Suppliers lose out as e-drives shift in-house

A hot business segment that global suppliers believed would yield a new stream of profit in the electric vehicle age may be a disappointment.

The e-drive market, a critical new component system for millions of upcoming EVs, looked like a surefire way for parts companies to help automakers get up and running. But its profitability has become "nonexistent," reports one of the industry's leading supplier executives, Liam Butterworth, CEO of Dowlais, the parent company of GKN Automotive.

The problem? It turns out automakers want to make their e-drives in-house, Butterworth said.

E-drives, or e-axles, package together an electric motor, an inverter and a gearbox for EVs. They had been a key plank of GKN Automotive's own diversification plan to expand its core driveshaft business.

But as the outlook for internal combustion engine vehicles slowly darkens, automakers are increasingly keeping e-drive production for their own factories to stave off job losses. And that's leaving less prospective business for suppliers such as GKN, even as the overall EV market grows.

"What we see are automakers doing around 70 to 80 percent of those systems themselves in-house," Butterworth told Automotive News Europe. "The remaining 20 percent that are going out to the market are in a very, very competitive environment."

GKN Automotive has won key e-drive contracts, including to supply the electric Fiat New 500, but has had to dial back plans to expand this element of the business, the CEO said.

"We could grow the e-drive business significantly because we have the capability, but the profitability in the e-drive market is nonexistent today," Butterworth said.

Some e-drive suppliers are bidding low "to compensate for a portfolio that is dying as a result of internal combustion engines" being phased out, Butterworth said, without naming those suppliers.

GKN Automotive's core driveshaft product is used by both combustion engine vehicles and EVs, meaning the supplier can avoid participating in a bidding war to expand its e-drive business, Butterworth said.

The U.K.'s Dowlais was spun off Melrose Industries in April and includes GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen.

Automotive is the new spinoff's dominant division, last year generating 80 percent of its revenue (adjusted to remove Melrose divisions not included in the spinoff), Dowlais said. The company employs 24,000 people in 17 countries and supplies parts in 50 percent of the world's light vehicles, according to company literature. Dowlais listed on the London stock exchange in April.

Butterworth is not a lone voice on the unattractiveness of e-drive business in the current market. The risk to suppliers of in-sourcing EV components was highlighted in a report from investment bank UBS last year.

"We struggle to see a path in which auto suppliers generate attractive profitability margins selling EV-related parts, due to intensifying competition, underexposure to the fastest growing OEMs, excess capacity risk and higher R&D" costs, the report said.

But UBS offered longer-term hope.

While automakers have worked quickly to bring elements of e-drive production in-house to replace combustion engine business, they will most likely return to an outsourcing model once it no longer becomes a differentiator, UBS predicted.

"The main reason being that OEMs can leverage the scale effect achieved by some suppliers," it said.

UBS illustrated its point with Volkswagen's ID3 e-drive unit including the gearbox. Based on a teardown of the vehicle, UBS estimated that it costs VW $1,000 to produce the e-drive. By contrast, it quoted the Japanese supplier Nidec as saying it could build a similar system for $500. Along with GKN Automotive and Nidec, other e-drive suppliers include Valeo, Vitesco, Schaeffler, BorgWarner and Aisin.

Butterworth agreed with UBS predictions that automakers will return to suppliers in the future for e-drives.

"We assume that that market will be about 50/50 in-sourced/out-sourced by 2030," he said. "It depends on the technical maturity of the automaker and also their legacy situation, in terms of how much capital and resources they need to redeploy from moving from combustion engines to e-drives."

Standardization of electric platforms "will introduce a certain element of commoditization" on e-drives that will drive the scale effect on cost, Butterworth predicted.

GKN Automotive's e-drive strategy is very focused on the niche applications, "where the customer needs our engineering capability and rewards us for doing so," Butterworth said. "Our strategy is not to go out and win a big program because I think it would destroy the company."

With automotive sales of $4.8 billion in 2021, GKN ranks 45th on the Automotive News list of the top global OEM suppliers.