TROY, MI – It is an unusually cold, wet, blustery mid-April Michigan morning when mega-supplier Magna CEO Swamy Kotagiri delivers a “Fireside Chat” to members of Detroit’s Automotive Press Assn., then answers their questions. There is no fire in the room, but no shortage of angst for the auto industry and its suppliers in a turbulent time.
The industry is going through a sweeping transformation focused on current trends of technology, consumer preferences and the fast-changing business landscape – all of which are driving increases in both R&D and capital expenditures, Kotagiri says. He cites one study of 12 leading OEMs that showed some $200 billion in spending in 2024, a 40% increase from $140 billion in 2015 even while global volumes have been flat (and down in North America and Europe), market share is fragmented and the number of platforms is increasing.
In terms of planning, he says, “We do global vs. regional, PHEV versus EV, and so on. What does our industry look for? Scale and stability to be efficient through the value chain.”
But while global OEMs planned roughly 120 million units last year, just 80 million were produced, and increased spending on smaller volumes of units drives poor returns. Meanwhile, technology – from electrification to assisted driving to even full autonomy – is rapidly evolving while those technology changes drive consumer preferences.
“Expectations are increased,” Kotagiri says, “and is varying from region to region. Consumers have choices, such as picking among ICE, EV and hybrid, and are expecting a lot of features in any price range, not just premium and luxury. Convenience and customization features include entertainment, navigation, connectivity, safety and more options of mobile media services. They have a truly three-dimensional chess board.” Also increasing dramatically, he adds, are applications of robotics and AI in manufacturing.
These rapid technology advancements and changing consumer preferences are driving major shifts in the industry landscape, including emerging markets, regional preferences, new vehicle architectures and new entrants without legacy constraints – and those new entrants are looking at a completely different approach with much less complexity to keep costs down. They’re coming to market faster and focusing on functionality rather than component specifications and a lot of component standardization.
“I think they’re getting back to what I call systems thinking, which has a tremendous impact on minimizing or optimizing cost and time to market,” he says. “They are looking at it from a consumer perspective…what does the consumer need?…and giving freedom to suppliers. In the past, we used to call it simultaneous engineering at a systems level, reducing the number of components and design and validation time in addition to cost optimization.
“So, now our complexities that have been there historically have been compounded, which means we need to spend more capital for infrastructure and/or product development.”
He points out that volume fluctuations of plus-or-minus 10% to 20% have been normal in the past, but that uncertainty is now at an all-time high. “We are seeing start-of-productions being delayed, programs canceled after investments have been made, volumes reduced after capacity is installed and OEMs hedging against risks, Kotagiri says. “They’re trying to protect their market share, and capacity is growing faster than the market can, so in some cases the volume fluctuations are as high as 50%. And all this is contributing to sub-optimal returns.”
Material and labor are typically planned two to three months in advance but, he notes, “the lack of schedule stability means you can’t plan workforce properly without cost and operational inefficiencies. The entire industry is working through some tough planning issues, and now if we add tariffs, we have complex and dynamic challenges resulting in a lot of turbulence.”
Kotagiri quotes consultant and educator Peter Drucker’s statement: “The greatest danger in times of turbulence is not the turbulence. It is to act with yesterday’s logic.” So, while the industry is going through this major transformation, he asks, “How do we resist the urge to solve tomorrow’s problems with yesterday’s framework? And how do we find flexibility in the face of these unprecedented uncertainties? And how can we move away from being reactive in the short term, the natural reaction, and move forward with an adaptive long-term strategy?”
The CEO contends the auto industry has typically been good at reacting and fighting through crises. “We have adapted, accommodated and innovated through many crises in the past,” he notes, “but we have to think differently today than we have in the past. Our industry thrives on scale, and we have to get back to that. And we have to look at partnerships and alliances differently and manage the risks and problems we are facing and adopt long-term strategies as an industry together.
Kotagiri advises, “We have to collaborate in terms of design and manufacturing to minimize costly changes and have engineering and sourcing work together. We must also acknowledge a deeper issue, which is, how to think from an integrated systems perspective.
“I strongly believe we can solve today’s challenges, but we need to think systems and to have more accurate expectations of volume forecast,” Kotagiri says. “Maybe we can phase in volumes and invest gradually in capacity, but that requires all parties to participate. And if the volumes do take off, we need to have the agility and flexibility to get to market quickly. We will get economies of scale and share the benefits of the upside. But (if) production falls below the expected range, there is a discussion of how to adjust accordingly.”
He concludes that Magna is focused on controlling the controllable. “That’s all we can do, and we do that by managing our portfolio from a long-term perspective. We are leveraging our expertise and investing in our manufacturing, in what we call the factory of the future, because I believe the next big transformation in the industry is not just in the product but what happens in the factories. These are very deliberate actions to position Magna for long-term success, not waiting for conditions to come up and then reacting, while keeping a healthy balance sheet.”
Kotagiri then opens the floor to questions from APA attendees:
Q: What is the impact of tariffs on your business?
KOTAGIRI: Our internal view is not to be reactive too soon. We have footprints in all regions, but they are not easy to change very quickly. We are having conversations with the OEMs on how they are changing their plans, and we are at the table with the policymakers to offer facts and data on the possible implications and looking for clear objectives in the long term.
When you have a 25% import tariff for vehicles, that leads to demand destruction, and if the volumes are reduced, they’ll have an impact on how you spread the cost that you’ve already invested. So, we’re going to see a lot of inefficiencies there. It’s difficult to say, but it’s early.
Q: What will a 25% tariff on parts do to the industry?
KOTAGIRI: I wish I could give you a clean scenario, but I can’t right now. If you look at the complexity of the value chain and adding up or stacking all the tariffs when it all becomes clear, I believe it is untenable in the long term to manage that. If there is a road map to a clear objective of what we’re trying to achieve in this time period, I’m sure the industry will respond and can get there. But I really don't see how you can mitigate the substantive short-term pain that is so akin to 2008-09, or is it more akin to the chip crisis in COVID? How do those patterns that we had to deal with compare to the current situation?
And if you take in what’s happening with China and what the supply chain could be with whatever the percent of tariff is, that’s the reason why I’m not being dramatic when I say it’s like all those rolled into one: demand destruction, interest rates, supply chain disruptions – it’s a really complex situation. I think it’s short-term, but I don't think it’s going to help the situation. There is some kind of certainty in where it’s going, right? Everybody’s trying to do their best, trying to mediate the short-term pain, but I don’t think that’s the long-term solution.
Q: There has been a lot of talk of deglobalization. Magna is in China and has facilities in multiple countries, so how do you respond to that?
KOTAGIRI: When you go back 10 years, we used to talk about global platforms, and in different regions of the world, we’ve always looked dominantly locally for local manufacturing. So, we can manufacture in China for consumption in China, or wherever. That philosophy applies to an automaker as a whole and follows the strategy of looking at North America as one region and Europe as another. We can adapt very quickly locally and once we get to parity in Mexico, Canada and the U.S. That can’t happen overnight, but there could be some balancing, and we can react to that.
Q: You mentioned the idea of sharing costs. How has that gone over with the OEMs?
KOTAGIRI: It’s a mixed bag. There is a little more willingness. In some cases, we have come to an agreement with an OEM to put in capital, but sometimes it’s partial, sometimes a mix. In some cases, we have seen the same component going on both ICE and EV vehicles, so that’s another way to hedge. That’s why I say you have to be training in sourcing together, not in isolation. It helps you know all parties in the ecosystem. The other one is volume banding. In some cases, we have had programs where it’s plus or minus X percent. In other areas, it’s across the board. It depends upon the competitive system and the magnitude of the investment. A lot of what Magna does is based on what the OEMs are doing.
Q: How is Magna looking at EV vs. ICE and investments you’ve already made?
KOTAGIRI: If you step back and look at it, ICE vs. EV is going through a typical adjustment. Magna has always said we believe in EVs, and our investment is based on that. But we’re also focused on the assisted-driving piece, where there is a huge market, and we continue to grow there. We still believe that EVs are coming, but at a different rate than everybody expected.
