KIDDERMINSTER, England, Oct 5 (Reuters) – Auto engine parts makers eyeing the promising market for electric vehicles face a severe case of delayed gratification.
Until electric vehicles really take off, engine parts makers face a perilous few years where they must invest heavily in new machinery, while battling declining fossil fuel car sales.
Evtec Aluminium, a small supplier with two factories in England, is a good example. He barely survived.
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For the past decade in the European Union – when Britain was still a member – diesel was the green fuel of the future. Automakers, including Evtec’s main customer Tata Motors (TAMO.NS), Jaguar Land Rover (JLR), have invested tens of billions of dollars in new diesel models and production capacity.
Suppliers have followed suit. Evtec, then known as Liberty Aluminium, invested tens of millions of pounds in new machines, some of which sit idle but are still depreciated.
Then the EU, spurred in part by Volkswagen’s “Dieselgate” emissions cheating scandal (VOWG_p.DE), quickly ditched diesel in favor of electric vehicles and now plans to effectively ban sales of cars at combustion engine by 2035.
“We left thinking diesel is the future,” Evtec commercial director Brett Parker said during a tour of the company’s half-empty foundry in Kidderminster in England’s Midlands. the historic heart of the British motor industry. “We bet on the wrong horse, unfortunately.”
Evtec was saved last year when a group led by investor David Roberts bought it out. Roberts says Evtec’s foundry in Kidderminster is Britain’s most modern – vast machinery here pumps molten aluminum heated to around 660 degrees Celsius (1,220F) into castings to create complex shapes – and stand to benefit as UK automakers look to build electric vehicles that need aluminum parts.
“For me, it was a no-brainer to invest in this business,” Roberts said.
As recently as 2015, diesel accounted for nearly 52% of car sales in the EU. After Dieselgate and the shift to electric vehicles, diesel fell to 19.6% of EU sales in 2021 and has fallen further this year. In Britain, diesel car sales have halved to just 8.2% in 2021.
Sales of petrol cars in the EU have fallen to around 40% in 2021, from more than 45% in 2015, and will continue to fall as Europe goes electric.
Major engine parts suppliers like Vitesco Technologies Group AG (VTSCn.DE) and Schaeffler (SHA_p.DE) are already investing in the transition to electric, but smaller players like Evtec – for which tracking data is not not widely available – must adapt or die.
“Engine parts manufacturers are ground zero for the most pain in this transition because they have the least portability in the world of electric vehicles,” said Mark Wakefield, global co-head of automotive and industrial practice of the consulting firm AlixPartners.
Some major automakers have warned of huge job losses, as electric motors have only a third of the parts of a combustion engine and require less labor.
Fewer parts also means fewer suppliers.
Engine parts suppliers must either transform into an EV-focused business or branch out into other industries by making parts for everything from heavy equipment to hair dryers.
Or go out of business.
“People have to realize that this transition has a cost,” said Evtec investor Roberts. “We all have our own valley of death to access electric vehicles, but for some providers it will be so much more difficult.”
“IMPOSSIBLE TO GROW WITHOUT MONEY”
Falling combustion engine car sales have already cost jobs.
The world’s No. 4 automaker Stellantis NV (STLA.MI), for example, is moving its plant in Tremery, France – long the world’s largest diesel engine factory – to EV motors.
Tremery currently employs 2,400 people, up from 3,000 in 2019. Many more will not be replaced when they retire.
German supplier Bosch (ROBG.UL) is transforming its plant in Rodez, southern France, from diesel injectors to new products including hydrogen fuel cells, cutting 750 of 1,250 jobs.
Auto industry consultant Bernd Bohr said larger, deep-pocketed suppliers are likely to be the “last man standing” to deliver a particular part.
“A lot of companies are fighting for a piece of an ever-shrinking pie and the question is, who gets 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 electric vehicle components and the other on higher value diesel technology to provide cash as that business winds down.
“We need to generate the necessary funds to be able to invest in the future,” Vitesco CEO Andreas Wolf said. “I can’t grow without money.”
A third division will include the remaining businesses to close or sell, Wolf said.
Parts supplier Schaeffler expects its future electric vehicle business to lag behind current combustion engine sales, so the German company is focusing on diversifying its customer base.
For example, the ball bearings that Schaeffler sells to automakers could be sold to other industries.
“OTHER WILL DROP”
Smaller suppliers are already grappling with soaring raw material and energy costs, as well as the need to invest in greener products to meet automakers’ climate goals.
Financing new equipment for electric vehicle parts could be difficult.
Evtec investor Roberts said the company had about 330 million pounds ($363.8 million) in electric vehicle parts business for JLR on a seven-year contract, plus about 250 million additional books with other automakers.
But due to long lead times in the auto industry, models for these contracts won’t begin production for two to three years.
Evtec is to spend up to £70 million on new tools and machinery for these contracts, half of which Roberts will pay, well before any revenue is generated.
Evtec also benefits from the support of JLR, which considers it a strategic supplier.
“Our suppliers play a central role in our transformation,” said a JLR spokesperson. “We are working closely with them as the automotive industry transitions to electrification.”
AlixPartners estimates automakers have committed $526 billion to going electric and if they don’t proactively address supplier issues, they could end up spending another $70 billion to fix them.
Suppliers making key components could be rescued, but automakers can’t afford too many bailouts, Wakefield said.
Evtec’s Parker said that with an investor backing its transition, in the near term the company is looking to “fill in the gaps” in its revenue.
Earlier this year, when an Israeli supplier closed, Evtec took over part of its business. As suppliers struggle after two years of pandemic, supply shocks and inflation, Parker expects more such opportunities.
“If you can hang on long enough, others will potentially give up,” Parker said. “Then you’re more likely to land business.”
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Reporting by Nick Carey in Kidderminster, England, and Christina Amann in Berlin Additional reporting by Gilles Guillaume in Paris Editing by Ben Klayman and Matthew Lewis
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