Auto industry faces 'profound transformation'

Detroit — In case you hadn't noticed, what with the steady background thrum of the U.S. auto industry having just wrapped up its fourth-strongest sales year on record — while at the same time stressing over whether sales are facing a pending drop — the global auto industry has taken a big shine to electric vehicles.

And the shockwave is hitting automakers, parts suppliers at nearly every tier level and materials companies.

It's a rapid outlook shift for the electric drivetrain, which just a year or so ago was seen as something of a niche player, relegated for use in megacities and a few key markets such as California. The internal combustion engine (ICE), market watchers had said, was here to stay — at least for the foreseeable future. But in 2018, despite falling gas prices, battery-electric ​ vehicle sales rose 199 percent, according to the Automotive News Data Center.

Now, though, some of those same industry watchers are taking a 90-degree turn and predicting that not only are electric cars a viable alternative for the near future but also they are increasingly about to displace the reliable gasoline engine.

"The auto industry is facing the most profound transformation since its inception, going from traditional internal combustion engine vehicles, with human drivers, to electric motors replacing ICEs and autonomous vehicles replacing drivers," Jeff Schuster, president of Americas operation and global vehicle forecasting for LMC Automotive said in a December report on General Motors Co.'s restructuring.

The pace of expected change is only accelerating, but not at a rate it will be easy to recoup the costs of research and development needed now, Schuster noted.

"This transformation requires an immense amount of investment capital that will likely not produce a return for quite some time," he said.

Schuster, a longtime industry watcher who urged caution when it came to big changes in the powertrain in the past, isn't alone in seeing a shift — regardless of what any federal fuel and environment policies state.

In May 2016, Bloomberg New Energy Finance published a report stating that electric vehicles would make up 35 percent of the global light vehicle sales in 2040. In November 2017, BNEF updated those numbers, now saying that it expects electric vehicles to make up more 54 percent of global sales — a jump of nearly 20 percentage points in just 17 months.

BNEF's 2018 report bumped that percentage slightly higher, to 55 percent by 2040, noting that there were nearly 1.6 million electric vehicles sold in 2018, up from 289,000 just four years earlier.

"The past tells us a very clear lesson, and that is that we have underestimated the pace of the energy transition," BNEF analyst Kobad Bhavnagri said.

Even OPEC, the Organization of Petroleum Exporting Countries, agrees that cars are about to change. In its World of Oil Outlook 2040 released in October 2017, OPEC researchers noted "strong trends" in both the growth of electric vehicles as a replacement for ICEs, as well as the growth of composites such as carbon fiber in replacing traditional metal-based material use.

That's a pretty big shift in a short period. After all, it was only 13 years ago that the documentary film "Who Killed the Electric Car?" made some waves. (The filmmakers' follow-up, "Revenge of the Electric Car," in 2011 didn't make the same splash.)

And to be clear, EVs are still a niche in North America, accounting for less than 1 percent of U.S. sales in 2018.

For mainstream automakers, especially, electric cars are just a small number. General Motors sold about 18,000 of its Volt sedans, out of nearly 3 million vehicles sold for the year. A refreshed Nissan Leaf saw a 31 percent climb in sales to 14,000 units, but compare that to 410,000 of its Rogue crossover vehicles.

But look to the headline-grabbing upstart Tesla for a different perspective. The California-based automaker sold 182,000 all-electric vehicles in 2018 — more than Ford Motor Co.'s Lincoln vehicles and GM's Buick nameplate combined. Its Model 3 made up 138,000 of those sales.

And beyond U.S. borders, public policy in China is turning that country — the world's biggest single auto market — into a buyer of electric vehicles. Six cities in China were responsible for 21 percent of all electric vehicle sales in 2017.

That's why companies like Ford and GM are putting their money into electric vehicles today, regardless of what consumers have been buying in the past.

When GM announced its restructuring plan in the fall of 2018, it made clear that it was moving away from fuel-sipping sedans but sticking with alternative powertrains. Mark Reuss, the new president of GM, noted that the company will launch at least 20 new battery-electric and fuel cell vehicles globally by 2023, which is just around the corner in auto production planning terms.

"While it's true that the industry is changing, its also true that some periods are more transitional than others," said Steve Kiefer, vice president of global purchasing and supply chain for GM. "We believe it will change more in next five years than in the last 50."

For plastics suppliers, those should equal a very big business opportunity.

In 2012, consulting group Frost & Sullivan estimated that plastics used in electric vehicles would see "tremendous growth" with the need to reduce vehicle weight to improve performance.

Between 2010 and 2017, the value of plastics in electric vehicles was expected to grow from $500,000 to $73 million, with investments in powertrain plastics, battery casing plastics, thermal management system materials and wire and cable plastic materials beyond lightweight parts.

Without federal tax credits and state rebates, EVs are still more expensive than cars with ICEs, but battery costs are falling faster than anyone predicted, the utility company said.

For the past several years, as cheap fuel prices made it easy to buy and use ICE vehicles, the high cost of producing lithium-ion battery packs and the new engines to power cars was seen as prohibitive.

When GM introduced the Volt sedan, it was a widely known secret that the automaker lost money on each car it sold, but Detroit-based GM stuck with it, insistent that the losses would pay for themselves in the long run by bringing new technology to the market — technology with GM's name attached to it.

California-based Tesla was seen as something of a fluke. A car that Wall Street and California loved but simply didn't make sense in Middle America.

Other automakers rolled out their own electric cars, from BMW's high-end i8 and i3, which used carbon fiber extensively, to Nissan's Leaf.

That outlook began to change, though, as GM brought out its second electric car, the smaller, all-electric Bolt. Unlike the Volt, which had electric motors but could run only 38 miles on pure electric charge before a gasoline engine kicked on to supply needed power, the Bolt did not rely on support from a hybrid engine.

It boasted a range of 238 miles — outpacing the Leaf's 150-range — and at a sticker price of $36,600, it was cheaper than the Tesla 3's listed price of $44,000 with a range of 310 miles.

And when researchers at UBS purchased a Bolt and tore it down to its individual parts, they found that the electric engine was far beyond what outsiders had expected.

UBS said it had overestimated the cost of Bolt by a whopping $5,000, while the battery pack, which is the biggest single-cost item within the Bolt, was expected to shrink from an estimated $10,000 today to $3,000-$4,000 by 2025, Colin Langan of UBS said during the 2017 Center for Automotive Research's Management Briefing Seminars in Traverse City, Mich.

As a result, UBS increased its forecast for electric vehicle sales as a total part of the global sales by 50 percent from its original estimates, with EVs expected to climb dramatically by 2020.

And the study pointed to the likelihood that the Bolt — and by extension, other EVs — isn't as much of a drag financially as assumed. UBS estimated that while GM loses about $7,000 per vehicle on an earnings before interest, taxes and depreciation (EBITD) basis, on a contribution margin level the Bolt is in "positive territory" financially, by about $3,000.

BNEF found similar pricing changes in battery packs. BNEF noted in its 2018 report on electric vehicles that when it first started tracking EV battery pack prices in 2010, the average battery pack price was $1,000 per kilowatt hour. By the end of 2017, that number had dropped to $209 per kilowatt hour, or a 79 percent drop in seven years. At the same time, BNEF said, average energy density improved 5-7 percent per year.

EVs are generating a whole new line of questions, though, namely what exactly is in them.

In its teardown of the Bolt, UBS broke down what is inside a $16,400 EV powertrain. It compared it to the ICE in a comparable Volkswagen Golf, which comes in at an estimated cost of $6,500.

The electric powertrain itself — consisting of the motor, converters, the charging system that plugs into the power grid, and power distribution systems — comes in at about $3,900, or less than an ICE. The big money goes into the battery pack.

For the Bolt, that's a $12,500 cost currently.

It's also one of the biggest elements of plastic within the EV system.

For the Bolt, that battery pack is supplied by South Korea's LG Chem Ltd. While neither GM nor LG Chem has released many details about proprietary elements of the Bolt, LG says it uses a proprietary polyolefin as the polymer film separator inside each one of the 288 individual lithium-ion battery cells.

The company's success in the U.S. auto market is prompting it to expand in 2018. It is building a 250,000-square-foot factory in the Detroit suburb of Hazel Park, Mich., where it will employ 292 people for battery systems for future EVs.

Continental Structural Plastics, just down the road in Auburn Hills, Mich., supplies the composite case for the battery pack.

But the battery cells those workers make will likely be even more advanced — and more competitive — than those going into today's Bolt.

"The materials, the processing and assembly are all playing a role in bringing prices down," said Subhash Dhar, an independent consultant for the auto industry and former CEO of Xalt Energy, a Midland, Mich.-based battery maker.

Half of the cost of a lithium-ion battery is in the cathode, the anode and the separator — the parts that go into the individual cell.

"We can cut that in half," Dhar said during the Management Briefing Seminars in 2017.

Today's lithium-ion batteries use multilayer film separator at the center of each cell. A solid state battery, which is on the near horizon, will eliminate the need for multilayer film.

"You won't have to make a 20-micron-thick separator; you can do a 2-micron separator," Dhar said. "The thinner the separator, the better the performance."

Dhar also noted he can understand why there is such skepticism about the potential for a better, cheaper battery.

"There are liars, damn liars and battery makers," he said.

All that interest in batteries is leading to a new issue for automakers: sourcing.

Hakan Samuelsson, president and CEO of Volvo Cars, noted in an interview with Automotive News, a sister publication of Plastics News, that Volvo has pledged that half of its cars made in 2025 will be fully electric.

"Today that is really a battleground because everybody is going electric and the capacity is not there," he said. "You need partnerships and you must have joint commitments and investments to really secure that partnership.

"Our first electric car will come in 2020, and we will have batteries for it. After that, things will ramp up rapidly. A huge number of batteries will be needed to achieve our 2025 goal. There will be new [battery] factories needed in Asia, Europe and the U.S."

The move to EVs affects far more than just the suppliers of separator film.

Integral Technologies Inc.'s conductive ElectriPlast-brand polymers are finding their way into vehicles as the global auto industry embraces electric vehicles.

The Evansville, Ind.-based company has started supplying its material for global carmakers who want lightweight material that is both electrically and thermally conductive for their vehicles.

"It is a big deal for a small company to have a material going into automotive around the world," CEO Doug Bathauer said. "Our goal as a company is to take that [success] and leverage it," providing proprietary intellectual property rights and issued patents to end users through licensing, joint ventures and material production.

European-based parts making powerhouse Plastic Omnium SA is investing $2.9 billion to prepare for future vehicles, including EVs.

The company said in April it signed an order with Chinese carmaker NextEV to supply all of its electric vehicle body parts, and it announced that production of the first high-pressure tank for rechargeable hybrid vehicles is scheduled to start at the end of the year.

It expects plastic tanks to make up 70 percent of the systems for plug-in hybrid electric vehicles by 2025.

German auto supplier ElringKlinger AG, which contributes under-the-hood functional systems to today's engines, is preparing its products for EVs.

"There are still unanswered questions relating to the increased demand for electricity that will result from greater numbers of electric vehicles and the need to expand the charging infrastructure," said Armin Diez, head of new business areas and battery technology at ElringKlinger in a sustainability report from the company.

"The main focus is on how to make housings and components for lithium-ion cells more efficient in terms of their function and production, with particular regard to electromobility applications. We are working with other companies towards a common goal."

Also in Germany, Preh GmbH, which injection molds electronic controls, is wrapping up its purchase of the ePower business unit of Kongsberg Automotive ASA, a maker of onboard charging systems for electric and hybrid vehicles.

Describing it as a "speedboat" in a growing automotive segment, Preh CEO Christoph Hummel said ePower was the "perfect addition" to the company's e-mobility business.

The acquisition comes on top of a $7.6 million investment to set up a new e-mobility laboratory for its electromobility business segment at its headquarters in Bad Neustadt, Germany.

Kristin Dziczek, vice president of industry, labor and economics at the Center for Automotive Research in Ann Arbor, Mich., said the news of GM's restructuring also hinted at the company's future transportation plans.

When GM announced it was shutting auto assembly plants, it also said it would stop production at transmission plants in Warren, Mich., and near Baltimore. What kind of a car doesn't need a transmission? An electric one.

"The bigger concern, which isn't the headlines, is GM pulling back on transmissions," Dziczek said. "Correcting transmission capacity is just maybe the first step in moving toward a more electrified future. That has big ramifications across the manufacturing sector. Conventional powertrain [manufacturing] is all over the Midwest."

Battery-powered cars have just more than a dozen moving parts, compared with hundreds in one powered by a traditional internal combustion engine.

"If there are fewer parts, there are fewer suppliers and therefore fewer jobs," she said. "We won't have the same job footprint. A plant that assembles vehicles, engines or transmissions has a greater economic footprint contribution. How many of these jobs really get replaced if these plants make only electric cars?"

LMC's Schuster, though, is careful to note that it may be another 15 years before the traditional car is really replaced, so the investments needed to transform companies like GM may take decades to see a return.

But automakers are continuing their very long, long-term view of an EV automotive future.

"This is not some vague declaration of intent," then-Volkswagen CEO Matthias Mueller said at the 2017 Frankfurt Auto Show. "The transformation in our industry is unstoppable. And we will lead that transformation."

And a change in leadership at VW isn't slowing its push into electric vehicles. At the 2019 North American International Auto Show in Detroit, the current CEO, Herbert Diess, announced the company will invest $800 million in an electric vehicle plant in Chattanooga and add 1,000 jobs in the region.

And that, Diess noted, does not include investments by suppliers it expects will set up shop for that new plant.