The Ledger

Mastering Program Profitability: Why Accurate Costing is Critical for Automotive Brands and Suppliers

The automotive industry in 2025 is more dynamic than ever, characterized by rapid technological evolution, shifting regulations, and the continued transition toward electric and autonomous vehicles. As brands and suppliers navigate this complex environment, program profitability remains a top priority—but achieving it has never been more challenging.

From geopolitical uncertainties and rising tariffs to shorter product lifecycles and heightened customer demands, companies across the automotive supply chain are facing increasing pressure to manage costs effectively while delivering quality and innovation. This makes accurate program costing a critical function—not just for maintaining margins, but for identifying opportunities, mitigating risks, and ensuring long-term success.

The Evolving Automotive Landscape: A Perfect Storm of Challenges

Automotive companies face a multifaceted set of challenges that directly impact program profitability. These include:

• Rising Costs of Materials and Components: The costs of raw materials like steel, aluminum, and lithium (essential for EV batteries) continue to climb. Additionally, supply chain disruptions and increased shipping costs exacerbate the financial burden on suppliers and OEMs alike.
• Tariff Uncertainty and Geopolitical Pressures: Proposed U.S. tariffs on goods from various countries are creating instability in global supply chains. These measures drive up costs for imported components and materials while exposing exporters to retaliatory tariffs, limiting access to international markets.
• The Shift to EVs and New Technologies: As automakers move toward electrification and autonomous driving, suppliers must invest heavily in R&D, retooling, and advanced manufacturing processes. This transition increases upfront costs and reduces margins, especially when combined with fluctuating consumer demand for hybrid, EV, and ICE vehicles.
• Sustainability Requirements: ESG (Environmental, Social, and Governance) compliance is no longer optional. OEMs are demanding sustainability from their suppliers, requiring significant investments in green materials and carbon-neutral manufacturing processes.
• Shorter Program Lifecycles: Vehicle programs are evolving faster than ever, driven by changing technology and market preferences. This reduces the time suppliers have to recover their investments, increasing the importance of precise cost management.

The Role of Accurate Program Costing in Addressing These Challenges

Accurate program costing is a cornerstone of managing these challenges effectively. Without a clear understanding of the financial impact of every decision—from sourcing materials to final assembly—companies risk eroding margins and losing competitiveness. Here are several ways accurate costing contributes to program success:

Improved Pricing and Profit Margin Management

Accurate costing allows automotive companies to set realistic pricing that reflects the true cost of production. This ensures margins are protected, even in the face of external pressures like tariffs or rising material costs. By understanding cost breakdowns, companies can also identify opportunities to negotiate better supplier contracts or optimize production processes.

Enhanced Forecasting and Risk Mitigation

Fluctuations in demand, regulatory changes, and supply chain disruptions make it difficult to plan for the future. A robust costing process enables companies to run scenario analyses and assess the financial impact of different risks. For example, a supplier can model how a proposed tariff would affect profitability and proactively adjust sourcing strategies.

Better Supplier Collaboration

Automotive programs often involve collaboration across a network of suppliers. Accurate costing facilitates transparent communication about pricing, enabling more productive partnerships. Suppliers and OEMs can work together to identify cost-saving opportunities and align with program goals.

Alignment with Sustainability Goals

Many suppliers are investing in sustainable materials and processes to meet ESG requirements. While these investments can be costly upfront, accurate costing allows companies to evaluate their long-term financial viability and identify where sustainability initiatives might generate cost savings or enhance customer value.

Faster Decision-Making

In a fast-paced industry, decision-makers must act quickly. Accurate program costing provides the data needed to make informed choices—whether it’s selecting a new supplier, adjusting production volumes, or deciding whether to pursue a specific program.

The Impact of U.S. Tariffs on Program Profitability

One of the most pressing issues in the automotive industry today is the potential impact of U.S. tariffs. As companies grapple with rising costs and shifting trade policies, accurate costing has become even more essential. Here’s why:

• Quantifying Tariff Costs: Tariffs add a variable cost to imported goods, which must be accounted for in program budgets. Companies without a clear understanding of these costs risk underestimating program expenses and over-committing to unprofitable programs.
• Identifying Alternatives: A robust costing process enables companies to evaluate alternatives, such as reshoring production, diversifying suppliers, or sourcing from tariff-exempt regions. Each option has financial implications that must be carefully assessed.
• Protecting Margins: With margins already under pressure, suppliers must determine whether to absorb tariff costs, pass them on to customers, or find cost-saving opportunities elsewhere. Accurate costing provides the insights needed to make these decisions.

Case Study: A Supplier’s Journey to Cost Optimization

Consider a Tier 1 automotive supplier specializing in powertrain components. Facing rising material costs and a proposed 20% tariff on steel imports, the company’s margins were under threat. By implementing a dedicated costing process, the supplier was able to:

1. Analyze the Tariff’s Impact: The company modeled how the tariff would affect its cost structure and identified which programs were most at risk of becoming unprofitable.
2. Evaluate Alternative Suppliers: Using cost data, the company compared the feasibility of sourcing steel from domestic suppliers versus suppliers in tariff-exempt countries.
3. Collaborate with OEMs: Armed with accurate cost data, the supplier engaged OEM customers in discussions about potential price adjustments and opportunities to co-invest in cost-saving measures.
4. Optimize Internal Processes: The company identified inefficiencies in its production line, reducing scrap rates and improving labor productivity to offset increased material costs.

As a result, the supplier maintained profitability across its programs while strengthening relationships with key OEM customers.

The Path Forward: Building a Dedicated Costing Process

In today’s complex automotive market, companies cannot afford to rely on outdated or ad-hoc costing methods. A dedicated, data-driven costing process is essential for identifying hidden opportunities and pitfalls, ensuring profitability from quote to program completion.

Key Features of a Robust Costing Process:

• Comprehensive Data Integration: Combining data from multiple sources, such as material prices, labor costs, and tariffs, ensures accurate cost calculations.
• Scenario Analysis: The ability to model different scenarios (e.g., tariff changes, supplier shifts) helps companies make proactive decisions.
• Performance Tracking: Ongoing monitoring of program costs allows companies to identify and address deviations from budget early.
• Collaboration Tools: Costing systems that facilitate communication between suppliers and OEMs streamline decision-making and improve transparency.

Why It Matters:

A dedicated costing process doesn’t just help companies avoid costly mistakes; it also uncovers opportunities to improve profitability. For example, it can highlight high-margin programs that deserve additional investment or reveal inefficiencies that can be corrected to reduce costs. Moreover, accurate costing enables companies to evaluate customer relationships—identifying which customers are consistently profitable and which may require renegotiated terms or a shift in strategy.

Conclusion

The automotive industry in 2025 presents both challenges and opportunities for brands and suppliers. Rising costs, shifting regulations, and evolving technologies make program profitability a moving target. However, companies that prioritize accurate program costing—from the initial quote to program completion—will be better equipped to navigate this complex landscape.

By adopting a dedicated costing process, automotive companies can gain the insights needed to manage risks, identify opportunities, and make informed decisions that drive long-term success. In a world where every penny counts, the ability to evaluate cost performance is not just a competitive advantage—it’s a necessity.