BorgWarner's EV plan: Follow the electrons

PARIS -- For many, BorgWarner’s name is synonymous with the internal-combustion engine, through the iconic Indianapolis 500 trophy and the supplier’s history of innovative transmissions and turbochargers.

But in the last few years, the Michigan-based company has been aggressively repositioning itself as a leader in electrification, through M&A activity and organic growth, as well as a planned spinoff of its fuel systems and aftermarket businesses.

"We are going to put all our energy into growing battery-electric vehicles and high-voltage plug-in hybrids, both for passenger cars and commercial vehicles," Frederic Lissalde, BorgWarner’s CEO since August 2018, told Automotive News Europe in an interview earlier this month in Paris, where he received an award from a French engineering society for his contributions to the automotive industry.

That focus is starting to pay off.

BorgWarner's 2022 revenue from electrification (primarily full-electric components) of about $850 million is expected to rise to $1.6 billion to $1.8 billion this year, Lissalde said. The goal under Lissalde’s Charging Forward strategy is to top $4.3 billion by 2025.

"Wherever the electrons go, from charging to moving the wheel, we want to have product differentiation and scale," Lissalde said. 

BorgWarner is not alone among Tier 1 suppliers trying to pivot to electrification, in various ways.

ZF has halted new investment in internal-combustion drivetrains; Continental has spun off its electric powertrain business into Vitesco; Bosch is reshaping its industrial footprint.

BorgWarner’s available market for electric components is three times that of internal-combustion components, Lissalde said, meaning that if it could sell all the components it makes in each sector, the content per vehicle for an EV would be $2,600 but just $900 for internal combustion.

Among recent wins, BorgWarner will supply an unnamed global automaker with 800-volt silicon carbide inverters, with a target of 400,000 units annually. It will also supply a German automaker with battery cooling plates, which fit between rows of cells to maintain batteries at optimal operating temperatures.

For Lissalde, the key to creating a profitable EV business is to build on BorgWarner’s existing strengths in the internal combustion space. Low-voltage controllers, for example, are a bridge to high-voltage ones, as are thermal management components; transfer cases can be developed into EV transmissions. 

"We have technology foundations, processes and people that we can leverage into growing our battery-electric vehicle business," Lissalde said.

He expects BorgWarner’s electric components business to be close to break even within several quarters, as investments in R&D go down and scale goes up.“We spent 50 percent of our overall R&D on our eProducts in 2022,” he said, “so that spending for future programs is impacting our e-Product margins compared to the margins that we have in internal combustion.”

Will that be possible when EV technology is changing quickly? Lissalde says modular design for components such as motors or inverters that can work with 400 or 800 volts, or with silicon- or silicon carbide-based chips, can help avoid excess product differentiation. "We don’t have to reinvent the wheel," he said. "When you start having scale, your modular design strategy starts to pay off because you don’t have design new products from scratch."

Even as BorgWarner is building on its traditional products to develop its electrification portfolio, it has embarked on a program of M&A activity with the clear goal of filling gaps in expertise -- and targeting $2 billion in revenue by 2025 from the results of that activity. 

Recent full or partial acquisitions have included Akaso, which makes commercial vehicle battery packs; Rhombus Energy Solutions (software and fast charging); Drivetek (power electronics; SSE (fast charging); and Santroll Automotive Components (light-vehicle electric motors).

"It’s a business where you need to invest upfront," Lissalde said of electrification, "and M&A has been an integral part of that strategy."

"We identify technological gaps on products where we want to be present, where we can differentiate ourselves in the marketplace," he said. "Then we ask whether we can fill those gaps internally, organically, or inorganically."

If a merger or acquisition makes sense, BorgWarner whittles down a long list of candidates to a few companies and starts making phone calls. "The calls can be very short, or drive longer discussions," Lissalde said, adding that none of the companies that BorgWarner has acquired over the past five years were for sale.

BorgWarner is an attractive partner for startups because of its decentralized operating model, he said. "We can offer being part of a big group and leveraging our know-how and available funds, but also giving a newly acquired company autonomy and empowerment to drive their business and grow."

That operating model extends to within BorgWarner, with about 150 executives who have their own profit/loss lines. "When they can drive their business on their own, they should proceed as if it was their own money," Lissalde said. "If they need the help of the bigger corporation, they can raise their hand and we will help them."

Daily operations are handled by BorgWarner’s five business units, with some shared functions such as legal or billing. "Decentralization brings ownership on the ground, and it also brings agility and speed. That is what I think has made a difference for us in the past few years," he said.

In another kind of decentralization, BorgWarner is in the process of spinning off its fuel systems and aftermarket business as a separately listed company, called Phinia. The "Phi" in the name is a nod to Delphi Technologies, which BorgWarner bought in 2020, bringing those business sectors under its wing.

The spinoff is expected to close in the second half of this year, Lissalde said, although BorgWarner has not said where Phinia will be listed. An executive team has just been named, and Lissalde is confident that Phinia can thrive on its own. "Phinia is starting from Day 1 as a strong company, well-capitalized, with a great set of product lines that is set, we believe, to be successful," he said.

After the listing is completed, BorgWarner will have about 52,000 employees, while Phinia will have about 14,000, he said. Currently 15th on the Automotive News Europe list of top 100 global suppliers, with 2021 sales to automakers of $13.99 billion, BorgWarner will likely slip down a few places.

But Lissalde is confident that BorgWarner will grow, quickly and profitably, in the transition to electrification. The company expects to generate $4.5 billion in free cash flow by 2025.

"If you take $4.5 billion and you apply whatever CAGR (compound annual growth rate) you think about the growth of electric vehicles between 2025 and 2030, you will have pretty significant pure EV revenue," he said.

Lissalde credits BorgWarner’s technological foundations for making that transition possible, dating back to the early days of the Indianapolis 500. "We were able to make that pivot thanks to past generations of leaders and people in the factories who worked so hard to make great products," he said. "It’s not me as a leader, it’s us as a group."