Engine parts makers must cross a ‘valley of death’ to reach the EV era

KIDDERMINSTER, England — Auto engine parts makers eyeing the promising electric vehicle market are facing a serious case of delayed gratification.

Until electric vehicles really take off, auto parts makers face a perilous few years in which they must invest heavily in new machinery while battling declining sales of fossil fuel cars.

Evtec Aluminium, a small supplier with two plants in England, is a good example. He barely survived.

During the last decade in the European Union, when Great Britain was still a member, diesel was the green fuel of the future. Automakers, including Evtec’s main customer Jaguar Land Rover (JLR), owned by Tata Motors, have invested tens of billions of dollars in new diesel models and production capacity.

Providers did the same. Evtec, then known as Liberty Aluminium, invested tens of millions of pounds in new machines, some of which sit idle but are still being paid for.

Then the EU, spurred in part by Volkswagen’s “Dieselgate” emissions cheating scandal, quickly abandoned diesel in favor of electric vehicles and now plans to effectively ban sales of combustion-engined cars by 2035.

“We think diesel is the future,” Evtec chief commercial officer Brett Parker said on a tour of the company’s half-empty foundry in Kidderminster in the Midlands, England, the historic heart of the British car industry. “We supported the wrong horse, unfortunately.”

Evtec was saved last year when a group led by investor David Roberts bought it. Roberts says Evtec’s Kidderminster foundry is Britain’s most modern: large machines here pump molten aluminum heated to around 660 degrees Celsius (1,220 degrees Fahrenheit) into castings to make complex shapes, and it stands to benefit as UK carmakers look to build electric vehicles that need aluminum parts. .

“It was a no-brainer for me to invest in that business,” Roberts said.

As recently as 2015, diesel accounted for almost 52% of car sales in the EU. After Dieselgate and the switch to electric vehicles, diesel fell to 19.6% of EU sales in 2021 and has fallen further this year. In Britain, diesel car sales halved to just 8.2% in 2021.

Petrol car sales in the EU are down to around 40% in 2021 from over 45% in 2015 and will continue to fall as Europe goes electric.

Major engine parts suppliers like Vitesco Technologies Group AG and Schaeffler are already investing in the transition to electric, but smaller players like Evtec, for whom tracking data is not widely available, must adapt or die.

“Motor parts manufacturers are ground zero for the most pain in this transition because they have the least amount of portability in the electric vehicle world,” said Mark Wakefield, global co-head of the automotive and industrial practice at AlixPartners consultant.

Some major automakers have warned of huge job losses as EV engines have only a third of the parts of a combustion engine and require less labor.

Fewer parts also means fewer suppliers.

Suppliers of motor parts must either transform into an electric vehicle-focused business or branch out into other industries that make parts for anything from heavy equipment to hair dryers.

Or go out of business.

“People have to realize there is a cost to this transition,” said Roberts, an investor in Evtec. “We all have our own valley of death to get to electric vehicles, but for some providers it will be much more difficult.”

‘YOU CAN’T GROW WITHOUT MONEY’

The decline in sales of cars with combustion engines has already cost jobs.

The world’s No. 4 automaker Stellantis NV, for example, is switching its plant in Tremery, France, long the world’s largest diesel engine plant, to EV engines.

Tremery employs 2,400 people now, up from 3,000 in 2019. Many others will not be replaced when they retire.

German supplier Bosch is converting its plant in Rodez, in the south of France, from diesel injectors to new products including hydrogen fuel cells, shedding 750 of 1,250 jobs.

Auto industry consultant Bernd Bohr said the biggest, deep-pocketed suppliers will likely be the “last man standing” to deliver a particular part.

“Many companies are fighting for a piece of a shrinking pie and the question is, who gets to keep that volume?” he said.

Powertrain supplier Vitesco is focused on combustion engines, but by 2030 the company expects electric vehicles to account for 70% of sales.

In January, the German supplier will split its business into two main divisions, one focused on EV components and the other on higher-value technology that can also be used in combustion engines to generate cash as the business winds down.

Some parts of the business that are no longer considered core will be closed or sold.

“We have to generate the necessary funds to be able to invest in the future,” Vitesco CEO Andreas Wolf said. “I can’t grow without money.”

Parts supplier Schaeffler expects its future electric vehicle business to be less than current sales of combustion engines, so the German company is focused on diversifying its customer base.

For example, the ball bearings that Schaeffler sells to automakers could be sold to other industries.

‘OTHERS WILL BE ABANDONED’

Smaller suppliers are already struggling with rising costs for raw materials and energy, as well as the need to invest in greener products to meet automakers’ climate targets.

Financing new equipment for electric vehicle parts could be difficult.

Evtec investor Roberts said the company has around 330 million pounds ($363.8 million) in business for electric vehicle parts for JLR over a seven-year contract, plus around another 250 million pounds. with other car manufacturers.

But because of the auto industry’s long lead times, the models on those contracts won’t start production for another two to three years.

Evtec must spend up to £70m on new tools and machines for those contracts, of which Roberts will pay half, well before the revenue arrives.

Evtec is also supported by JLR, which considers it a strategic supplier.

“Our suppliers play a critical role in our transformation,” said a JLR spokesperson. “We are working closely with them as the auto industry transitions … to electrification.”

AlixPartners estimates that automakers have committed $526 billion to go electric, and if they don’t proactively address supplier issues, they could end up spending another $70 billion to fix them.

Suppliers that make key components could be bailed out, but automakers can’t afford too many bailouts, Wakefield said.

Evtec’s Parker said that with an investor backing its transition, in the short term the company is looking to “close the gaps” in revenue.

Earlier this year, when an Israeli supplier went out of business, Evtec took over part of its business. As suppliers struggle after two years of pandemic, supply crisis and inflation, Parker looks forward to more such opportunities.

“If you can hang on long enough, others will potentially drop out,” Parker said. “Then you have a better chance of getting back into business.”

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