Focus: 'Humble and hidden' auto suppliers driving the EV revolution
22/03/2022 06:00
* Connector suppliers such as TE find sweet spot with EVs
* TE planning more capacity or to buy other firms to expand
* Going electric means more complex and expensive parts
By Nick Carey and Christoph Steitz
WOERT, Germany, March 22 (Reuters) - The shift to electric
cars may pose an existential threat to suppliers of combustion
engines but for auto parts firms such as TE Connectivity TEL.N
the challenge is keeping up with demand.
It makes the connectors that link miles of cables in cars to
all things electrical, from sensors to fuel injection systems to
infotainment - and if there's anything the cars of an electric
era will need, it's larger and ever more complex connectors.
That's why TE spent $125 million to open a new building in
2020 dedicated to electric vehicle (EV) parts at a factory
tucked away in a shallow valley in the small town of Woert in
southern Germany.
And that's why it's on the lookout for acquisitions or
partnerships to keep expanding its auto business, Chief
Executive Terrence Curtin told Reuters: "We're going to continue
to add capacity."
As legacy auto parts suppliers figure out if and when to
sell combustion engine businesses or buy EV parts makers, TE and
rivals in the connectors or sensors businesses such as Sensata
Technologies ST.N , Amphenol Corp APH.N and Molex are looking
to supply higher-value components and do more development work
with carmakers going through a massive transition.
"All these automakers talking about moving their fleets to
electric and making promises about range are incapable of doing
that without suppliers like TE," says William Kerwin, an analyst
at Morningstar who covers TE, Sensata and Amphenol.
Auto parts account for over 40% of TE's $15 billion in
revenue, making it one the biggest car suppliers most people
have never heard of. Its $43 billion market value is far bigger
than Nissan 7201.T and Renault RENA.PA combined - and more
than three times heavyweight supplier Continental CONG.DE .
TE has a price-to-earnings ratio of about 18, Amphenol and
Sensata are in the 20s, while Continental trades at about 10.
EUROPEAN DEMAND EXPLOSION
TE's Curtin said car parts suppliers and automakers alike
had been caught out by an explosion in demand for EVs in Europe
over the past two years - and with everyone playing catch-up
TE's new facility was running at double its planned production.
While a global shortage of semiconductors has hit overall
car production, Curtin said automakers have been using the chips
they do have to prioritise EVs over fossil fuel vehicles -
putting ever more strain on suppliers such as TE.
The challenge TE faces is getting the timing and scale of
its expansion right, given the EV transition and shift to
self-driving cars could run into speed bumps, such as an end to
subsidies or safety concerns, Curtin said.
Because for TE, electrification means going bigger.
The far greater power needed by EVs means TE must develop
larger and more complex components to handle the extra current,
without causing fires.
TE's conventional parts have up to five components but its
newer EV parts have up to 50 components. The supplier also now
buys tonnes of aluminium, which is lighter and cheaper than
copper, to make up portions of those larger parts.
In the older part of the Woert factory, machines spit out 16
connectors for fossil fuel cars a second. In the new building,
more complex and costly machines, some supplied by Germany's
Manz M5ZG.DE , crank out larger copper connectors with welded
alloy springs for EV charge ports at a far slower pace.
TE also makes a large connector here that sits atop an EV
battery module - an EV has up to 12 modules - and serves as its
brain, measuring each battery cell's performance while a tiny
semiconductor measures their temperature.
The new facility in Woert can make 2 million such connectors
a year but demand continues to soar.
"We're going to need more," said Matthias Lechner, TE's head
of Europe, Middle East and Africa, adding that TE planned to
manufacture more at a plant in Hungary and elsewhere.
Lechner, who describes TE as "humble and hidden", says its
connectors can reduce EV charging time by 10 minutes, an edge
carmakers can sell to consumers.
CEO Curtin says EVs and self-driving cars will double the
value of the parts TE supplies from about $70 now for the
average fossil fuel car. That means the payoff could be huge.
EVs almost doubled their global share of vehicle sales to 6%
in 2021, according to research group JATO Dynamics, and that
share is only set to rise.
Europe's auto supplier market will grow to 330 billion euros
($359 billion) in 2030 from 216 billion now, driven by software,
EVs and electronics, McKinsey estimates, as firms tackle chip
bottlenecks and cost pressure while investing in growth.
"We're observing a double transformation," McKinsey partner
Timo Moeller said.
TE's Woert site employs 2,200 people and is adding more
engineers and technicians, as well as different machines to make
connectors for data in self-driving cars - because unlike EV
parts, tiny connections are better for moving data.
TE has three auto parts factories in Germany and another
five across Europe. Worldwide, it has 29 factories dedicated to
its automotive business.
Morningstar's Kerwin said TE faces the same risks as others
in a cyclical business such as the auto industry.
But he said TE had a "sticky" relationship with customers
and has embedded engineers with carmakers to develop products
for vehicles in an electric age.
"The writing is on the wall that you have to play into
electrification if you want to succeed," Kerwin said.
($1 = 0.9194 euros)
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(Reporting by Nick Carey and Christoph Steitz; Editing by David
Clarke)
((nick.carey@thomsonreuters.com; +44 7385 414 954;))