Europe's combustion-engine factories at a crossroads

Few factories are more closely connected to a company's identity than BMW’s Munich plant. Established in 1922, the factory has built iconic models such as the 3 Series -- and perhaps even more notably for a company with "Motor" as part of its name, millions of engines.

Until now, those engines were BMW’s fabled "big sixes," as well as four-, eight- and even 12-cylinder models. But at the end of 2020, BMW took an abrupt U-turn at the Munich site, moving all engine production to existing factories in Austria and England and dedicating it instead to electric cars.

"Restructuring our engine production network is a strategic move geared toward the future," Milan Nedeljkovic, the BMW management board member responsible for production, said at the time.

European automakers are facing similar decisions, with combustion engines expected to be effectively banned by 2035. Electrification is the main force that is buffeting Europe’s once-mighty network of engine factories, which cranked out more than 20 million gasoline and diesel units as recently as 2019. 

"Automakers are consolidating their engine plant portfolios because it doesn't make sense to maintain dozens of production lines if the volumes aren't there anymore," said Romain Gillet, the lead EMEA powertrain analyst at S&P Global Mobility.

Industry consolidation -- notably the creation of Stellantis -- has meant that factories that once exclusively supplied brands such as Fiat or Opel have either closed or are in peril. And with the need to guard margins to finance the move to electrification, engine ranges within brands and even models have been scaled back. 

Finally, an overall cloudy outlook for the European market in the wake of COVID lockdowns, the conflict in Ukraine and looming hikes in inflation could mean demand for cars (and engines) will remain millions of units below pre-pandemic levels.

As experts see it, there are a number of pathways for Europe’s combustion engine production. Some plants will close, at great cost to their owners and raising concerns about the economic consequences. 

Others are being converted to making electric motors or batteries, or potentially for "circular economy" activities such as parts refurbishing or reconditioning used cars. What remains of combustion-engine capacity could be moved to countries with lower wages, or away from automakers’ home markets, where political considerations favor a fast transition to EV production.

Or, enterprises could be set up specifically to build engines for single or multiple brands, as with Geely’s Aurobay subsidiary, which will build powertrains for Volvo and other brands in Sweden and China. Renault is planning a similar spinoff, with details to be revealed shortly.

"What we see is a transformation of engine plants in high-cost countries such as France and Germany to making electric motors or gigafactories, while maintaining internal-combustion engines in lower-cost countries like Spain or Romania," Gillet said.

European light vehicle engine production (passenger cars and light-commercial vehicles) is forecast to decline to about 19.3 million units in 2025 from a high of nearly 24 million in 2017, a drop of about 20 percent (see table, below), according to figures from S&P Global Mobility (formerly IHS Markit).

But within those figures are several key trends.

Gasoline engine production is likely to be relatively stable, with hybrids remaining a large part of the market during that time frame.

At the same time, diesel output will drop by a whopping 66 percent, to 3.6 million units from about 11 million. And electric motor production will ramp up sharply, to more than 4.8 million in 2025 from about 82,000 in 2015.

Excluding EV powertrains, overall internal-combustion engine production is expected to fall to 14,138,861 -- a decline of 36 percent -- from 22,239,844 units in 2015. 

Another analyst company, LMC Automotive, is also predicting a similar trajectory, with the total number of light vehicles built in Europe with internal combustion powertrains (gasoline, diesel, hybrid) expected to fall to 14.7 million in 2029 from 22.8 million in 2019. At the same time, the production of battery-electric vehicles is expected to increase to 9.5 million from 310,000. 

LMC also tracks the source for powertrains installed in cars built in Europe. In 2021, 91 percent came from within Europe, a figure that is expected to hold mostly steady until 2027, when it will start heading in the other direction to 88 percent in 2029 (see table, below). 

Al Bedwell, LMC’s lead powertrain analyst, said the number of "offshored" internal combustion engines will probably be higher than forecast because of a lack of clarity on automakers’ strategies.

"I suspect the ROW (rest of the world) share may rise a bit further than the numbers suggest," he said, and added that after 2029 "things may move faster."

As production declines, the overall footprint is also shrinking. In 2017, according to data provided by LMC Automotive, there were 52 factories across the pan-European region (including Russia, North Africa and South Africa) making internal-combustion engines, from Lamborghini’s tiny Sant’Agata Bolognese plant (1,200 engines a year) to Audi’s huge site in Gyor, Hungary (1.9 million annually).

But that landscape will look very different in 2029, according to LMC. There will be just 34 sites actively building engines by that point, with the rest either having transitioned to EV components or other activities, or potentially closing. 

And those that remain will be building combustion engines in vastly reduced numbers. 

At Ford’s mighty Dagenham, England, factory, which builds diesel engines for commercial vans, production is expected to fall to just 131,200 units from 1.27 million in 2017. At Gyor, which says it is now the world’s largest engine production site, the transition to electric motors and other EV components began in 2018, and by 2029 the plant may be building just 271,000 combustion engines a year, LMC says.

"The landscape is changing a lot," Gillet of S&P Global said. "We used to produce a lot of engines in Europe and didn't import very many from other regions."

"This was a core expertise of European automakers," he added. "The production footprint was very robust, but this activity is going to decrease in the coming years." 

These figures and forecasts are raising serious concerns among lobbying groups and trade unions, which argue that Europe's automotive industry is facing the loss of tens of thousands of internal combustion-related jobs at automakers and suppliers. 

Apart from any overall decline in powertrain production due to market forces, electric motors have vastly fewer parts and take less labor to construct.

A 2021 study in France found that it takes a total of 21.6 workers to build 1,000 diesel powertrains (from block to transmission to exhaust) over the course of a year, but only 13.2 to build 1,000 EV powertrains -- of which five are employed in battery cell production alone.

CLEPA, which represents European suppliers, said in a December 2021 report produced with PwC that as many as 501,000 internal-combustion jobs (or 84 percent of the current total) will become obsolete by 2040, if the EU, as expected, moves to require that only zero-emission vehicles can be sold after 2035. 

Many of those workers will shift to making electric motors and other parts of the EV value chain such as batteries, but CLEPA is still forecasting a net loss of 275,000 jobs by 2040. Most of those job losses will happen between 2030 and 2035, when the percentage of combustion-engine cars is expected to dwindle to almost nothing. 

If the transition to electrification is not carefully managed, CLEPA says, "an abrupt loss of powertrain employment will place great pressure on regional economies" and that "regional inequities" are a real risk, with the runout of internal-combustion engine production heavily focused in Eastern and Central Europe.

Those pressures may also fall disproportionately on smaller suppliers, many of which cannot diversify into electrification as easily as automakers and Tier 1 component makers. The 2021 French study found that only 30 percent of combustion engine sites of Tier 2 and below companies planned to diversity, while that figure rose to 49 percent for Tier 1s and 69 percent for automakers.

"It’s not easy to know which suppliers are most affected, as there are big differences between suppliers even in the same tier level," a CLEPA spokeswoman told Automotive News Europe. "A more diversified company will be better placed to deal with the shock of an OEM plant closing, whereas one that depends solely on the ICE powertrain will face more difficulty.

"There is no straightforward impact, and it will very much depend on the supplier size and structure," she said. "But suffice it to say that some will be heavily impacted and will have to close."

Some of Europe’s largest engine factories are already slated for conversion to EV activities.

"It’s not that easy to close these plants. That’s why automakers are trying to repurpose them," Gillet said. Among them are:

• Tremery, France (Stellantis): Long the largest diesel engine plant in the world, Tremery has now started to build electric motors in a joint venture with Nidec. Stellantis said this summer that electric motors would make up half of the plant’s installed capacity by 2024, or more than 1 million units a year.
• Salzgitter, Germany (VW Group): VW is investing 2 billion euros to turn its leading combustion engine factory into its main battery cell production center. Batteries will also be developed, tested and recycled at the site. 
• Cleon, France (Renault): The factory in northern France built the famed "Cleon engine," a small four-cylinder unit that appeared in every notable Renault model from 1962 until the early 2000s. But Cleon is now in the heart of the automaker’s ElectriCity EV hub, first building motors for the pioneering Zoe EV, and just this year inaugurating a new production line for the 6AM motor, the first motor developed in-house by the Renault-Nissan Alliance.

Gillet and Bedwell say that Europe should not look overseas for future combustion engine demand and sourcing either, because regulations and market preferences differ so much between regions. 

"In Europe, we are not only talking about electric cars but also a road map when it comes to pollutants," mainly the coming Euro 7 regulations, Gillet said. "Based on that, we don't really expect that Europe will compensate for the lack of combustion-engines demand by producing cheap engines for the rest of the world."

By the same token, building engines overseas to supply Europe -- outside of a few opportunistic cases -- also makes little sense, he said. Some automakers have the capacity to do so, including Stellantis, which has a joint venture with the Indian company CK Birla Group that has started building 1.2-liter engines for Citroen’s New C3 model in India, but also has the intent to sell to "global automotive OEMs." 

But ever-tightening CO2 emissions targets will mean that most future European combustion engines will be either full- or plug-in hybrids, while Euro 7 pollution regulations will require a complex arrangement of catalytic converters and particulate filters. That results in a powertrain that is most efficiently assembled in Europe, for Europe, analysts say.

"It's more a need to shift to electric powertrains rather than sourcing from elsewhere with lower costs," Gillet said. 

A more intriguing idea is collaboration, either between automakers or with outside partners, to create production synergies and save on development costs.

Geely’s new Aurobay unit, a venture between Volvo Cars and Geely Holding, which builds three- and four-cylinder combustion engines in Sweden and China, includes Volvo Cars' former powertrain operations in Skovde. That factory built 370,000 engines in 2021, Aurobay said, adding that it expects to partner with companies "both inside and outside Geely."

One company looking for a partner in combustion engines is Renault, which earlier this year announced its intent to spin off both its EV operations and internal combustion activities as separate companies. Details are expected to be announced in November. Renault says it will not comment on recent reports that Geely and an energy provider could be its partners in the combustion-engine company.

"The elephant in the room is the Renault plan to spin off the legacy ICE activity and the EV operation," Gillet said. "This is a key question -- but what is certain is that with less and less volume every year, it doesn't really make sense to keep developing everything in parallel."