Powertrain electrification is advancing more quickly than anticipated, presenting both challenges and opportunities for suppliers.
Electric vehicle (EV) sales, which have always been brisk, recently surged. While the COVID-19 pandemic slowed momentum in many industries, it accelerated the electrification of vehicles. Between 2020 and 2022, EV sales grew by over 90 percent in the United States and Europe, and by over 300 percent in China.
This report builds on investigation of powertrain electrification trends, highlighting the latest developments in the electric powertrain (e-powertrain) market. Our research shows a significant shift: about 70 percent of automotive suppliers expect industry consolidation within the next three to five years. Tier-one suppliers are under pressure from both tier-two-plus suppliers (like raw materials and electronic manufacturing services) and rising internal costs. Unlike OEMs, who can increase consumer prices, tier-one suppliers have limited options for passing on costs. This is reflected in the higher 2022 average margins for OEMs compared to their suppliers.
This article explores the implications for automotive suppliers and suggests strategies to remain competitive.
Key Shifts in the Powertrain Component Market
Over the past three years, several critical changes have occurred in the powertrain component market:
1. Accelerated Electrification: EV sales have surged since the pandemic, driven by increased climate action through government policies, corporate commitments, and consumer behavior.
2. OEMs’ Electrification Strategies: OEMs are increasingly deciding to insource e-powertrain systems and components, accelerating the electrification of vehicles faster than expected.
3. Legacy Component Considerations: The rapid pace of EV adoption has made legacy internal-combustion engine (ICE) components a key consideration for OEMs. Demand for these components is expected to grow through mid-decade before declining, potentially increasing supplier pricing power.
4. Common Carve-outs in Powertrain Business: Efforts to separate ICE from EV businesses among OEMs and suppliers are increasing. This can generate short-term cash to finance the transition and clarify opportunities for capital markets.
Electrification Accelerates
The journey toward widespread vehicle electrification has reached a crucial turning point due to stringent regulatory pressures, consumer demand, technology advancements, and the commitment of automakers to an electric future.
From Today to 2035: China, Europe, and the United States
China has led in battery-electric-vehicle (BEV) penetration, surpassing Europe in 2021 and 2022. However, Europe is projected to catch up by the end of the decade, achieving its electrification targets by 2035 when the EU bans the sale of new gasoline and diesel vehicles. Annual BEV sales in Europe could reach 14 million units by then.
In the U.S., recent legislation, such as the Inflation Reduction Act and stricter emissions targets, is driving electrification, though at a slower pace than in China and Europe. To understand the economic impact of accelerating electrification, we analyzed market size and growth forecasts for electric powertrain components:
– Electric Drive Unit (EDU): Includes a traction motor, reducer, and inverter.
– Battery Pack: Consists of the battery housing, cells, and battery management system.
– Power Electronics: Comprises the onboard charger (OBC) and DC/DC converter.
– Thermal Management System: Maintains powertrain component temperatures within operational limits.
These components have large markets (greater than $1 billion) expected to grow by 40 percent or more annually over the next five years.
Despite a dip in car sales since the pandemic, overall vehicle production growth is likely to resume, supported by e-powertrain cost reductions driven by market competition and manufacturing scaling effects. This growth will challenge existing value chains through 2035 and beyond.
OEMs Clarify Their Electrification Strategies
With ambitious electrification targets and plans to divest ICE powertrain assets, OEMs are significantly investing in BEV production. Announced investments exceed $500 billion for general electrification by 2025, with actual figures likely higher due to aggregated investment announcements.
EDU Make-Versus-Buy Implications
OEMs’ BEV platform strategies are maturing. By mid-decade, many large traditional OEMs are expected to insource e-drive units and battery packs, while outsourcing battery cells and selected power electronic systems. The key drivers for insourcing e-powertrain components include cost savings, workforce retention, and competitive differentiation.
These decisions will impact the tier-one and tier-two automotive supply base, as OEMs build their in-house capabilities, leading to a major consolidation of the nascent EDU supplier market.
OEM e-powertrain sourcing strategies could follow five potential paths:
1. In-house: EV disruptors insource components across the e-powertrain value chain, working with suppliers on subcomponents and leading the design and final assembly stages.
2. Cost-focused and Insourcing: Mainstream incumbents limit systems sourcing to stay current with system-level breakthroughs from suppliers.
3. Performance-focused: Luxury performance OEMs control performance-related differentiating aspects of an e-powertrain.
4. Cost-focused and Outsourcing: New entrants and niche players focus on short-term profitability, representing a large portion of the outsourced EDU market.
5. Buy: Electrification followers primarily buy EV powertrain solutions from suppliers due to lack of resources or expertise to develop their own.
Legacy Components as a Transition Challenge
OEMs face production capacity challenges through mid-decade, with ICE production expected to increase moderately before dropping sharply by 2030. OEMs will likely shift low-volume ICE engine and transmission programs to tier-one suppliers to free plant space for BEV components.
Separating ICE and EV Functions
Continued ICE component production can generate cash, prompting some industry players to separate business units or create stand-alone entities. This move helps management focus on critical challenges and drives strategic repositioning. ICE suppliers that endure the transition may experience increased pricing flexibility.
Implications for Suppliers: Becoming an Electrification Winner
Suppliers should update their strategies to include detailed implementation approaches, emphasizing performance focus and a culture of accountability. They should brush up on M&A skills, allocate resources with an “old world versus new world” lens, and keep supply chain resilience a priority. By maintaining an active portfolio roadmap and positioning themselves as indispensable partners to targeted OEMs, suppliers can navigate the rapidly changing competitive environment and secure their place in the market.
A fundamental shift is occurring across the automotive value chain, happening faster than many anticipated. The current surge in vehicle electrification poses significant challenges for suppliers, who must secure investment capital and adapt to shifting customer plans. To succeed, suppliers must offer critical components and systems with industry-leading competence.
