Short-Selling the Auto-Parts Sector: A Case for Targeting Overleveraged Firms Amid Tariff Turmoil

The auto-parts sector, long a cornerstone of global manufacturing, is now a minefield for investors. A confluence of U.S. tariffs, rising debt burdens, and structural shifts in demand has left many firms exposed. For short-sellers, this is fertile ground. The sector's average debt-to-equity ratio of 0.47 masks a darker reality: key players like American Axle & Manufacturing (AAM), ZF Friedrichshafen, and Forvia are operating with leverage far exceeding industry norms, their balance sheets strained by a perfect storm of macroeconomic and geopolitical pressuresAuto & Truck Parts Industry financial strength, from the Q2 2025^[1].

Tariffs as a Catalyst for Financial Stress

The Trump administration's 25% tariffs on auto parts—spanning engines, transmissions, and lithium-ion batteries—have exacerbated existing vulnerabilities. According to the Center for Automotive Research, these tariffs added $35–50 billion annually to manufacturers' costsThe Fiscal, Economic, and Distributional Effects of 25% Auto Tariffs^[5]. For suppliers, the ripple effect is dire. Companies like AAM, which recently raised $2.3 billion to fund its acquisition of Dowlais, are forced to borrow at junk-bond rates to maintain liquidityAuto-Parts Makers Are Diving Into the US Junk-Bond Market^[2]. This reflects a sector-wide reliance on high-yield debt, with ZF Friedrichshafen issuing a €1.25 billion bond in early 2025 to stabilize its balance sheetZF Accelerates Restructuring Efforts^[3].

The tariffs' impact on demand is equally concerning. North American auto sales are projected to decline by 4.0% and 7.5% in the U.S. and Canada, respectively, by year-endAuto-Parts Makers Are Diving Into the US Junk-Bond Market^[2]. While this could boost demand for repair parts, small and medium-sized repair shops—key customers for auto-parts firms—are struggling with inventory shortages and higher input costs. This creates a vicious cycle: weaker downstream demand forces suppliers to cut prices, squeezing already thin margins.

Leverage as a Liability

The sector's overleveraged firms are particularly vulnerable. ZF Friedrichshafen, for instance, reported a leverage ratio of 3.2x in Q3 2025, with net debt of €10.5 billionZF Accelerates Restructuring Efforts^[3]. Despite €8 billion in liquidity headroom, the company's 2024 loss of €1 billion—driven by €600 million in restructuring costs—underscores its fragilityZF Accelerates Restructuring Efforts^[3]. Similarly, Forvia's half-year 2025 results reveal a 1.3% sales decline and a marginal operating margin of 6.0%, down from 6.2% in 20242025-07-25 FORVIA HELLA presents half-year results for 2025^[4]. These firms are not just reacting to tariffs; they're being punished for past overreach.

American Axle's financials tell a similar story. While its Q3 2025 interest coverage ratio improved to 1.30, this barely covers its debt obligations2025-07-25 FORVIA HELLA presents half-year results for 2025^[4]. The company's reliance on junk-bond financing to fund Dowlais—amid a backdrop of rising global tariffs—signals desperation. For short-sellers, these metrics are red flags. A firm with a debt-to-equity ratio of 0.96 (compared to the sector's 0.47) and a history of sub-1 interest coverage ratios is a ticking time bombAuto & Truck Parts Industry financial strength, from the Q2 2025^[1].

Structural Shifts: EVs and Semiconductors

Beyond tariffs and leverage, the sector faces existential shifts. The transition to electric vehicles (EVs) is eroding demand for parts tied to internal combustion engines (ICEs), such as exhaust systems and fuel pumps2025-07-25 FORVIA HELLA presents half-year results for 2025^[4]. Meanwhile, semiconductor shortages—exacerbated by geopolitical tensions—continue to disrupt production of software-defined vehicles. These trends are accelerating the obsolescence of traditional auto-parts businesses, particularly for firms like Forvia, whose Lighting segment saw a 7.3% sales drop in 2025 due to ICE-related project phase-outs2025-07-25 FORVIA HELLA presents half-year results for 2025^[4].

Short-Selling Strategy: Who to Target

For investors, the case for shorting is compelling. ZF Friedrichshafen's €10.5 billion debt load and €3.2x leverage ratio make it a prime candidate. The company's plan to cut 14,000 jobs by 2028—a blunt attempt to restore profitability—risks alienating stakeholders and triggering further debt accumulationZF Accelerates Restructuring Efforts^[3]. American Axle's junk-bond binge and weak interest coverage also warrant scrutiny. Its acquisition of Dowlais, while strategically sound in theory, is a financial overreach in practiceAuto-Parts Makers Are Diving Into the US Junk-Bond Market^[2]. Forvia, meanwhile, is caught between declining ICE demand and a costly restructuring. Its “SIMPLIFY” initiative, aimed at saving €80 million annually by 2028, may not offset the drag from falling sales and margin compression2025-07-25 FORVIA HELLA presents half-year results for 2025^[4].

Conclusion

The auto-parts sector is at a crossroads. For overleveraged firms, the path forward is fraught with tariffs, shifting demand, and structural obsolescence. Short-sellers who target these vulnerabilities—through companies like ZF, AAM, and Forvia—stand to benefit from a sector in distress. As the industry grapples with its next phase, the lesson is clear: leverage is a liability when the macroeconomic winds shift.