What do you mean?
If you look at our directly impacted portfolio, such as the powertrain, we are No. 1 in all-wheel-drive systems by a wide margin. But all-wheel-drive systems currently only account for 20 percent of the overall market. As all-wheel-drive systems transition to e-drives, which are agnostic, our product line can address the entire market. We are confident about our potential here because we have won business for e-drives in Europe, China and North America with all types of customers.
What is the financial effect?
Last year we forecast having $4 billion in electrification sales by 2025, but we have already increased that outlook to $4.5 billion.
Will other Magna business areas besides powertrains benefit from the electrification shift?
Yes. One example is our body and chassis structure group, which does metal stampings. We currently have two programs of battery enclosures, which is a new product line for us, but it is a key addition because there will be so many electric vehicles going forward. It's a complex product. You have to look at thermal management and you need all types of material processing capabilities, which Magna has. Last year we had almost no sales here, but now we expect the number to rise to more than $600 million by 2024 and over $1.5 billion by 2027. That is why we are very enthusiastic about increasing market share and content per vehicle. Even if you look at the new electric vehicles that are launching now and you take the overall Magna portfolio over the last 10 years, the content per vehicle is equal to or in most cases higher in the electric platforms.
Could you quantify what this increase in content per vehicle means?
If you look at the all-wheel-drive system, it's currently about $450 worth of content. With the move to e-drives, that increases to the $800 to $1,200 range. And as I mentioned, you go from addressing 20 percent of the market to the entire market. For the battery enclosures, it is in the range of $1,200 to $1,800 of content, which was not there before.
Doesn’t this come with a significant cost to get plants ready for this since it’s not something already on the shelf?
Every time a new product comes along you are going to have additional costs. We have a so-called building block strategy where we look at the key subsystems to determine the needs of the product. For example, what power level will be needed in an e-drive and what power electronics module will be required to meet that? If you think this through, you won't need to engineer every product from scratch. Even so, we plan to spend on average about $900 million a year for the next three years on engineering and R&D costs in the megatrend areas, with the expectation that the investments will produce returns over time. In the short term, it's going to create some pressure, but you need to make that transition. I'm glad to say we are winning a lot of business there.
What is Magna's industry outlook for vehicle production for Europe, the United States and China for 2022?
Our current light vehicle production outlook shows Europe being down by 2.1 million units to 16.4 million, with Russia accounting or 900,000 of that. We foresee North America being down 500,000 units to 14.7 million and China rising 200,000 units (to 24.4 million). But it's a fluid situation that we keep monitoring. We initially expected global light vehicle production to increase 6 percent this year, but we adjusted that to plus 3 percent in April. And while this is a crystal ball question, we still expect the second half to be better than the first half, barring any unforeseen "black swan" event like we have seen in the last two years.
Will Magna grow faster than the overall market?
Magna continues to grow faster than the market all over the world despite all the challenges. This is shown in the business we continue to win today. And as you know, in this industry the impact of what we do today shows up three years later. The new wins are a positive indication of how Magna is being accepted by the automakers, who are judging us based on how we are handling the current challenges. Overall, our outlook is positive because we continue to make really good progress in the megatrend areas of electrification and ADAS [advanced driver assistance systems].
How is Magna coping with the dramatic increase in raw materials prices, inflationary effects, the chip shortage and overall supply chain challenges, and how successful has the company been in passing along price increases to automakers?
That is a very important workstream. We have been addressing inflation effects since the later part of last year and dealing with the interruptions in production for longer than that because of the chip shortage. The first priority is to avoid interrupting production. Then we look at how we can have the discussion with the customers, who have been open to these talks whether it's based on inflation costs, the tight labor market, commodity price increases or the chip shortage. Fortunately, some major commodities such as steel are indexed, so adjustments are built in. For the raw materials that are not indexed we look at several variables. We look for ways to offset some of the productivity givebacks that are normal in the industry. We engage in discussions with customers to recover costs. We also look at how these talks can be part of building up new business. It's a complex variable equation. Some of the discussions have already led to recoveries, but it's an ongoing process.
Is there a particular component or raw material that is causing the most headaches?
Overall, the supply chain is very fragile. What has become increasingly important is understanding it beyond one layer. In the past, you would monitor how the tier below you was doing. Now you have to go down two or three more tiers to see what is happening to avoid being surprised later. That being said, semiconductors, from a pricing perspective, have been the biggest challenge based on allocations and having long-term contracts, whether it's 18 months or two years. For this we are sometimes having three-party discussions between us, the chip makers and the automakers to keep things as transparent as possible. That way we better understand how to get the allocations, protect production schedules and manage the pricing. What happened in Ukraine and Russia further impacted the supply chain, affecting gallium [which is often used in semiconductors] and chip manufacturing.
Suppliers are being asked to do larger portions of the vehicle. Are those requests coming more often from startups or established brands?
From established customers because we have been working with them for decades and they know what we are capable of. And even if we only do a subsystem for them, we are definitely at the table for the larger discussions.
When will we have full-autonomous car on the road in significant numbers?
The crystal ball gets really foggy here, but we anticipate this will happen beyond 2030, and that it will probably be 1 percent or 2 percent of the overall market. And while that is small, the business case and the economics of an autonomous car fleet or an autonomous vehicle is completely different. The vehicle price point and how people use it, for instance as a service rather than owning it, will be different. Therefore, even if it's a small percentage of the overall market, the economic impact could be substantial.
What will we see in the interim as we move toward full autonomy and how will Magna benefit from this?
We foresee a significant proliferation in assisted driving solutions, whether they be Level 2 or Level 2 Plus, because of what they can provide in terms of comfort, convenience and safety. The addressable market for ADAS is estimated to be $45 billion by 2030, which is why Magna is very active here.
How much has the semiconductor shortage cost Magna when it comes to lost production and to the bottom line in 2021, and what is the expectation for 2022?
We don’t have those numbers. What I can say is that there are several variables to consider. One is the pricing changes for the semiconductors and allocations of the chips. The volatility of these factors has resulted in the three-party discussions I mentioned earlier between us, the chip maker and the automaker to figure out how we are going to work through the issue. The second aspect is that the automakers have to decide how to manage the allocations, which means determining what vehicle lines will run. The uncertainty and frequent schedule changes have caused a lot of inefficiencies in the operations. We also have to decide which of our Tier 2s and Tier 3s can best weather the challenges. This has an impact on working capital. All of these factors make it difficult to truly quantify the cost of the shortage.
Is the shortage improving?
Yes. We definitely expect to see an improvement in the second half, but the trajectory of improvement is not what we had expected at the beginning of the year. I also think there will be lingering effects in 2023. Overall, the supply chain is very fragile and since there are no buffers, so any small impact anywhere is going to have a ripple effect.
What approach has worked best for Magna when it comes to dealing with the shortage?
You have to provide the customer an indication of a possible problem as early as possible. Sometimes the best you can do is 24 hours, but you need to get them on board as quickly as possible. It is important that there are no surprises.
Would Magna consider making chips on its own?
I don't know whether it's the right thing for us to be in chips directly. Alliances and different types of business arrangements, maybe even joint ventures and partnerships would be more likely. I also don’t know whether it would make long-term economic sense for a Tier 1 to own a substantial piece of the supply chain such as semiconductors. And while you should never say never, it is more important to establish more long-term relationships with some of the existing players.
What impact has the war in Ukraine had and what is Magna doing to cope with these issues?
There are direct and indirect effects. The direct impact is that we have six facilities in Russia that are predominantly idled. We had about $370 million in sales in the country last year, so that's another direct impact. And as of March 31, we had about $440 million related to our investment in Russia on the balance sheet. We are very focused on doing what is right for our 2,500 employees, who we consider first and foremost part of Magna regardless of their nationality. Indirect effects include the 900,000 units of lost production in Russia, which is pulling down Europe’s overall volume and impacting us because we have content in some of those cars.
What are Magna’s future plans in Russia?
We are working to follow the local regulations because we have substantial sales there with Hyundai and Volkswagen. We have to work with them to see how they are managing this situation, so we honor what is necessary there. But if you ask me in terms of future investment, I would say our priorities would be elsewhere in the world.
When you consider all the changes the industry is going through and when you consider all the challenges automakers and suppliers are facing, what do you imagine will be the transformative outcome? What will the supply chain of the future look like? How will it be improved and how will it be different?
One of the big megatrends from a consumer perspective is how do we provide continuity of experience from outside the vehicle to inside of the vehicle? Whether this is ADAS or providing all the streaming services and whatever else people want to take from their offices or living rooms into the car, this will have a transformative impact on the product. The other megatrend is how do we positively impact climate, which is through electrification. What has to be done to make these changes scalable is going to drive the supply chain. The amount of electronics, infotainment and services that are coming in the car is one reason why you are seeing a change in the supplier landscape. Ten years ago, we weren’t talking about an Nvidia or Renesas or any of the chip companies as much as we do today. As we start getting into electrification, the first part of that is the arrival of newcomers. Then the questions include: How long it will take them to get to scale? How long will it take for the infrastructure that is needed to be built? How and where do you charge? Will the power companies continue to have contracts with homeowner, or will the automakers start supplying charging stations for free along with the lease so that they can tie the customer to their brand? The landscape will change. We, indeed, are in a transformative time. Therefore, we have to be agile and open minded as we see who we will partner with and what different product lines to start.
What topic are we not talking enough about?
We as an industry should look at the importance of manufacturing, which is underappreciated by a lot of people. I'm talking about what it takes to make a complex product like a vehicle. We talk a lot about the transformation of the product, but there is also a transformation taking place on the manufacturing side. Automation and robotics are substantial parts of the business. They will impact how we run the factories and how the factories will look in the future. This big, big transformation will determine who is going to be successful in the future. We at Magna have a manufacturing DNA. We spend a lot of time working on this.