Continental's supervisory board said last week that it has approved the spin off of its powertrain business to create Vitesco Technologies in the second half of 2021, after it was delayed by a year because of the pandemic.
The delay gave the company more time to prepare to become a standalone specialist in electrified drivetrains, says Vitesco CEO Andreas Wolf. By 2030, Vitesco expects 60 percent of all powertrains to be electrified. But Wolf says he wouldn't be surprised to see that number rise because of growing interest in electrification in North America, led by General Motors' announcement that it aims to have an all-electric lineup there by 2035.
Wolf, 60, spoke about the future of electrification and a range of other topics with Automotive News Europe Managing Editor Douglas A. Bolduc and News Editor Peter Sigal.
Q: Did last year's postponement of the spinoff have any effects on where Vitesco is in the process today?
A: Actually, 2020 confirmed that we have a robust strategy because the trend toward electrification has only accelerated. When we announced in 2019 that Vitesco would be formed out of Continental's powertrain division, there were still some questions about the uptake of electrification. Today, we are 100 percent sure this shift is going to take place. That's a positive effect of the delay.
Investors are pouring billions into EV makers such as Li Auto and Fisker, while Tesla's valuation has grown rapidly. Does Vitesco expect to gain from this wave of enthusiasm for electrification from investors?
Those examples show that investors understand the idea of electrification. In addition, those companies you mentioned underline that competition is growing. Our customers see that there is no longer just a push in the direction of electrification from tougher emissions regulations. They see there is also a pull from consumers who want these products. This works well for us.
Last year you said Vitesco expected 40 percent of all powertrains to be electrified by 2025. Has the acceleration of the electrification shift caused you to revise that number?
We base our strategy on forecasts by external market experts. The latest such market studies expect that 60 percent of global light-vehicle production will be electrified by 2030.
Does the change in the U.S. administration make you more bullish about the shift to electrification there?
There are two things that make me optimistic. One is the change in the political environment. We are seeing more openness toward electrification. That will certainly have an impact on market forecasts. The other thing we are seeing from our U.S. customers is a change in mindset. The most recent example was General Motors saying that by 2035 it will no longer sell cars with combustion engines. That change is not reflected in a lot of the forecasts yet, which means predictions for electrification will become even more optimistic. I would not be surprised if in a couple of years, North America starts to head in the same direction as Europe and China today.
It's not just the market growth rate for electrification that is important. Another key factor for companies such as ours is the possible sales per car, also known as the content per vehicle.
What effect does that have?
Electrification increases our potential for value contribution to each car. Our content-per-vehicle opportunity is five times higher for a full-electric car in 2025 than it was in 2018 for a car with an internal combustion engine. It is three times higher for a plug-in hybrid.
What does that mean in hard figures?
If a customer had taken all of our products for an internal combustion engine vehicle in 2018, we could have made around €500 (about $600) in possible sales. For vehicles that are purely electric in 2025, this value contribution could be around €2,000 to €2,500 ($2,400 to $3,000). For hybrids, the value opportunity will be somewhere between €800 and €2,000 ($960 and $2,400).
In spring of 2020, you said Vitesco "wanted to drive the change in the market for electrification." What examples showcase this?
After more than a decade in this sector and with our electrification products in more than 2 million vehicles, we are already a big player in this field. When the move to electrification started, however, you had a standalone DC-DC converter, a standalone inverter and so on. That's not very efficient.
One trend we are a part of is integrating multiple components to create a system. For example, the integrated electric axle drive we provide for the Opel/Vauxhall Corsa-e and the Peugeot e-208. The system features our electric motor and our power electronics.
The trend toward integrating several functionalities into one product will continue, and we contribute to this because we create many of those products in-house. Through integration, we can reduce cost and complexity and make the products more energy efficient. We expect this to give a huge boost to electrification.
Another key trend is that we are becoming more modular in our approach, rather than building everything from scratch.
What's your outlook for plug-in hybrids?
They are a good transition technology to help people get used to an electrified car. Over the next decade, both mild hybrids and plug-in hybrids are expected to grow, but maybe after 2030 the portion of mild and plug-in hybrids will steadily decline, and battery-electric vehicles will win that portion.
How agile is Vitesco now, and will it become even more so after the spinoff?
There are some advantages in being part of a larger company such as Continental, but there are drawbacks as well, such as competition for capital, i.e., investment funding between the business areas, and you can't raise capital on your own. As a standalone company, Vitesco will be able to make decisions much faster and can be more agile when it comes to reacting to market trends. We will also be able to raise capital and decide on capital allocation ourselves and form our own partnerships.
What is Vitesco's outlook for 2021 and beyond?
The ultimate driver for us is the global electrified-powertrain market, which is expected by experts to grow roughly by 30 percent a year between 2020 and 2025, and we want to grow faster than the market. Obviously, this only works if you have the right products, which we think we do. It's true we don't produce battery cells, but we make battery management systems and other products that help us take advantage of the direction the market is moving.
In addition, if we needed to add a technology such as a silicon-carbide-based inverters, we can form a partnership or even buy a small tech company. At the moment, though, we have everything on board that we need in order to grow.
How are you planning to transition from being a supplier for fuel-powered drivetrains to supplying electrified ones?
We divide technologies into three areas: non-core business, underlying business and new components. The non-core business, which is comprised of components that have no future in electrified powertrains, will be phased out over the next five to 10 years. This portion currently accounts for about €2 billion ($2.39 billion) in annual sales. Those losses are expected to be more than compensated by the other two areas.
The underlying business includes components such as sensors and electronic control units, which can be adapted to electrification, so they will survive. New components include electric motors, power electronics and integrated e-axle systems. This part of our business is expected to grow significantly over the next decade.
Is your work force ready for the shift toward more electrified vehicles?
The majority of our engineers — about 75 percent — are software engineers, electrical engineers and system engineers. Therefore, unlike a mechanically focused company, electrification and software have been in our DNA for decades.
What is the future for your production footprint?
We have been very transparent in communicating that some locations where we produce injectors and high-pressure pumps have been impacted by the decline in diesel demand, which nowadays is only half of what it was in 2019.
We have been overwhelmed by the reduction of diesel engines. This impacts our locations, but we have clearly communicated in 2019 which locations will be phased out over the next five to 10 years.
It's true that for some components, the phaseout will happen a bit faster than originally thought. For example, we expected the demand for diesels to halve, but we didn't think it would happen so fast. And this trend is accelerating. It may take seven or eight years to complete it instead of 10, but it won't happen in just two years. It's clear that we cannot keep all locations, but we have time to determine whether there are alternatives to closure.
What are the alternatives?
One alternative is to qualify people to work on the new components in our product portfolio, but not everybody is able or willing to do so. Also, we have had companies that are not affiliated with Continental or Vitesco inquire about taking over a plant because they need the production capacity and our engineers.
We are reacting to the different challenges in a very measured and constructive way, always striving for the best solution for our people. But we cannot ignore the fact that by the end of 2023, 2024 and 2025, a small number of locations will be closed.