Last year you said Vitesco expected 40 percent of all powertrains to be electrified by 2025. Has the acceleration of the electrification shift caused you to revise that number upward?
We base our strategy on forecasts by external market experts. The latest such market studies expect that 60 percent of global light vehicle production will be electrified by 2030. We expect very strong growth in China and Europe for electrification, which includes 48-volt mild hybrids, plug-in hybrids and full battery-electric cars.
What about North America? Does the change in the U.S. administration make you more bullish about the shift to electrification there?
There are two things that make me optimistic. One thing is the change in the political environment. We are seeing more openness toward electrification. That will certainly have an impact on market forecasts. The other thing we are seeing from our U.S. customers is a change in mindset. The most recent example was General Motors saying that by 2035 it will no longer sell cars with combustion engines. That change is not reflected in a lot of the forecasts yet, which means predictions for electrification will become even more optimistic. I would not be surprised if in a couple of years, North America starts to head in the same direction as Europe and China today. Perhaps North America won't match the speed of the electrification shift in those markets, but it is expected to increase quickly on a percentage basis. It's also worth adding that it's not just the market growth rate for electrification that is important. Another key factor for companies such as ours is the possible sales per car, also known as the content per vehicle.
What effect does that have?
Electrification increases our potential for value contribution to each car. Our content per vehicle opportunity is five times higher for a full-electric car in 2025 than it was in 2018 for a car with an internal combustion engine. It is three times higher for a plug-in hybrid.
What does that mean in hard figures?
If a customer had taken all of our products for an internal combustion engine vehicle in 2018, we could have made around 500 euros in possible sales. For vehicles that are purely electric in 2025, this value contribution could be around 2,000 to 2,500 euros. For hybrids the value opportunity will be somewhere between 800 euros and 2,000 euros.
During our last conversation in spring of 2020, you said Vitesco "wanted to drive the change in the market for electrification." What examples showcase this?
After more than a decade in this sector and with our electrification products in more than 2 million vehicles, we are already a big player in this field. When the move to electrification started, however, you had a stand-alone DC-DC converter, a stand-alone inverter and so on. That's not very efficient. One trend we are a part of is integrating multiple components to create a system. For example, the integrated electric axle drive we provide for the Opel/Vauxhall Corsa-e and the Peugeot e-208. The system features our electric motor and our power electronics. The trend toward integrating several functionalities into one product will continue, and we contribute to this because we create many of those products in-house. Through integration, we can reduce cost and complexity and make the products more energy and economically efficient. We expect this to give a huge boost to electrification. Another key trend is that we are becoming more modular in our approach rather than building everything from scratch. Therefore, we put more development resources into the base product so that it can be adapted more effectively. This increases the economies of scale and helps bring down costs for materials and further development. It will make electrified cars more affordable. We think we can be a front-runner here and drive the market in this direction.
The 48-volt mild hybrid appeared to be a clear winner in Europe when it comes to electrification, but will the pressure rise to move to plug-in hybrids and full-electric cars because the emissions gains from mild hybrids are so minimal?
We see mild hybrids as a solution that helps customers reduce emissions very quickly and conveniently because they don't have to make any big changes to the car. It doesn't require a new platform, so they don't have to wait three years until they see the financial benefits. That is the reason mild hybrids were so positively accepted by our customers. Market studies still predict mild hybrids to be growing percentage-wise in the next five to 10 years, both worldwide and per region, to the point where they have a penetration of about 50 percent in Europe, 35 percent in China and 26 percent globally by 2030. That is a significant increase, and we have the technology to support that trend. It is clear that the move to mild hybrids is an optimization of CO2 output, but it's not a zero-CO2 solution. Therefore, in perhaps 10 to 15 years, full-electric cars will start to win that race, meaning they will start to overtake other electrified powertrains.
What about plug-in hybrids?
They are a good transition technology to help people get used to an electrified car. From driving my current plug-in hybrid, I have learned for instance that if you drive in a sensible way, 30 to 40 percent of the total distance you travel is fully electric. You also get used to recharging the vehicle and you appreciate that if you have to drive long distances, you are not restricted by the battery. This technology helps to move people from pure combustion engines to electric vehicles. Therefore, over the next decade, both mild hybrids and plug-in hybrids are expected to grow, but maybe after 2030 the portion of mild and plug-in hybrids will steadily decline, and battery-electric vehicles will win that portion.
Are you concerned about Europe not having enough local battery production to keep up with demand or worried that the electric grid will not be able to handle the extra demand for all those EVs?
I don't think there will be a problem with battery cells because the entire industry is ramping up this part of the business. There will probably be some small setbacks along the way because the increase will be so rapid, but this will not stop the move toward electrification. When it comes to the grid, I also don't see that being an issue. There are a lot of smart ways to optimize charging of EVs, including having the EVs put power back into the grid.
How agile is Vitesco now and will it become even more so after the spinoff? What are some examples of this agility?
There are some advantages in being part of a larger company such as Continental, but there are drawbacks as well, such as competition for capital, i.e. investment funding between the business areas, and you can't raise capital on your own. As a stand-alone company, Vitesco will be able to make decisions much faster and can be more agile when it comes to reacting to market trends. We will also be able to raise capital and decide on capital allocation ourselves and form our own partnerships.
What is Vitesco's outlook for 2021 and beyond?
The ultimate driver for us is the global electrified powertrain market, which is expected by experts to grow roughly by 30 percent a year between 2020 and 2025 and we want to grow faster than the market. Obviously, this only works if you have the right products, which we think we do. It's true we don't produce battery cells, but we make battery management systems and other products that help us take advantage of the direction the market is moving. In addition, if we needed to add a technology such as a silicon-carbide based inverters, we can form a partnership or even buy a small tech company. At the moment, though, we have everything on board that we need in order to grow.
Do any particular markets stand out?
When it comes to the number of cars produced globally, the forecast is for the volume to increase from about 74 million last year, which was very low because of the pandemic, to 100 million by 2030. China, which has rebounded quickly from the pandemic and is showing a V-shaped recovery, is likely to account for 35 to 40 percent of global sales in the future. Meanwhile, it will take longer for the rebound in Europe and North America, which is currently showing an L-shaped recovery.
What percentages do you foresee for the different electrified powertrains?
Globally, market studies expect a share in global light vehicle production of between 15 and 20 percent battery electric, 10 to 15 percent plug-in and full hybrid and about 25 percent mild hybrid powertrains by 2030.
How are you planning to transition from being a supplier to fuel-powered drivetrains to electrified ones?
We divide technologies into three areas: non-core business, underlying business and new components. The non-core business, which is comprised of components that have no future in electrified powertrains, will be phased out over the next five to 10 years. This portion currently accounts for about 2 billion euros in annual sales. Those losses are expected to be more than compensated by the other two areas. The underlying business includes components such as sensors and electronic control units, which can be adapted to electrification so they will survive. New components include electric motors, power electronics and integrated e-axle systems. This part of our business is expected to grow significantly over the next decade.
Is your workforce ready for the shift toward more electrified vehicles?
The majority of our engineers -- about 75 percent -- are software engineers, electrical engineers and system engineers. Therefore, unlike a mechanically focused company, electrification and software have been in our DNA for decades. This helps us shape our future when it comes to the innovations we are focusing on.
What is the future for your production footprint?
We have been very transparent in communicating that some locations where we produce injectors and high-pressure pumps have been impacted by the decline in diesel demand, which nowadays is only half of what it was in 2019. We have been overwhelmed by the reduction of diesel engines. This impacts our locations, but we have clearly communicated in 2019 which locations will be phased out over the next five to 10 years. It's true that for some components, the phaseout will happen a bit faster than originally thought. For example, we expected the demand for diesels to halve, but we didn't think it would happen so fast. And this trend is accelerating. That means the phaseout will be accelerated; therefore, it may take seven or eight years to complete it instead of 10, but it won't happen in just two years. It's clear that we cannot keep all locations, but we have time to determine whether there are alternatives to closure.
What are the alternatives?
One alternative is to qualify people to work on the new components in our product portfolio, but not everybody is able or willing to do so. Also, we have had companies that are not affiliated with Continental or Vitesco inquire about taking over a plant because they need the production capacity and our engineers. We are reacting to the different challenges in a very measured and constructive way, always striving for the best solution for our people, but we cannot ignore the fact that by the end of 2023, 2024 and 2025 a small number of locations will be closed.