Auto Parts Suppliers Earnings for Electric Cars Could Be Limited by Competition from Semi-Conductor Firms

Auto parts suppliers of powertrain parts for electric vehicles may be excited about the rising popularity of the product and potential for earnings in the sector, but analysts with Moody’s Investors Service see competition from semi-conductor companies selling components limiting such growth.

"GKN Holdings plc, Valeo S.A., ZF Friedrichshafen AG and Continental AG could enjoy a revenue boost from the growing adoption of alternative fuel vehicles (AFVs) with hybrid or all-electric powertrains," said Scott Phillips, a Moody's vice president and senior analyst. "This shift is fairly positive for their revenues. However, semi-conductor companies are also looking to capture the value of key components so the uplift in auto suppliers' earnings is likely to be much smaller than expected."

Some car producers may wish to manufacture the electrification equipment on their own, but Moody’s expects suppliers to begin taking advantage of growth opportunities in this sector. “Industry observers expect AFVs to account for 15%-20% of total vehicle production by 2025, supported by tougher carbon regulations, the decreasing popularity of diesel vehicles and growing consumer acceptance. Additionally, government financial incentives will boost this fledgling market,” analysts said.

Until batteries become more inexpensive, hybrids will continue to dominate the market. Value is concentrated in key AFV components like 48 volt DC/DC converters, chargers, inverters and electric motors—all of these play to the strengths of semi-conductor companies like Infineon, STMicroelectronics and NXP Semiconductors, Moody’s said. “If mass production and competition were to commoditize the manufacture of power electronics components, this could erode the profitability of the European auto parts sector. However, Moody's believes it is more likely that auto suppliers will earn low single-digit EBITA margins on electrical components, which would leave them all net beneficiaries of electrification.”

– Nicholas Stern, senior editor

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