The tariff tangle: strains on manufacturing

Tariffs on steel and aluminum have driven up vehicle production costs, disrupting supply chains and squeezing manufacturers’ margins. Recent adjustments to tariffs on Canadian and Mexican imports under USMCA add further complexity, with compliance gaps – only 63% of motor vehicle parts from Mexico met USMCA standards in 2024 – potentially raising costs and impacting production.

History shows tariffs leave lasting industry impacts, as seen with the 1960s “chicken tax,” which still influences vehicle manufacturing today. To navigate these challenges, automakers must shift focus from hardware dependencies to software-driven efficiencies, ensuring long-term resilience in a volatile trade environment.

In addition to the previously imposed tariffs, the U.S. administration has recently implemented a 10% baseline tariff on all imports, effective April 5, 2025. This broad measure compounds the existing 25% tariff on auto imports, leading to an overall increase in production costs for automakers.

Industry analysts project that these combined tariffs could raise new car prices by approximately $5,000 to $15,000, significantly impacting consumer affordability and potentially dampening demand. Furthermore, the increased tariffs may force manufacturers to reevaluate their supply chains and production strategies even further to mitigate financial strains.

SDVs: Rethinking cost reduction through software

In the face of tariffs, many in the industry are doubling down on efforts to cut hardware costs. While this reaction is understandable, it overlooks a more impactful opportunity: reducing software complexity.

Rather than focusing solely on minimizing hardware expenses, automakers should seize this moment to establish a unified software platform – one that streamlines software part numbers, reduces variants, and unlocks new revenue potential through frequent functional updates.

This shift offers several strategic advantages:

1. Lowering software costs, not just hardware costs – A standardized software platform reduces fragmentation, cutting down on redundant development efforts, validation cycles, and maintenance costs. This consolidation creates a more scalable and efficient software foundation.
2. Enhancing long-term value – By increasing the number of functional updates, automakers can continually enhance vehicle capabilities post-production, differentiating themselves in the market and delivering ongoing customer value.
3. Strengthening supply chain resilience – Decoupling software from hardware enables a “build-to-print” model, where a wider range of ECU suppliers can be utilized, even those without in-house software expertise. This flexibility helps manufacturers navigate supply chain disruptions and reduce dependency on specific regions or materials.

Economic implications: A path to sustainable growth

Transitioning to SDVs is not merely a defensive maneuver against tariffs but a proactive strategy for sustainable growth:

• Cost efficiency: While the initial investment in SDV technology may be substantial, the long-term benefits include reduced research and development expenses and lower maintenance costs. Studies indicate that, over time, SDVs can lead to significant cost reductions for original equipment manufacturers (OEMs), enabling competitive pricing without sacrificing margins.
• Market competitiveness: Manufacturers embracing SDV technology position themselves as innovators, appealing to tech-savvy and cost-conscious consumer bases and differentiating their offerings in a crowded market.

Challenges and considerations

The journey toward widespread SDV adoption is not without hurdles:

• Infrastructure development: Implementing SDV technology necessitates robust digital infrastructure to support features like over-the-air updates and real-time data processing.
• Cybersecurity concerns: As vehicles become more connected, safeguarding against cyber threats becomes paramount to ensure consumer safety and trust.
• Regulatory alignment: Harmonizing global regulations to accommodate the unique aspects of SDVs is essential to facilitate international adoption and interoperability.

Steering toward a resilient future

In a world where trade policies can evolve overnight, the automotive industry must pivot toward resilience. The shift to Software-Defined Vehicles (SDVs) offers a powerful way forward, enabling manufacturers to decouple from tariff-sensitive components and embrace the flexibility of software-driven design.

This strategic realignment not only mitigates the risks of trade turbulence but also drives long-term growth by enabling continuous innovation, streamlining costs, and strengthening supply chain resilience. The evolution to SDVs is more than just an adaptation to current trade challenges – it’s a blueprint for a future-proof, competitive automotive industry in an ever-changing global landscape. As tariffs continue to shape market dynamics, the ability to respond swiftly and efficiently with software-first solutions will be crucial in maintaining stability and sustaining growth.