How GKN is transforming to gain from e-powertrain shift

GKN Automotive is the UK's largest automotive supplier -- and No. 43 in the world, according to Automotive News Europe's annual ranking -- because of its leadership in driveshafts and all-wheel-drive systems. As electric cars become more prevalent, GKN wants to turn its all-wheel-drive division into a top supplier of all-in-one e-drive systems, putting it head to head with formidable rivals such as Robert Bosch, Magna International and BorgWarner. The man guiding GKN through this transition is Liam Butterworth, a Briton who has led the automotive division since 2018, joining after the company's hostile takeover by Melrose Industries. Prior to that he was CEO of Delphi Technologies. Butterworth spoke about the company's challenges amid the race to electrification with Automotive News Europe Correspondent Nick Gibbs.

You lost money in the first half of 2020, along with many other companies. What is your prognosis for 2021?
The market has experienced remarkably strong rebound, especially North America, and we see that continuing at least throughout the first half of 2021. Asia is starting to come back and our China business has been strong since they came out of COVID-19 lockdowns. This year we expect that about 83 to 85 million cars will be produced globally, up around 10 percent. We are relatively optimistic, but we don't see it coming back to 2019 levels for another three years.

In terms of those 83 to 85 million vehicles, how many will have GKN content?
We are the global market leader in the side-shaft business with a share of about 45 percent. So, roughly one in two of those vehicles will have GKN content. Our market position is pretty consistent in all regions.

More than 70 percent of your revenue comes from driveshafts based on your most recent results. What effect has to move to e-mobility had on that business?
Our driveshaft business is more or less completely agnostic to powertrain source, so it's relatively bullet proof. We are seeing a lot of increased requirements from automakers in terms of torque and NVH [noise, vibration and harshness] specifications because EVs are much quieter.

Does that increase your content per vehicle in driveshafts?
No, but it reinforces our ability to differentiate by having a high-performance product. It enables us to sustain our position and reinforce our market leadership. We are the partner of choice when they are looking at driveline systems as a whole as they integrate electric drivetrains into the overall system.

All-wheel drive represents about quarter of your revenue. How is that affected by e-mobility?
We are seeing our all-wheel-drive business actually migrating into e-drive units. The core of the all-wheel-drive business is in our differential units, so what is happening is that is moving into an e-drive unit, which includes an electric motor, inverters and gearbox, creating a three-in-one unit on an e-axle. We are investing quite heavily into that.

When automakers put an electric motor on two axles to create all-wheel-drive models, do they still need your all-wheel-drive differentials and other components?
Whether the gearbox goes into the differential or the three-in-one e-drive unit, it's same manufacturing technology and same expertise. It comes back to NVH requirements. Automakers value our skill set in integrating the right level of components and our understanding of NVH on the whole system.

E-drive accounts for 2 percent of your revenue while awd is at 25. Will this switch in the future?
We are investing in our e-drive portfolio of products and technologies. As that business grows and evolves, that will compensate for the migration of conventional all-wheel-drive systems.

When will the switch take place?
We expect mid-2025, but that depends on the pace of the electrification shift. One thing we are seeing is that automakers are going through a process of deciding what they want to manufacture themselves versus what they want to outsource. The core of the e-drive unit is the gearbox and transmission system. We are well placed to supply the transmission as a Tier 2 or the fully integrated e-drive unit as a Tier 1.

Are automakers looking to save money via the e-drive, making them as simply as possible, or are we going to see some differentiation?
It varies a lot by automaker. We are in a very cost competitive industry. We offer a standard three-in-one e-drive unit to all of our customers and we are adapting as and when needed. We can standardize that unit across multiple platforms and share the R&D across a larger volume. We have compartmentalized the different parts of the overall system, which can be standard or separated. In 2020 we launched our three-in-one e-drive on 13 new platforms with four automakers and 10 different brands.

There is a lot competition out there for e-drives. How does set GKN apart from its competitors?
We are currently enjoying a reasonable share of that market. In terms of how we differentiate its two things, one is NVH on our drivetrain systems. Second is our ability to integrate the gearbox, the electric motor and electronics into one compact standardized unit.

Bosch, BorgWarner and Magna would say the same thing, right?
They would but they don't have a driveline business of the scale we do. The understanding of the drivetrain system is actually really important to the automaker in terms of how the pieces fit together in a cost-effective way but also a highly reliable system with good NVH.

Which components in the three-in-one e-drive unit do you make?
We have been manufacturing e-transmissions for about 20 years. For the next generation e-drive launching in two years' time we will also be manufacturing electric motors. We see that as a core requirement for our three-in-one systems. We have a partnership with Delta Electronics for the invertor.

You have spoken in the past about GKN's investment in two-speed EV transmissions. Has there been a strong take-up rate for them?
We don't see the market for two-speed e-transmissions taking off. Nearly every program we are working on is for single speed, the torque band in an electric motor is such that you don't need a dual-speed transmission. We are not investing heavily in dual-speed.

GKN has been undertaking a number of steps to cut costs. Could you elaborate on those?
When I joined company two years ago we launched big transformation program looking at all business areas in terms of growth, cost and infrastructure. When it comes to cost we are working on all areas. There has been a lot of activity on procurement and a lot of work done to improve the efficiency of our manufacturing locations such as implementing smart automation. We are also looking at “make versus buy” to see where we can insource to utilize spare capacity. We also have been looking at our global manufacturing footprint to ensure we are cost competitive going forward.

That resulted in the closure of three plants. Will more factories be shut?
We are continually looking at the footprint to see where our customers are moving, and the cost base we have, so I expect there will be more footprint reviews being done in the coming months and coming year.

Since our original interview GKN announced it was consulting over whether to shut its last remaining UK manufacturing plant. Butterworth gave us this additional comment on that topic.
Proposing the closure of our Birmingham assembly site is a difficult decision. Sadly, an increasingly competitive global market means that the site is no longer viable, this is despite significant effort and investment over the last 10 years to reduce the site's high operating costs and make it competitive. Supporting our people is our first priority as we consult on this proposal.
 
Where do you make e-drives for Europe?
We manufacture in Brunico, Italy and Koping, Sweden. We also make them in China, and export some back to Europe. In the UK we have an advanced R&D center where we do a lot of research into motors, invertors, electronics and integration.

Could you provide some examples where you have insourced?
Forging is a big area where we have got quite a lot of installed capacity and we have been looking at insourcing more of that.

You mentioned that automakers are also looking to insource. Will that impact you?
On the conventional drivetrain business, automakers are assessing how much more they can push out to the supply base to free up capacity for some of the newer technologies they want to insource such as e-drives. In terms of the e-drive units themselves, automakers are going through a number of iterations of make versus buy. The final decision depends on the automaker and their current internal capabilities and what they want to control. Even if they do insource more, electrification still represents a content opportunity for us in the future.

If they decide to insource e-drive components doesn't that mean a lost revenue opportunity for GKN?
Yes, but that is not revenue we are going to lose. We didn't have it in the first place.

But you are losing some awd business and you've said you want to replace that with e-drive.
All-wheel drive is declining very moderately. A big chunk of our all-wheel-drive business is in the truck space in northern America and we see that declining very gradually over a longer period of time as they electrify much later down the line. We don't see the automaker insource versus outsourcing dilemma as having a major impact on the business

You set aside 93 million pounds ($129 million) for money-losing contracts in your most recent quarter. Why do you continue with loss-making contracts?
We don't continue with loss-making contracts. We have resolved them. One of the things we have done since I came is review how we price programs. We review them every quarter and address them accordingly. In that 93 million pounds there were some pretty significant programs that we were underwater and we needed to resolve them. You come to a solution, either through walking away or repricing.

Every automaker is looking to reduce costs now. How does that impact GKN?
It's not just about reducing price, it's about how you take costs out of value chain. It varies by automaker. In general, we put a lot of emphasis on value: how do we redesign and reengineer to take cost out and share that saving with the automaker. This is also what we are doing in terms of our footprint. We are looking to improve the efficiency of our operations as well as our supply chain. We are looking to have a more regionalized business. This way we can avoid shipping things around the world, which has a massive impact on working capital and generates costs that aren't bringing value to anybody. Our business is one of scale. We need to have scale and vertical integration so it's not just doing assembly. It's about forging and machining as well. Having all that capability in one location creates a significant competitive advantage.