BorgWarner exec: 'Now is the right time' for spinoff plan

BorgWarner, the U.S.-based driveline specialist, began to reinvent itself to succeed in an electrified world with an ambitious M&A program, including the acquisition of Delphi Technologies in 2020 at a $3.3 billion valuation. BorgWarner took another big step in December, announcing it would spin off its aftermarket and fuel systems businesses into a separately traded company. Paul Farrell, BorgWarner executive vice president and chief strategy officer, spoke with Automotive News Europe News Editor Peter Sigal about why the move makes sense for BorgWarner as it focuses on new propulsion technologies.

BorgWarner just announced that it would spin off its aftermarket and fuel systems units as a separately listed company. Why this move, and why now, with so much economic uncertainty?

When we announced our Charging Forward strategic plan in 2021, it included dispositions of $3 to $4 billion in combustion revenue by 2025. The spinoff is part of that strategy. Our view is that now is the right time. The electrification business at BorgWarner is accelerating. We have booked $3.1 billion in organic 2025 EV revenue. We have got another $900 million in EV-related 2025 revenue associated with acquisitions we have made since we announced Charging Forward. We are well positioned as a leader in electrification. On the other side, if we look at NewCo [the as-yet unnamed spinoff company], it is financially strong, margins are good, and they have improved significantly since BorgWarner took over the business [after the acquisition of Delphi Technologies]. The business is performing well in a challenging environment. And NewCo has a nice, balanced business mix -- light vehicle, commercial vehicle and aftermarket.

This gives us a great opportunity to form two more-focused companies that are both going to be financially strong, and each can then pursue the strategies that they need to succeed. BorgWarner can focus on electrification, and NewCo will have the opportunity to pursue its priorities. 

Before BorgWarner acquired Delphi Technologies, it was split off from Delphi Automotive, along with Aptiv. Are there any takeaways or lessons that can be applied? 

Five years ago, we were going through the same process. I look at it as another step in the evolution of the automotive propulsion market. Delphi Technologies was spun out of Delphi Automotive to give it more freedom to pursue the strategies it needed to pursue. That was done with a recognition at the time that the propulsion market was changing, and that the company would be better able to navigate that change if it had more control over its own destiny.

In this case, it’s a similar situation with the Fuel Systems and Aftermarket businesses. It may look like a similar play, but nobody said, "Delphi did this, let's go do that." That wasn’t the case. For me, it's really just reflective of the larger changes that are happening in automotive propulsion that lead to the realigning of assets to best serve customers and create value.

CEO Frederic Lissalde said that one of the reasons for the spinoff is that BorgWarner is meeting its electrification goals faster than anticipated. What are some of the key drivers of this?

Our electrification story isn't based on a single product. By 2025, we expect to supply more than 3 million inverters, 2 million electric motors and 4 million high voltage coolant heaters. And we expect to have more than $600 million in commercial vehicle battery pack revenue. These core foundational technologies are allowing us to rapidly build scale. The industry is accelerating, and we have the right products at the right time. And so, as that wave hits, if you will, we have been very successful in riding it. 

What does BorgWarner bring to the table in electrification?

We like to think of our strengths as grid to wheel. We have leadership positions in CV battery packs, thermal management, inverters, electric motors and integrated drive modules. Charging is another area that we are pursuing. If you take those strong foundational capabilities and combine them with BorgWarner's global footprint, our customer relationships and strong financial discipline, we’re really positioned well for the future, and we can scale up that business very quickly.

Are you able to provide a full electrification program that is managing the electrons from charger all the way through the drive module?

We have most of the elements, but our customers typically want to do more of the integration themselves. Our highest levels of integration are around the drive module. Our focus is really on having best-of-breed component technologies supported by systems expertise, and then we can mix and match those based on what customers want and need.

Is BorgWarner looking to maintain a traditional supplier-customer relationship in electrification, or are you weighing partnerships with automakers that might involve more development or production, for example?

We have been successful as a supplier, in the traditional sense, to the world's best OEMs. I don't want to speculate about potential future case-by-case discussions based on what an individual OEM's strategy might be. But right now, we are happy with the path we are on and the progress we are making. 

The cost of EV batteries per kilowatt hour has risen, in a reversal of longtime trend, because of increasing raw material prices and inflation. Do you think that EV market momentum can be sustained through 2025 or 2030?

We see the momentum around electric vehicles accelerating, particularly in the light vehicle space. With EVs, you have new technologies, new raw materials, new supply chains, and new production capability. It takes time to get all those puzzle pieces in place and scaled up. Based on how quickly those things come together, EV penetration will move a little faster or a little slower. But I think with increasing consumer adoption and increasingly strict regulations, the path is clear.

BorgWarner has been very active in M&A in the last two years, including Akasol for batteries, Santroll for electric motors, and Rhombus and SSE for charging -- just to name some of them. Do you have any more specific needs? 

EV-focused M&A is a core part of the Charging Forward Strategy. We have an objective of $2 billion or more in EV revenue from M&A in 2025. Right now, we are at about $900 million. We feel like we have made a lot of progress, but we still have some work to do to close that out. If we look at our portfolio, downstream of the battery in things like drive modules, inverters, motors and integrated drive modules, we have leading technology and we have scale. We feel good about our position there. If we look upstream of the battery, we have foundational capabilities in areas like onboard and offboard charging, but I wouldn't say we have reached scale. Those are probably some areas where there may be opportunities to continue the build out. 

Big Tech companies are cutting jobs, and startups are having a harder time attracting capital. Could there be opportunities there?

I think if you look at the economy and funding constraints for startups and things like that, it may create opportunities. We will look at them on a case-by-case basis and follow the disciplined approach to M&A that we have been following all along. 

Is it fair to say that that BorgWarner is developing its electrification expertise primarily through M&A?

I would say we have been building electrification expertise both organically and inorganically, although acquisitions no doubt have been important. For example, acquiring Delphi Technologies in 2020 really gave us scale in power electronics, low-voltage control electronics and software. Akasol, which we took full operational control over in early 2022, is the basis for our commercial vehicle battery pack business. And then we have Rhombus Energy Solutions, which closed mid-2022, that is building on charging capabilities we have from the Sevcon acquisition in 2017. We have also done organic development. We developed high-voltage coolant heaters internally, leveraging our thermal capabilities, and our high voltage electric fan leverages our core fan capabilities. As we have made these acquisitions, we have continued to invest in them and grow their capabilities. They aren’t static. Acquisitions have been an important part of the story, but a lot of it is also what we've been able to do with them post-close.

NewCo will focus on combustion technologies such as direct injection and engine management, in addition to aftermarket sales. How do you see the market for combustion engine technology playing out? 

NewCo is positioned to benefit from growth trends that we see in things like gasoline direct injection. And as we look further out, they have got hydrogen combustion, which is another opportunity that leverages their core engine management and fuel injection technologies. But also, roughly a quarter of NewCo’s business is based on commercial vehicles, which have a different set of use cases and a longer time horizon. And then you have got the aftermarket business, which is another integral piece, serving a large vehicle parc and with synergies across light and commercial vehicles. So, it is much more than just a light vehicle powertrain business. We are confident it's going to be successful. 

What are your global and regional outlooks for 2023? 

We haven't yet provided our guidance and outlook for 2023. We will do that in February. I would say that we do expect to see growth in our business driven by electrification. 

One of the main stories in the automotive business has been the shortage of semiconductors. What has been the effect on BorgWarner's business and what are you doing to mitigate it?

It's something we manage closely with our customers and our suppliers to find the best solution we can to minimize the impact. Longer term, silicon carbide will be critical for our inverter business. This is why we invested $500 million in Wolfspeed’s financing transaction to secure up to $650 million in annual capacity for silicon carbide devices.

Do you anticipate that the spinoff will alter the head count or production footprint of BorgWarner and the NewCo?

Both businesses will naturally evolve, and each one will have more flexibility to do what it needs to do. Over time, we expect BorgWarner to grow. We also expect NewCo to be successful. Post-spinoff, it will ultimately be up to their leadership team to chart their own course and decide where they want to go and the priorities they want to set.

What is the next step in the spinoff plan?

The plan is to complete it in late 2023, subject to satisfaction of customary conditions. We clearly have work to do between now and then, but we are making good progress.