How Vitesco aims to benefit from the shift to electrified powertrains

Megasupplier Continental is preparing to spin off its powertrain business to create Vitesco Technologies, a stand-alone, publicly listed company that aims to capitalize on the industry's rapid move toward electrification. By 2025 Vitesco expects 40 percent of all powertrains to be electrified because of a combination of tougher global emissions regulations and rising consumer demand. CEO Andreas Wolf wants the company to play a leading role in the transition. He explained how in an interview with Automotive News Europe Managing Editor Douglas A. Bolduc

Why does spinning off Vitesco Technologies from Continental make sense?
According to current market studies 40 percent of all powertrains will be electrified by 2025. With initiatives such as the European Green Deal [an effort by the EU to have no net emissions of greenhouse gases by 2050], there could be an even steeper increase in electrification. We decided we wanted to drive the change in the market for electrification.

Does the spinoff change how you will operate in Europe, the U.S. or China?
No, because we will continue to be active in all the major regions. One big advantage of being a stand-alone company, however, is the flexibility we gain. Clearly, at a company the size of Continental, with 45 billion euros in annual sales in 2019, doing things can sometimes take more time. While we are still a big company, with nearly 8 billion euros in annual sales in 2019, we will be more agile and can react faster to changes in the market. In addition, as a stand-alone company, we have more options if you want to join forces in the market.

How do you see the markets developing for Vitesco in 2020 and beyond?
Several public market studies forecast significant growth due to electrification and emissions regulation. Independent from the overall vehicle demand, they forecast that the value of the content of a typical powertrain will increase significantly. In the electrification area, the market for many products is expected to grow 20 percent to 30 percent a year over the next decade. We expect our electrification products to grow at an even faster pace.

How much of a boost do you expect from the EU's emissions targets dropping to 81g/km in 2025 and 59g/km in 2030 from 95 g/km this year?
Electrification is the only short-term solution to meet these targets. The faster electrification comes and the higher the level of electrification that is needed, the bigger our market opportunity. Compared to our 2018 combustion offering, our potential content per vehicle in 2025 is expected to be twice as high for a 48-volt mild hybrid. It's a factor of three for a plug-in hybrid and up to a factor of four for a battery-electric vehicle.

How long will it take for EV and hybrid components to have a larger share of your sales than parts for gasoline and diesel powertrains?
It's impossible to say when these components will exceed the size of our combustion products. Many of our core products such as electronics have a universal purpose. They can be applied in traditional combustion engines, hybrids or full-electric vehicles.  For example, our central electronic control unit which regulates the propulsion of a full-electric car has the same DNA as the engine control unit that controls the injection in a combustion engine. This crossover usage also applies to several sensors, thermal management systems and other products.

How much of your current business is e-components?
In 2019, components for hybrids and electric vehicles accounted for about 200 million euros of our sales. But if you factor in a solid annual growth rate for us, which we target to exceed the forecast growth rate for the entire electrified car market, you end up with a much bigger business rather quickly.

The European and U.S. markets appear to have different goals when it comes to electrification. How will Vitesco best serve both?
In Europe, there is a strong regulatory push that is linked to fines that, according to Bloomberg estimates, could reach $39 billion for the automotive industry, if the 95 grams per kilometer CO2 fleet average is not met. Regulations are also pushing the technology in China. In the U.S., current CO2 regulations are expected to remain more relaxed, but we see another factor pulling electrification there: the fun-to-drive aspect. People appreciate the torque offered by the electric motor and the immediate acceleration they get when they step on the pedal. That is driving the demand there.

Should the fun-to-drive factor be emphasized more in Europe?
It's always better to excite people about a technology, because they will then ask for the products. The fun factor that people experience with these cars gives me hope that the move toward electrification will accelerate. It's mobility without regret.

How will the creation of the new company help you in traditional internal combustion powertrains?
That portion of our core business accounts for 80 percent to 90 percent of our sales today, and we see a lot of growth potential here for the next 10 years. However, a key issue we focused on when we defined our vision and mission was to look beyond 2030. The combustion engine is forecast to die around 2035, which means the last development on those engines will be in 2025-26. That will have a huge impact on the next five or six years. Therefore, we knew we had to understand what would happen beyond 2030. Our goal is to make sure we are well equipped for success beyond 2030.

Reports say Vitesco has already won business with Volkswagen Group on the ID family for power electronics. How crucial is that for Vitesco?
That information is inaccurate with regard to the power electronics. What I can confirm is: If you look at the top 10 electrified platforms for 48-volt mild hybrids, plug-in-hybrids and battery-electric vehicles for the coming years [according to IHS Markit], we supply products in the majority of them -- be it electronics or electrification components.

Does the fact that electrified powertrains are not in great demand in North America dampen your enthusiasm for growth there?
The main difference between North American and other regulations is, that current regulation is very strict on pollutant emissions, but less on CO2. Therefore, the regulatory push on electrification is lower. Our strategy does not rely on one scenario. It covers all powertrain options. Based on current market studies the electrification market is increasing rapidly in Asia and Europe and that even if the U.S. trails it won't change the overall picture. For the time being, all the technical solutions, meaning battery-electric vehicles and plug-in hybrids, are evenly spread out in the U.S. We don't see a clear electrified powertrain winner in the U.S. at this moment, which is fine because we serve all sectors.

Is it fair to say the 48-volt mild hybrid is the clear winner in Europe?
We don't believe there is one winning technology. There will be a mix of technologies. Also, it really depends on the strategy our customers have chosen to electrify their fleets. If you chose the 48-volt mild hybrid you don't have to completely redesign the powertrain, but if you want to see a significant impact on your fleet CO2 average, you have to use this solution across large parts of your fleet. Other customers focus on full-electric vehicles, because it's possible to reach the same CO2 target, if these zero-emissions cars account for 10 percent to 15 percent of their fleet. So it's a trade-off between "low effort at high quantity" and "high effort at low volumes." That being said, we have seen a very strong push in Europe toward 48-volt mild hybrids, so you might call it an early winner for the mass market. But other electrification options are also on the rise: Over the next few years automotive customers are expected to launch numerous new plug-in hybrids and electric models at even more attractive prices and the charging infrastructure has significantly improved. So pretty soon there will be electrification options for nearly all use cases and budgets.

We have a slowdown in vehicle production, Brexit, tariffs and a pandemic. Not exactly the perfect conditions for a new company to be born. How do you overcome that?
The feedback that we are getting from various parties is encouraging. I consider this a signal that our strategy is solid. That being said, the coronavirus outbreak and its consequences are not helpful. The target of spinning off remains the same, the upcoming weeks will show which implications we have to face with regards to our timeline.

What is your unique selling point vs. the competition?
There are several competitive advantages. One is our long experience in key product areas, especially our DNA in electrification. We have been in this market for more than a decade. More than a million electrified vehicles in the field are equipped with our products; we know what we are talking about. We also have an extremely diverse electrification product portfolio. We serve all parts of the market whether it be 48-volt mild hybrids, high-voltage hybrids or battery-electric vehicles. Third, we have a strong DNA in all areas of the combustion engine as well. This means we have a deep understanding of hybrids, meaning combustion engines plus electrification. We have both worlds under one roof and the more competency you have in-house the easier it is. A fourth competitive advantage, which is based on feedback we get from customers, is that we offer technical advantages in several product areas. This includes the power of our e-motors and the efficiency of our power electronics. Last but not least, we have a strong DNA in electronics, functions and software, which will be key in future vehicles. For example, we have 7,300 development engineers and 4,300 are software and system engineers. Therefore, our starting point is significantly different from our competition.

One area of your business will be so-called contract manufacturing. Could you explain this?
The spinoff will create two separate companies, but there are still some Continental products that we will produce and vice versa. Instead of immediately relocating these activities to Continental or Vitesco Technologies, we will do it over the next decade. This area will be categorized as contract manufacturing, and it will account for 1.2 billion to 1.3 billion euros in business for both us and Continental.

How did you decide on the products you would keep at Vitesco?
We conducted a detailed analysis of nearly 20 product families looking at market position, technical capabilities, financial contribution and their market perspective until 2030 and beyond. We also factored in whether the product could be transformed or used for another purpose. The product families we chose now make up our core business. This includes components linked to electrification, such as the electric motor and inverter, as well as parts currently used in combustion engines. What they all have in common is that they have a long-term future.

What is the future for your workforce?
As we already announced, some plants, such as those producing injectors and high-pressure pumps, will be shut down over a period of three to eight years. Those plants are affected by the technical transformation from combustion engines to electrification. If it is technically and economically viable to adapt a plant to produce another product, we will, but this won't be possible in all cases. As production winds down at these plants it will significantly ramp up at other locations. Therefore, our total number of employees are expected to stay flat or possibly increase.

How will Vitesco's shares break down?
Immediately after the spinoff, we will basically have the same structure that Continental has today with IHO Group [a strategic management holding company owned by the Schaeffler family] holding a 46 percent stake and the rest being free float. This gives us confidence, because we have a large, stable shareholder that we have known for years.