Strategic shift toward domestic manufacturing driven by geopolitical tensions, rising costs, and the need for enhanced supply chain resilience in electric vehicles
23 May 2025 | 652 Views | By Vivek Patel, AVP, FACE, Ingenious e-Brain
The US automotive industry has long been a cornerstone of the nation's economy, driving innovation, job creation, and global leadership in manufacturing. According to the report by Ingenious e-Brain, the US automotive sector continues to demonstrate robust trade partnerships with neighboring countries notably Mexico and Canada for internal combustion engine ...
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The US automotive industry has long been a cornerstone of the nation's economy, driving innovation, job creation, and global leadership in manufacturing. According to the report by Ingenious e-Brain, the US automotive sector continues to demonstrate robust trade partnerships with neighboring countries notably Mexico and Canada for internal combustion engine vehicle components, leveraging regional proximity and integrated supply chains for the critical part; However, a distinct sourcing pattern emerges in the electric vehicle segment, the US exhibits a higher dependency on Asian and European suppliers, with China, Taiwan, and Vietnam playing key roles in providing batteries, semiconductor, and other specialized materials.
Localization: A Strategic Imperative to Boost Domestic Supply Chains
In general, automotive supply chain localization means the strategic shift from globally sourced to domestic & locally produced materials and components within the same region or country. This shift is not merely a fad but a response to various factors, including rising transportation costs—up approximately 15% since 2020 according to the US Bureau of Labor Statistics—and geopolitical tensions brought to the forefront by trade disputes and tariffs. Localization offers numerous economic benefits, foremost among them being job creation. A report from the Economic Policy Institute indicates that for every job in auto manufacturing, approximately 7.4 additional jobs are created in related sectors. By establishing manufacturing operations closer to assembly plants, companies can generate local employment opportunities, revitalize communities, and bolster state economies.
Additionally, the reduced reliance on international shipping minimizes logistics costs and shortens lead times. For example, a study by the National Association of Manufacturers found that the average automotive company saved 20% in operating costs by localizing its supply chain.
The ongoing tariff war between the US and China might be responsible for the disruptions of the automotive vehicle and components supply chain between the two countries; This trade conflict will likely have a significant impact on major automotive manufacturers in China, South Korea, Japan, the European Union, and other regions, affecting the supply of parts and materials and overall market competitiveness. Amid this ongoing tension, automotive supply chain localization has emerged as a critical trend reshaping this industry’s landscape in the US.
To reduce the foreign dependency and strengthen domestic supply chains, the US government is pushing companies to localize the production of critical components & materials for semiconductors, sensors, batteries, and motors to strengthen domestic supply chains and reduce foreign dependency; Due to protectionist policies and tariffs, automakers and suppliers are localizing their supply chains by investing locally, and expanding supply networks.
Localization Barriers: Investment and Skills Gaps
Despite the clear advantages, localization comes with certain challenges amongst which one significant hurdle is the initial investment required for establishing local manufacturing capabilities. According to a study, 56% of manufacturers cite high upfront costs as a barrier to localizing supply chains. Companies must weigh these costs against long-term benefits, which can complicate decision-making.
Another critical aspect to address is the skills gap in the local workforce. As per the report by the Manufacturing Institute 2.1 million manufacturing jobs could go unfilled in the next decade due to a shortage of skilled workers. As manufacturers transition to advanced technologies and automation, there is a pressing need for skilled professionals who can operate and maintain these systems. Moreover, companies must navigate the delicate balance of maintaining beneficial global partnerships while prioritizing localized production strategies. The challenge is to leverage global efficiencies while building a robust local network.
Battery and vehicle imports pose significant strategic risks; To mitigate exposure and manage cost volatility, implementing localization initiatives and diversifying the supply chain Although electric motors and semiconductors represent low to moderate cost per vehicle, they are essential to operational continuity, mainly in EVs; it is crucial to secure supply resilience by building strong partnerships with reliable suppliers or pursuing domestic semiconductor strategies in the near term.
A Transformative Shift: Localizing Production for Resilience
In response to geopolitical tensions and global disruptions, companies are relocating production and sourcing to the local markets; This strategy enhances supply chain resilience, cuts transportation costs & emissions, and improves flexibility in adjusting to changes in demand OEMs and suppliers are making substantial investments in new US facilities to support localization strategies; For instance, Ford and SK Innovation’s USD 5.6 billion Blue Oval City in Tennessee, Hyundai’s USD7.6 billion EV plant in Georgia, and Honda has invested around USD 19 billion in its US manufacturing operations, signaling a strong shift toward USA-based manufacturing.
Automotive OEMs are bringing more production in-house to reduce reliance on Tier 1 and Tier 2 suppliers; This strategy enhances control over manufacturing processes, minimizes supply chain risks, and improves responsiveness to market changes, ultimately boosting operational flexibility and resilience. Toyota has opened a new automotive battery plant in North Carolina, with a USD 14 billion investment company plans to start battery production for North American electrified vehicles.
To offset the higher labor costs of moving production domestically, companies are incorporating advanced manufacturing technologies such as robotics and AI; These innovations enhance efficiency and productivity in local facilities. Ford has invested more than USD 7 billion in AI-powered manufacturing to utilize machine learning to enhance battery production for electric vehicles (EVs); Similarly, Tesla extensively employs AI-driven robotics in its Gigafactories, cutting production time by 30% and streamlining car assembly.
The Tariff War: Navigating Strategic Risks
The US Administration has instituted a 90-day pause on its broad-based global tariffs, but this temporary relief does not apply to China; Nearly all the US's trading partners are now subject to a 10% base tariff, in addition to the 25% product tariffs already imposed on cars, car parts, steel, and aluminum. Leveraging the authority granted under the International Emergency Economic Powers Act, the US Administration has designated trade deficits as a national emergency and is implementing tariffs aimed at eliminating the U.S. goods trade deficit with individual countries; In the short term, companies should anticipate continued volatility in U.S. trade policy and tariff structures, as international negotiations and potential retaliatory measures from trade partners continue to evolve.
Vivek Patel is the Associate Vice President (AVP), Food, Automotive, Chemical, & Energy (FACE) Operations at Ingenious e-Brain. Views expressed are the author's personal.