Auto supply chain at a crossroads: Impact assessment for traditional players

Following the recent Q-Series on "Tech reshaping the electric vehicle supply chain - where is the opportunity?" we now zoom in exclusively on powertrain electrification (excluding the battery). We take a deep dive into this key theme currently disrupting the auto industry, which is reflected in: direct exposure of tier 1 suppliers under our coverage representing >€150bn market cap; a global legacy powertrain revenue pool estimated at >€250bn as of 2021; and a 100% battery electric powertrain revenue pool to add up to c€150bn by 2030E (>10x vs FY21). Given the magnitude of the transformation process, powertrain electrification is attracting substantial investor attention as the market appears to have taken the view that, as we shift towards a fully electric automotive world, OEMs will insource the entire process, while suppliers struggle as their product portfolio becomes irrelevant. We are more balanced in our views, given the thorough assessment we make in this report on suppliers' EV order wins, sizing the outsourced market, and evaluating the development of net content per vehicle (CPV) as the powertrain mix is transformed.

OEM insourcing: A genuine threat? Will EV profitability ever reach ICE levels?

The EV powertrain orders allocated by OEMs to traditional component suppliers have strongly accelerated since the beginning of the year, with >€15bn worth of revenues allocated, corresponding to outsourced content on c10m EVs, representing 10-15% of total expected EV production over 2024-27. In the long run, with the powertrain no longer a major differentiator, we estimate outsourcing strategies will lift OEMs' profitability margins by c300bp. However, 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-for-longer R&D. As a result, we estimate that, by 2030, the battery-powered electric vehicle (BEV) profitability pool for our company sample (€7bn) will represent about one-third of today's ICE pool (c€22bn). Furthermore, we anticipate the combined ICE + BEV pool to be -35% (-c€8bn) versus 2021.

The end of the ICE age: Managing the legacy

On our forecasts, ICE vehicle production growth will be broadly stable until it peaks in 2024, declining thereafter by an average annual c15% until 2030. Meanwhile, the number of BEVs produced should grow sixfold over 2021-30. Based on our interactive model assumptions, the end of the ICE age will likely impair suppliers' total annual sales growth by 400bp, on average, until 2030. The non-ICE portfolio revenues will have to grow at least 4 percentage points faster than total vehicle global production for suppliers to be able to outperform. Exiting the ICE legacy will amplify differences in growth profiles within the supply chain.