Carmakers’ loudly promoted investments in electric vehicles are sending tremors through a lower-profile but huge industry: their parts suppliers.
Suppliers that historically built components for internal combustion engines are feeling increasing pressure to adjust to battery power. It has not always been a smooth shift.
The challenges are encapsulated in two companies with ties to the former Delphi Automotive, which was once one of the largest suppliers in the US.
BorgWarner and Aptiv are not familiar names to most drivers, but their parts help build cars and trucks for manufacturers such as Ford and Volkswagen. Together they have more than 200,000 employees — more than Ford or General Motors alone.
Michigan-based BorgWarner has a long history producing parts for petrol-powered vehicles. It generated 19 per cent of its revenue last year from selling turbochargers, which use exhaust from combustion engines to rotate a turbine and boost power. “To make the transition to EV, they have to totally reinvent themselves,” said Luke Junk, an analyst at Baird.
As part of that reinvention, BorgWarner last week said it plans to buy a business of China’s Hubei Surpass Sun Electric that makes electric chargers for up to Rmb410mn ($58mn), its second EV charging deal in two months after purchasing California’s Rhombus Energy Solutions for $185mn.
The transition to electric vehicles is “probably more broad-reaching” for BorgWarner than for its carmaker customers, Paul Farrell, the company’s chief strategy officer, said in an interview. After all, “they’re still making cars on some level”.
BorgWarner jump-started its transformation two years ago when it purchased the power-train spin-off of Delphi Automotive, which itself was previously part of General Motors. The $3.3bn deal, the biggest in its 94-year history, further enmeshed BorgWarner in the business of supplying combustion engines with products such as fuel injection systems and ignition products,
But it also brought a key EV technology to the company: inverters which convert direct-current electricity stored in a battery into alternating current that can run a motor.
Acquisitions are part of BorgWarner’s plan to refashion itself for the electric era. Last year chief executive Frédéric Lissalde said the group plans for EV-related products to account for 25 per cent of sales by 2025, and up to 45 per cent in 2030, through a combination of organic growth, M&A and selling internal combustion-related businesses. In 2022, the company projects revenue from EV-related products will account for $850mn, or about 5 per cent of sales.
Dealmaking can bring companies new technologies to sell to their current customer base. According to Dealogic, the number of deals in the US auto supply chain for the year to date is 72, increasing from 49 for the same period two years ago.
“I didn’t hear CEOs worried about it until two years ago, like really starting to rethink their M&A,” said Kim Borden, a partner at McKinsey. “There are definitely people, even now, today, who are still coming to terms with the fact that their portfolio doesn’t match their future.”
Lissalde told investors last month that the company was on track to book $3.7bn in EV-related revenue in 2025. But chief financial officer Kevin Nowlan said plans to sell $3.5bn worth of internal combustion-related businesses were “temporarily on hold” until debt markets settle.
A different situation awaits Aptiv, which is how Delphi Automotive renamed itself after the power-train spin-off five years ago. Aptiv held on to other, mostly higher-tech, businesses of Delphi’s.
The businesses manufacture wiring harnesses, cables and connectors; engineer layouts for that electrical architecture; design systems for automatic braking and to prevent lane drifting; and also develop autonomous driving technology.
Electric vehicles need more of Aptiv’s wiring and connectors than traditional cars and trucks. The company could make about $500 per internal combustion vehicle if it sold every relevant product that it makes, Junk said.
On an EV, the per-vehicle sales balloon to $1,200. Suppliers such as Aptiv are “essentially making this transition with the same products”, the analyst said.
Aptiv chief executive Kevin Clark told investors this month that its business selling electrical architecture for EVs “was effectively profitable from day one” because the company already sells products “on one out of every 3.5 vehicles manufactured globally”.
Some car parts suppliers are simply “better positioned as this transition takes place”, said Fitch Ratings analyst Stephen Brown. “It’s those suppliers that are less well-positioned that are really having to focus on transforming their business”.