Why EV-focused Vitesco expects 'robust' full-year sales

German powertrain specialist Vitesco Technologies has revised its full-year sales outlook upward after having a strong third quarter, led by demand for its electrification products. Spun off from megasupplier Continental last year in a bid to capitalize on the industry's rapid move toward electrification, Vitesco said 74 percent of its 4.3 billion euros in third-quarter orders were for e-solutions such as its battery management system. Andreas Wolf, who has led the world’s 26th-largest supplier since its inception, said he expects Vitesco to have "robust" sales of 9 billion euros or more this year, helped by higher global car production and a more reliable supply of microchips. He discussed this and more in an interview with Automotive News Europe Managing Editor Douglas A. Bolduc and News Editor Peter Sigal.

What is your overall market outlook for 2022?

This is really tied to things such as the semiconductor shortage, the war in Ukraine, the price of raw materials and other things happening all over the world. The biggest pain point is still the semiconductor shortages. We felt the shortage situation would improve in the second half 2022, and it has, but not for all our products. There are some older technologies where chip capacity has not really increased, so you still have to fight to get your share. That being said, the chip supply situation will improve even further in 2023 to the point where it is no longer holding us back.

Will Vitesco outperform the market?

That's hard to say because the situation is still volatile. Despite this, we have adjusted our guidance upward to increase revenue to 9 to 9.2 billion euros from a previous outlook of 8.6 to 9.1 billion euros for the full year, up from 8.3 billion last year. We expect to improve our EBIT margin to 2.3 to 2.5 percent from 1.8 percent last year. So, we will have a robust 2022. When it comes to 2023, it's too early to make a prediction, but we are sticking to our goals of having 5 billion euros in sales from our electrification business unit by 2026, up from 888 million last year, and 10 to 12 billion euros by 2030.

How is raw materials inflation affecting you, and how are you offsetting this?

For steel, aluminum, copper and so on, we have clauses in our contracts for most of our raw materials to base pricing on an index. Therefore, if the steel price goes up, we are compensated by our customers for the difference during a certain time period. Throughout 2022, we have had really constructive discussions with our customers on both categories.

How exposed is Vitesco to a potential gas shortage caused by Russia’s decision to limit supplies to Europe? Are you replacing natural gas power with other sources?

That is not a direct headache for us because we use very little gas to power our production processes. We mostly use it for heating purposes at our facilities. The bigger risk is that we are hit indirectly, for example, if steel production is reduced or stopped because if they can't run their plants then cars cannot be built. Based on discussions with our customers, we have the understanding that the risk is being well managed. Therefore, the impact will not be as high as some people predicted two or three months ago.

What are some of the key lessons Vitesco learned from the chip crisis and how with this help you better offset this problem in the future?

As an industry we learned we need better information, and it needs to cover a long period of time. That is a change because this industry has a legacy of: I order, then I get. This game is more or less over because we now have components that you have to plan two or three years in advance to get. We have more and more customers giving us data not only for 2023 but also for 2024. Having this long-term outlook has made it much easier for us to negotiate with our suppliers. Another trend is that we no longer give our suppliers orders for a range of the volume we will need; now we give them firm orders. If we continue to move in this direction, we will have more transparency, better data and therefore we can better secure our capacities.

Is there a way for suppliers to buy and sell their chips?
Yes, there are platforms offering this. It's anonymous so you don't know which company is offering what. The company sends in the information with the complete specifications. The goal is to manage the information of who has what to help optimize the overall situation.

Which chips are hardest to get and why?

It's the chips that are more specific for automotive applications because we normally use them for 10 years and longer. That means you're using an older technology, for instance 60, 80, 90 nanometers technology, when the trend in the chip industry is to go down to 20, 10 or even fewer nanometers. Naturally, chip suppliers will invest in 20 and 10 nanometer technology, and they don't want to invest in bigger sizes because to them it's old technology that they consider outdated. But the automotive industry can't follow this trend of redesigning things every two to three years because that would be extremely difficult for us. That is the unfortunate situation we are in.

Are you concerned about de-globalization?

We are not seeing a trend toward de-globalization, although we are seeing some countries introduce stricter rules on imports and exports. Our answer to this is to produce 90 percent of our demand for a particular market in that market. That is why we have production in places such as China, Korea, the U.S., Mexico and Europe. Therefore, this trend is not impacting us. What would have an effect is if China said there could be no more European products or no more U.S. products in the country. But they can't afford to do this because they are exporting to the U.S. and to Europe.

With the EU’s decision to mandate zero-emission sales in 2035, how do you see the electrification market developing by then?

We somehow anticipated that decision and I have been saying for a while that I don't see the combustion engine surviving beyond 2035, especially in Europe. As a result, in Europe we will see an even steeper ramp-up of electrified powertrains, which plays in our favor because our content in an electrified car is five times higher than in a combustion car. The sooner that electrified vehicles come into the market and gain market share the better for us.

How do you see the plug-in hybrid market developing?

We consider all hybrid solutions as a bridge technology. That is why we don't specifically develop products for plug-in hybrids. We have platforms for inverters, motors and so on that can be used in plug-in hybrids as well as battery-electric vehicles. So, wherever the market goes, we can follow. Based on the data, by 2030 the trend will be heavily toward battery-electric vehicles. They will be the winner of the race.

What are some of the potential roadblocks to EV adoption, and how are you preparing for them?

If you completely change from one technology to the other one, there will always be roadblocks. I don't see the cost as a roadblock because if you look at the total cost of ownership, battery-electric vehicles even without any incentives are already cheaper than comparable combustion cars. That includes maintenance and consumption. It is the cheaper way to be mobile. What continues to be a challenge is the charging infrastructure. I have had a battery-electric vehicle for six months and have driven 22,000 km during that time, and I find that the charging infrastructure is the biggest hurdle to adoption.

Vitesco in July signed a strategic partnership with Renault to develop the "one box" power electronics package. How is this different from the standard supplier/manufacturer relationship?

The biggest difference is that this is not the typical automaker/supplier relationship where the OEM defines the product with the specifications it wants and then the suppliers provide quotes to do the work. Then the order is made. With Renault, they see us as a good partner for future high-voltage applications because we have been working with them for three decades (previously as part of Continental, which spun off Vitesco in 2021). Both sides have a lot of know-how and manpower, so we said, "Let's be partners." We will work together and create a solution that is powerful, highly efficient and at a lower cost. I was part of a collaborative project for a highly integrated body controller with Renault in the past and the results were great because all those barriers were torn down and people with the right competence and skills were sitting together under one roof working toward a common goal.

Could this be extended beyond Renault?

Potentially with its alliance partners, Nissan and Mitsubishi, but for now we are just concentrating on doing this with Renault.

You recently announced battery management systems contracts worth 3 billion euros. What kind of efficiency and range gains can you achieve as you develop these systems?

That's hard to say, because it depends on where you are with your technical solutions. But since we have the inverters, motors and battery management systems we can better simulate the potential improvements. Therefore, the savings could be in the range of 5 to 10 percent. Also, efficiency gains are just part of this. You have to have the component and the integration expertise to create this. We are not talking about a small box because these three pieces have to fit into a defined space. It is a highly complex job. Fortunately, we made extremely good progress here with those big orders, but there is more to come.

What are other growth areas in electrification, for example thermal management of the battery?

If I look at our order intake, we are having success selling all our products: electric axles, inverters, battery and thermal management systems. And we are selling them in all regions to all customers. It's a positive wave of success we are riding. We are also happy that the majority of all our orders are for battery-electric vehicles.

What is Vitesco doing to make sure its products are safe from cyberattacks?

We have to prove to our customers that are products are safe against cyberattacks. We are audited to show how we protect the small computers and electronic control units in our products. We also have to show them that the software is safe because it's clear that if you can hack a computer, you can hack a car. When we get an order we have to prove that this part of the powertrain can't be hacked. We have specific teams working on that and having that expertise.

What is the breakdown when it comes to your electrification products and those for internal combustion engines and what is the outlook?

When it comes to our engineering, it's two-thirds electrification and roughly one-third for powertrain parts for other products. We still need to support our customers in this area to manage the transformation. They still need our engine control units, transmission control units and more. Therefore, we are still developing those products, but step by step this will diminish over time.

What businesses areas will exit?

One is the contract manufacturing we do for Continental and Continental does for us. This 1 billion euro business will conclude at the end of 2024. The other one is our non-core internal combustion engine technologies, which generates about 2 billion euros in revenue. It will diminish significantly over the coming years. The rest is what we call core technologies. This includes after-treatment systems, components for the aftermarket, parts for commercial vehicles, parts for two wheelers and for non-automotive solutions. This part of the business will go on beyond 2030 because it is generating strong profits. We use those to help finance the heavy investments we are making to ramp up our electrification products. Because of those high costs, we don't expect to reach break-even until 2024.

Is Vitesco looking to add any businesses to get access to intellectual property in key areas or to gain access to more engineers?

Looking at our product portfolio we have no need to buy anything because we have everything on board to reach our sales targets. We just need to sell what we have to offer. That being said, we are always scanning the market for opportunities where we could add a key technology or gain access to a new region or strengthen our global presence. But we have the luxury of not needing to add anything.

Does that include engineers?

We have thousands of software developers and thousands of electrical engineers so it more a matter of managing when do we put which resources where. We are also fortunate that instead of having them develop an engine control unit we are asking them to develop a function controller unit for a battery-electric vehicle.