Global Insight Perspective | |
Significance | BorgWarner has announced a US$125 million global investment over the next five years to increase turbocharger production in every one of its global regions. An increased demand for the components for both gasoline and diesel engines is fuelling new orders and increased capacity constraints. |
Implications | For the previous quarter, BorgWarner saw sales increase in regions outside the United States, and managed a lesser decline in the U.S. market than the industry averaged. Revenue was up 17.3% to US$1.5 billion, with a bigger-than-expected net profit of US$88.7 million for the first quarter. |
Outlook | With the new CAFE standards in the United States now signed into law, new programmes to downsize and boost engines for North American applications are causing a significant increase in demand, just as Global Insight forecast in the third quarter of last year. Turbocharger production will be an especially hot segment. |
Powertrain component supplier BorgWarner has announced that it will be investing nearly US$125 million globally to expand its production of gasoline (petrol) and diesel engine turbochargers by over three million units. The company said that it is responding to an anticipated increase in demand for such systems as global growth of fuel efficiency components takes off over the next several years. "With new business awards, additional capacity is essential to meet customer demands for our market-leading turbocharger technology," Tim Manganello, BorgWarner Chairman and CEO, said in a statement. "The continued growth of diesel engines around the world and the move to gasoline direct injected engines in North America provide us an opportunity to leverage our turbocharger technology expertise as never before. We will be well positioned to serve our customers' needs as the world market for turbochargers expands. The demand for turbochargers is expected to grow over 40% in the next five years, from 19 million units to 27 million as more engines are downsized and turbocharged and more sophisticated engines incorporate multiple turbochargers."
The company's investments will truly be global. In North America, production for turbochargers will more than double by 2013 to 2.3 million units, according to the company's projections. As such, the company will build a new facility in Ramos (Mexico), on the site of the company's current facilities, and will supply an unspecified North American gasoline direct-injection programme in mid-2010. In Europe, production is expected to grow 20% to 14.2 million diesel turbo units by 2013, with gasoline turbo units also expected to more than double to 3.8 million units. This is fuelling a third expansion of BorgWarner's Hungarian plant, which will expand capacity for a new gasoline engine programme and several small diesel programmes with European customers, while the Polish facility will already require a capacity expansion despite having begun construction just two months ago. That plant will double its floor space, according to the company, in order to produce turbochargers for diesels. And in Asia, production is expected to grow by 48% to 6.7 million units, causing BorgWarner to fund an investment in a facility in Thailand.
Later in the week, BorgWarner announced its first-quarter results, posting a 52% jump in earnings, thanks to growth in the European and Asian markets, and favourable exchange rates. Net income rose from US$58.4 million in the first quarter of 2007 to US$88.7 million in the most recent one, with revenue up 17.3% to US$1.5 billion. According to the company, favourable foreign currency rates (especially the stronger euro) increased net income by US$7.3 million and upped revenues by US$115.3 million. Without the boost from currencies, the company said that sales were up 8% in the first quarter. Like most other automakers and suppliers, sales outside the slumping U.S. market rose (15% in BorgWarner's case), while sales in the United States dropped 4%.
Outlook and Implications
Thus begins the first of many increases in fuel-efficient technologies forecast by Global Insight's own Phil Gott last year at the company's Global Automotive Conference in Dearborn (Michigan; see United States: 5 October 2007: GI Global Automotive Conference 2007: CO2 Top of the Agenda as Industry Wrestles with Regulators). In his presentation to the assembled industry executives and interested parties, Gott described the changes that would need to happen if the 35 mpg by 2020 corporate average fuel economy (CAFE) changes were instituted by the government later that year. With the signing of the new requirements in December 2007, that supposition became a reality, and automakers and suppliers have begun heavily investing in new powertrain technologies that will be necessary in order to meet the stringent 40% improvement in fleet fuel economy. Gott's study concluded that nothing short of a massive shift in powertrain technologies would be required to meet the new CAFE standards. By 2020, nearly two-thirds of the U.S. vehicle fleet will need to be powered by a direct-injection engine (either gasoline or diesel), downsized from the current displacements and turbocharged. Diesel would need to comprise one-third of the market. Half of all vehicles would need to be one of the four forms of hybrid, and half of those hybrids would also need to be diesel-equipped.
According to Gott, the variable cost impact necessary to introduce such a stunning shift from port-injected gasoline engines (the vast majority of U.S. powertrains) to the new configurations would require a staggering amount of investment. Automakers will face powertrain costs that are a minimum of 30% more expensive than the current lowest-cost technology, costs that will certainly be passed on to consumers. But the even bigger impact will come from the investment required in order to build the infrastructure that can make the new technologies. Automakers will have to make a capital investment in components to install direct-injection technology on 8 million engines for the U.S. market, invest in component plants and suppliers to make components for an additional 8 million hybrids, and construct the equivalent of eight new diesel-engine manufacturing plants at a cost of nearly US$1 billion each, not including associated fuel-injection and emissions controls systems manufacturing. Suppliers will have to be able to make up to 12 million turbochargers a year, or more if two-turbo systems become more common.
It would seem from the investments announced by BorgWarner that the company fully realises this, and are starting now to expand as new orders come in. The Mexican business timing is interesting, as it is likely to supply Ford's new "Eco-Boost" GTDI technology, one of the only gasoline direct-injection applications expected around that time. The motors will reportedly appear in Ford's F-Series pick-ups as twin-turbocharged, gasoline direct injection V6 engines, providing the power of a V8 with the fuel economy of a V6. The motors are also expected to arrive in Ford's Lincoln MKS luxury sedan in place of a V8 option. Such moves are going to become more commonplace as stricter efficiency standards come into play, but Americans continue to demand powerful vehicles.