Uncertainty is a constant in business. Rarely, though, has it arrived with the force that Canada’s auto component sector has faced over the past 18 months. U.S. tariffs, an unsettled future for the Canada–United States–Mexico Agreement (CUSMA), EV transition volatility, and stalled investments by car manufacturers have reshaped the industry's outlook – pushing it into an entrenched defensive position.
But a new report from Ivey Business School’s Dean Julian Birkinshaw, Assistant Professor of International Business Romel Mostafa, and postdoctoral fellow Sergii Nevmerzhytskyi argues that the time for simply playing defence is over. Based on a survey of 28 Ontario-based automotive manufacturers – predominantly small and medium-sized enterprises (SMEs) – the authors say the sector's long-term viability now also depends on going on the offence.
And that starts with firms lifting their gaze – balancing the needs to respond to immediate pressures toward a deliberate, long-term strategy for resilience and growth.
“These firms are dealing with short-term issues that are easy to get sucked into,” said Mostafa, co-author of Between Survival and Transformation: How Automotive Suppliers Are Responding to Industry Disruptions. “We are suggesting diversification in industry adjacencies becomes an important long-term strategic option for these firms.”
Short-term measures such as cutting labour costs and postponing or reducing investment can help stabilize financial performance, Mostafa said – but at a cost. Focusing on such near-term fixes risks weakening long-term competitiveness by limiting investment in innovation and capability upgrading.
More than economic whiplash
Just how serious is the strain on Ontario's auto component sector? The numbers leave little doubt.
68 per cent of firms surveyed reported declining automotive revenues, with more than half seeing revenue contract by over 10 per cent. To counter this turbulence, 50 per cent of firms surveyed responded with aggressive cost-management, including reducing labour and postponing capital investments. And while 29 per cent of firms made efforts to diversify into a non-automotive industry over the past year, the rest were left absorbing the blows as they came.
And no single force has done more damage than tariffs.
Under the Trump administration, the U.S. has posted a 25 per cent tariff on automobiles and trucks, alongside tariffs of up to 50 per cent on steel, aluminum, and related products. The trade dispute escalated further when Washington layered on Section 338 tariffs of up to 50 per cent on a range of Canadian exports, prompting Canadian counter-tariffs of the same magnitude, which in turn prompted a fresh round of U.S. import restrictions. Under CUSMA, compliant auto parts are currently exempt from the U.S. 25 per cent automotive tariff. However, suppliers continue to be exposed to knock-on effects like higher input costs, uncertain sourcing and production arrangements, and investment decisions throughout the North American supply chain.
The trade-policy whiplash, however, is only part of the picture, Mostafa said.
The Trump administration has rolled back federal incentives for EV purchases and charging infrastructure, reinforcing the case for legacy automakers to continue investing in internal combustion engine vehicles, even as major markets elsewhere press ahead with their transition to EVs.
“There are real concerns about whether the North American automotive supply chain can remain competitive globally in the long run if current U.S. policy continues along this path,” said Mostafa. “For our SME automotive component manufacturers, diversification into adjacent industries is becoming an increasingly appealing strategic option.”
A route to long-term resilience
To understand what diversification actually looks like in practice, Mostafa and his co-authors zeroed in on the firms that had expanded beyond the automotive sector at some point in their history.
The pattern that emerged was less about reinvention than building new capabilities on a foundation of existing strengths. The strongest opportunities were in sectors that could absorb the engineering and manufacturing capabilities suppliers had spent decades building for the automakers. Mining and defence, for example, are a good fit for firms producing engines, metal body parts, and steering and suspension systems. Agriculture, medical equipment, and aerospace also offer similar opportunities.
Yet, Mostafa notes that diversifying into adjacent industries is challenging. Firms that had not yet diversified identified several barriers, including the costs of retraining staff, purchasing new equipment, developing new products, and forging relationships across unfamiliar supply chains.
“Thinking about moving into a new area, with potential opportunities but also risks, is challenging – even more so when you’re already cutting costs to stay afloat and managing your cash flow in your core business,” said Mostafa. “But what if we could improve the conditions that make it easier for firms to explore and pursue diversification into technologically related industries with stronger growth potential, both at home and internationally – including beyond North America? That’s where policy comes in.”
Mapping a way forward
Mostafa stresses that diversification isn’t a one-size-fits-all solution. But targeted policy measures could give auto part firms more opportunities to explore diversification and improve their chances of success if they choose to pursue them.
The report proposes the following three-part policy framework to create conditions for the beleaguered industry to pursue industry adjacencies – including in sectors the government is prioritizing for nation building and industrial development.
1. Champion diversification
The first proposal for policymakers is to build a diversification track into the auto-support programs already in place. The goal isn’t to shift policy away from the automotive industry so much as broaden the pathways for firms to weigh their strategic options.
“Not all firms are going to diversify,” said Mostafa. “But the ones that would seek to do so should know that there are these supports that they can rely on and they can apply to these funds.”
2. Streamline the pathway
Today’s support system and programs are dispersed across federal and provincial institutions, each with its own timelines and eligibility rules. SMEs don’t have the bandwidth to navigate a disjointed system. To mitigate this, Mostafa calls for stronger coordination across delivery agencies and clearer referral pathways for the firms trying to use them.
“It would be good to have an advisory that will help navigate the patchwork of supports that are there,” he said.
3. Close the capability gap
As the survey responses showed, one of the biggest barriers to diversifying is navigating a deluge of new certification, regulatory compliance, customer qualification, and supply chain considerations. Internally, it requires developing the managerial acumen to pursue new opportunities while preserving the core automotive business.
This balancing act in the management research is known as “organizational ambidexterity.”
The report proposes building a dedicated market-entry stream to help suppliers break into adjacent sectors. It would include stronger cross-industry networks, matchmaking between suppliers and potential buyers, formal partnership mechanisms, technical training opportunities in industry adjacencies, and leveraging strategic procurement to reduce the risk of landing that critical first customer in a new sector. It would also entail strengthening firms’ managerial capabilities in areas such as strategic planning for diversification, financial and resource management, and leadership and change management, helping them pursue new opportunities while sustaining their core automotive operations.
For Mostafa and his co-authors, the real opportunity of this moment isn’t surviving disruption, it’s using it to build a broader, more resilient and competitive advanced manufacturing base for the future.
“Even if we sort out the trade agreements, these companies would come ahead much stronger and more diversified,” he said. “There’s always a risk, but if you can successfully expand into one or two new, ideally counter-cyclical markets, [you] can build a much stronger business.”
Or, put more simply: the sector may have been pushed into a defensive position, but going on the offence now could be what separates the firms that merely survive this moment from the ones that come out ahead of it.
To learn more about this research, read the policy report, Between Survival and Transformation: How Automotive Suppliers Are Responding to Industry Disruptions, co-authored by Julian Birkinshaw, Dean, Ivey Business School; Romel Mostafa, Director of the Lawrence National Centre for Policy and Management; and Sergii Nevmerzhytskyi, Post-Doctoral Research Fellow, Ivey Business School.
