The profitability for suppliers chasing business in the global e-drives market has become “non-existent” as automakers bring more of the business in-house, said Liam Butterworth, the CEO of Dowlais, the parent company of GKN Automotive.
E-drives or e-axles package an electric motor, an inverter and a gearbox for electric cars, and they had been a key plank of GKN Automotive’s diversification plan to expand its core driveshaft business.
Automakers, however, are increasingly in-sourcing the production of e-drives to compensate for falling demand for combustion engines as EV growth continues. That is leaving less and less business for suppliers such as GKN, even as the overall EV market grows.
“What we see are automakers doing around 70 to 80 percent of those systems themselves in-house,” Butterworth told Automotive News Europe. “The remaining 20 percent that are going out to the market are in a very, very competitive environment.”
GKN Automotive has previously won key e-drive contracts including to supply the electric Fiat New 500, but has had to dial back plans to expand this element of the business, he said.
“We could grow the e-drive business significantly because we have the capability, but the profitability in the e-drive market is non-existent today,” Butterworth said.
Some e-drive suppliers are bidding low to “to compensate for a portfolio that is dying as a result of internal combustion engines" being phased out, Butterworth said, without naming the suppliers.
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GKN Automotive’s core driveshaft product is used by both combustion engine vehicles and electric vehicles alike, meaning GKN can avoid participating in a bidding war to expand its e-drive business, Butterworth said.
U.K.-based Dowlais was spun off from Melrose Industries in April and includes GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen.
Risk of in-sourcing to suppliers
Automotive is the new company's dominant division, last year generating 80 percent of its revenue (adjusted to remove Melrose divisions not included in the spinoff), Dowlais said. The company employs 24,000 people in 17 countries and supplies parts found in 50 percent of the world’s light vehicles, according to company literature. Dowlais listed on the London stock exchange in April.
The risk of in-sourcing to suppliers was highlighted in a report from investment bank UBS last year. “We struggle to see a path in which auto suppliers generate attractive profitability margins selling EV-related parts, due to intensifying competition, underexposure to the fastest growing OEMs, excess capacity risk and higher R&D [costs],” the report said.
However, while automakers have worked quickly to bring elements of e-drive production in-house to replace combustion engine business, in the future they will mostly likely return to an outsourcing model once it no longer becomes a differentiator, UBS predicted. “The main reason being that OEMs can leverage the scale effect achieved by some suppliers,” it said.
One example given by UBS was the e-drive unit including the gearbox in the Volkswagen ID3, which the bank estimated cost VW $1,000 to produce following a teardown of the car. By contrast it quoted the Japanese supplier Nidec as saying it could build a similar system for $500. Along with GKN Automotive and Nidec, other e-drive suppliers include Valeo, Vitesco, Schaeffler, BorgWarner and Aisin.
Suppliers could win back business by 2030
Dowlais’ Butterworth agreed with UBS predictions that automakers will return to suppliers in the future for e-drives.
“We assume that that market will be about 50/50 insourced/outsourced by 2030," Butterworth said. “It depends on the technical maturity of the automaker and also their legacy situation in terms of how much capital and resources they need to redeploy from moving from combustion engines to e-drives.”
Standardization of electric platforms in the future “will introduce a certain element of commoditization” on e-drives that will drive the scale effect on cost, Butterworth predicted.
He said that currently the GKN Automotive e-drive strategy is very focused on the niche applications “where the customer needs our engineering capability and rewards us for doing so,” Butterworth said. “Our strategy is not to go out and win a big program because I think it would destroy the company.”
GKN ranks 45th on the Automotive News Europe list of top 100 global suppliers, with automotive sales of $4.8 billion in 2021.
