Kidderminster, England (Reuters) – Auto engine parts makers who want to get into the promising electric vehicle market have to wait a long time to get what they want.
Until EVs really take off, companies that make parts for engines will be in a tough spot for a few years. They will have to spend a lot of money on new equipment while sales of cars that use fossil fuels continue to drop.
One example is the small supplier Evtec Aluminium, which has two plants in England. It just barely made it.
Diesel was the green fuel of the future in the European Union a decade ago, when Britain was still a member. Automakers, including Jaguar Land Rover (JLR), which is owned by Tata Motors and is Evtec’s biggest customer, spent tens of billions of dollars on new diesel models and ways to make them.
Suppliers did the same. When Evtec was still called Liberty Aluminium, it spent tens of millions of pounds on new machines, some of which are still being paid off even though they are not being used.
Then, in part because of Volkswagen’s (ETR:VOWG p) “Dieselgate” scandal of cheating on emissions tests, the EU quickly gave up diesel in favour of electric vehicles (EVs) and now plans to effectively stop selling cars with combustion engines by 2035.
“We went in thinking diesel is the future,” said Brett Parker, the business director of Evtec, as he showed me around the company’s half-empty foundry in Kidderminster, England, which has long been the centre of Britain’s car industry. “We put our money on the wrong horse, which is a shame.”
Last year, a group of investors led by David Roberts bought EVTEC and saved it. Roberts says that EvTec’s foundry in Kidderminster is Britain’s most modern. Huge machines here pump molten aluminium heated to about 660°C (1,220°F) into castings to make complex shapes, and Evtec stands to benefit as UK carmakers look to build electric vehicles that need aluminium parts.
Roberts said, “It was clear to me that I should put money into that business.”
As late as 2015, nearly 52% of cars sold in the EU were diesels. After Dieselgate and the shift toward EVs, the number of diesel cars sold in the EU dropped to 19.6% in 2021. This year, diesel sales have dropped even more. By 2021, only 8.2% of cars sold in Britain were diesel-powered.
In the EU, sales of gasoline cars dropped from over 45% in 2015 to around 40% in 2021. They will drop even more as Europe moves toward electric cars.
Big companies that make engine parts, like Vitesco Technologies Group AG and Schaeffler, are already putting money into making the switch to electric. However, smaller companies, like Evtec, for which tracking data is not widely available, must change or go out of business.
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Mark Wakefield, global co-leader of AlixPartners’ automotive and industrial practise, said, “Engine parts makers are ground zero for the most pain in this transition because they have the least amount of portability into the EV world.”
Some big car companies have warned that EV motors will kill a lot of jobs because they only have a third of the parts of a combustion engine and don’t need as much work.
With less parts, there are also fewer suppliers.
Engine parts suppliers must either switch to making parts for electric vehicles (EVs) or start making parts for other things, like heavy machinery or hair dryers.
Or just stop doing business.
“People need to understand that this change won’t be free,” Evtec Investor Roberts said. “We all have our own valley of death on the way to EVs, but it will be so much harder for some suppliers.”
“Can’t Get Bigger Without Money”
Sales of cars with combustion engines are going down, which has already cost jobs.
Stellantis NV, the fourth largest car company in the world, is switching its plant in Tremery, France, which used to be the largest diesel engine plant in the world, to EV motors.
Tremery now has 2,400 workers, compared to 3,000 in 2019. When many other people retire, they will not be replaced.
Bosch, a German company, is switching its plant in Rodez, in southern France, from making diesel injectors to making new products like hydrogen fuel cells. This means that 750 of the 1,250 jobs at the plant will be cut.
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Bernd Bohr, a consultant for the auto industry, said that the “last man standing” for delivering a certain part will probably be a large supplier with a lot of money.
“A lot of companies are fighting for a piece of a smaller and smaller pie, and the question is, who’s getting that volume?” he said.
Vitesco is a company that makes powertrains. Its main focus is on combustion engines, but by 2030, the company thinks that EVs will make up 70% of sales.
The German supplier will split its business into two main parts in January. One will focus on electric vehicle (EV) parts, and the other will focus on higher-value diesel technology to make money as the diesel business winds down.
Andreas Wolf, the CEO of Vitesco, said, “We need to make the money so we can invest in the future.” “Without money, I can’t grow.”
Wolf said that the business that needs to be shut down or sold will be put into a third division.
Schaeffler, a company that makes parts for electric vehicles (EVs), thinks that sales of EVs will be smaller in the future than sales of combustion engines, so the German company is focusing on getting a wider range of customers.
For example, the ball bearings Schaeffler sells to carmakers could be sold to other industries.
Others will drop out.
Smaller suppliers already have to deal with rising costs for raw materials and energy. To meet carmakers’ climate goals, they also have to invest in greener products.
It might be hard to pay for new equipment for EV parts.
Roberts, an investor in Evtec, said that the company has about 330 million pounds ($363.8 million) worth of EV parts business lined up with JLR over a seven-year contract, plus another 250 million pounds with other carmakers.
But because the auto industry takes a long time to make cars, the models in these contracts won’t be made until two or three years from now.
For these contracts, Evtec has to spend up to 70 million pounds on new tools and machines, which Roberts will pay for. This is a long time before any money comes in.
JLR also backs Evtec because it sees it as a strategic supplier.
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A JLR spokesperson said, “Our suppliers are the key to our transformation.” “We work closely with them as the auto industry makes the switch to electric vehicles.”
AlixPartners thinks that car companies have already spent $526 billion on going electric, and if they don’t deal with problems with their suppliers right away, they might have to spend another $70 billion to fix them.
Wakefield said that carmakers can’t afford too many bailouts, but they could help suppliers who make key parts.
Parker from Evtec said that, with the help of an investor, the company is trying to “plug the gaps” in its income in the short term.
This year, an Israeli supplier went out of business, and Evtec picked up some of its business. After two years of pandemics, supply shocks, and inflation, Parker thinks there will be more opportunities like this.
“If you can keep going for long enough, others may leave,” Parker said. “Then you’ll have a better chance of getting clients.”
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