerging technologies

AI plays a transformative role in personalizing the driving experience, optimizing vehicle performance, and supporting predictive maintenance. The integration of AI is critical for developing self-driving cars. Technologies like computer vision, sensor fusion, and reinforcement learning help vehicles navigate complex environments and make real-time decisions. 5G and Advanced Connectivity provide a low latency, reliable communication that is essential for real-time updates and autonomous functions. Advanced Driver Assistance Systems (ADAS) enhance safety through real-time data processing. AI also contributes to the development of eco-friendly vehicles by optimizing EV battery performance and facilitating the shift towards sustainable practices.

AI-driven solutions enhance personalization in automotive services, ranging from tailored recommendations for vehicle features to interactive, voice-based virtual assistants in cars. Over-the-Air (OTA) updates are reshaping the automotive landscape by enabling seamless feature upgrades and security improvements without physical servicing. However, the process faces challenges according to the survey conducted by TATA. Success rates vary, with only 14% of companies achieving a high rate (76-100%). Improving OTA infrastructure and reliability is a priority, with 67% of survey participants willing to invest more in enhancing this capability.

Monetizing connectivity

Connected vehicles generate extensive data and opportunities for monetization. Strategies include:

• Cost management: Many companies are adopting cost-sharing models for connectivity features to balance affordability and revenue.
• New business models: Subscription services and personalized features are becoming key revenue streams.
• Tech partnerships: Collaboration with technology companies is critical for innovation, particularly in SDVs.
• Vehicles are evolving from standalone assets into platforms for delivering on-the-move services. This shift is expected to generate long-term revenue streams as electrification narrows traditional profit margins. To succeed, OEMs must deepen their understanding of customer needs beyond the point of sale.

Strategic collaboration and future directions

Partnerships with tech companies are increasingly seen as essential, favoring collaboration to drive innovation. The shift toward service-oriented business models is also gaining traction, focusing on enhancing customer experiences through personalization and digital transformation.

Looking ahead, the TATA report identifies key opportunities: Developing new mobility services (e.g., ride-hailing, car-sharing); expanding partnerships with tech firms to leverage expertise in AI, connectivity, and software development; and exploring monetization strategies for vehicle data - while addressing privacy and security concerns.

Industry issues, Chinese competition and supply chain resiliency

The supply chain of OEMs faces headwinds from regulatory hurdles, delays in EV charging infrastructure, and investment uncertainty across ICE, e-mobility, and hybrid technologies. The European Commission’s Green Deal also requires an industrial, energy and employment plan which is still missing. Rising competition from cost-advantaged Chinese manufacturers, with a 30% edge, is also pressuring OEMs to cut costs. Stellantis, for instance, is addressing this challenge through a joint venture with a Chinese automaker.

Chinese competition is not the only reason for cost-cutting. Cars have become a lot more expensive in the last two decades. Weight of vehicles increased by 45% in Europe as well as length by 25%. This is due to regulations that auto manufacturers must comply with in Europe. China has a 40% lower labor price and achieves 35% more productivity, while controlling 95% of the supply chain. Renault, for example, would like to achieve a 40% cut in cost of EV production by 2027.

Recent disruptions in the supply chain, such as the Suez Canal blockage and the COVID-19 pandemic, have driven OEMs to prioritize supply chain resilience. While increased inventory enhances robustness, it also reduces liquidity, adding financial strain to the industry.

The automotive industry stands at a pivotal crossroads, where embracing innovation and adaptability is not just an option, but a necessity. The integration of advanced technologies, such as artificial intelligence, software-defined vehicles, and connectivity solutions, is redefining how vehicles are manufactured, operated, and monetized. As OEMs and their partners navigate economic, regulatory, and technological challenges, strategic collaboration and investment in emerging technologies remain critical. By focusing on flexibility, sustainability, and consumer-centric design, the industry can not only meet current demands, but also shape a future where mobility is smarter, safer, and more sustainable.

1. BMI, Global Autos Report, January 6, 2025↩
2. https://www.tcs.com/content/dam/global-tcs/en/pdfs/who-we-are/events/tcs-future-ready-emobility-study.pdf↩