Automakers hope electric vehicles will be an engine of growth

The inevitability of electrification is clear. The timing less so. The size of the automakers’ existing combustion engine manufacturing networks illustrates the scale of the electrification challenge. By Martin Kahl

The automotive industry’s shift to electrification opens up exciting opportunities for technology development, new business models, and new product. Full battery electric vehicles, hybrid powertrains or fuel cell vehicles—the means of electrification will become clear over the next decade or so, but the industry is preparing for an inevitable, and significant shift to electrification.

A conventional vehicle powertrain—engine, transmission and drivetrain, as well as associated systems including cooling and exhaust—is generally the most complex and highest value system in a vehicle, and production involves numerous tiers of suppliers and an intricate supply chain. An electric vehicle (EV) powertrain is just as valuable, but—hybrids aside—much less complex, something that will have considerable implications for that intricate supply chain.

Sales of EVs have been slow, and much slower than was anticipated when the new generation of EVs came to market in 2010. However, improved product, tightening fuel economy and emissions regulations, and increased consumer awareness about the impact of fossil-fuelled driving is expected to lead to a steep rise in EV uptake.

A car factory can relatively easily be retooled to build an EV; repurposing an engine plant for battery assembly or electric motor production is a very different challenge

According to consultants at McKinsey, “Global sales of EVs surpassed the one million mark (1.3 million) in 2017, and we forecast that sales could rise to as many as 3 million vehicles in 2020.” In 2018, AlixPartners forecast that by 2025, BEVs and PHEVs will account for at least 20% of EU vehicle sales.

The automakers are equally bullish; the Volkswagen Group, for example, is investing over €30bn (US$33.4bn) in vehicle electrification by 2023, and has plans to sell 22 million EVs over the next decade, offering nearly 70 new electric models by 2028. The automaker expects at least 40% of its vehicle fleet mix to be electric by 2030.

A rise in EV uptake within a slowing market means only one thing for combustion engines; they will still be needed in hybrid vehicles, but for every BEV sold, there will be one less combustion engine required.

As the EV/ICE mix evolves, falling ICE demand will raise questions about the viability of engine plants. Europe alone is home to some significant engine factories. According to a new study published by Automotive World, Volkswagen’s Györ factory produced 1.95 million engines in 2018, the most out of the seven factories in Europe that built over one million light vehicle engines that year. PSA’s Tremery facility followed with 1.76 million units, and VW’s Salzgitter plant, at 1.6 million, wrapped up the trio of plants that built over 1.5 million engines in 2018. Also on the million-plus list were Renault Valladolid (1.44 million), BMW Steyr (1.22 million), and Daimler’s plants at Bad Cannstatt, Stuttgart (1.19 million) and Koelleda (1.15 million).

For all automakers, the next round of strategic investments will be crucial, as the real question is not, “ICE or electrification?” but, “Which type of electrification—EV, hybrid or fuel cell?”

In Asia, Shanghai Volkswagen Powertrain is a notable presence, building almost 1.5 million units in 2018, and in North America, FCA’s Saltillo, Mexico factory built just shy of 1.2 million units.

How automakers decide to reshape their manufacturing networks, once the proportion of EVs begins to raise questions about ICE production, will depend on the age and viability of their existing factories. A car factory can relatively easily be retooled to build an EV; repurposing an engine plant for battery assembly or electric motor production is a very different challenge. Does this mean factory closures?

Longer term, quite possibly. The issue was raised in an article entitled ‘Electrification may disrupt the automotive supply chain’, published in February 2019 by the Congressional Research Service, which provides policy and legal analysis exclusively for the US Congress. The article notes: “Should electric powertrains displace those used by gasoline over the next decade and beyond, it is likely that both production and engineering jobs will be affected.” However, it could be argued that electrification will increase jobs, as has been noted by AlixPartners. Assuming EVs account for 20% of vehicle sales by 2030, the consultancy said in 2017 that it expected a hybrid vehicle-led increase in ICE jobs of 7,000, with EVs requiring an additional 18,000 people in battery and electric motor assembly. Jobs here are discussed in numbers, not individuals, and the talk of broad workforce increases overlooks issues such as transferrable skills, retraining, relocation and redundancies, voluntary or otherwise.

Do consumers even want to go electric? The analysts’ projections say they do; the automakers expect them to; but the consumer surveys suggest otherwise

In 2018, a number of vehicle assembly plant closures were announced globally, with further closures in 2019. It was notable that in 2018, there were also very few new vehicle assembly plant openings. Engine production operates differently, with greater flexibility to adapt to changing market trends and demand, noted Jonathan Storey, who produced Automotive World’s ‘Global vehicle engine plant database’, which contains production data for light- and heavy-duty vehicle engines.

“Scale economies, automation potential, high capital investment and the ease of transporting engines mean that engine plants typically produce higher volumes than vehicle assembly plants,” Storey noted.

He also confirmed the impact that rising vehicle electrification could have on ICE factories: “If battery electric vehicles take a growing share of the market, I expect some consolidation, with smaller plants closing.”

Along with connectivity, automation and the impact of vehicle sharing, electrification presents automakers not only with a major challenge, but also a major opportunity. For those with a large and well-established combustion engine manufacturing network, however, turning electrification into an opportunity will itself be a challenge. For all automakers, the next round of strategic investments will be crucial, as the real question is not, “ICE or electrification?” but, “Which type of electrification—BEV, hybrid or fuel cell?” Back the wrong horse, and watch that investment prance away. But stay with the animal analogy, because there’s an elephant in the room: do consumers even want to go electric? The analysts’ projections say they do; the automakers expect them to; but the consumer surveys suggest otherwise. Electrification may be inevitable, but there’s a long way to go.

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