On September 7, BorgWarner CEO James Verrier hosted the auto-parts makers first investor day at its Powertrain Technical Center in Auburn Hills, Michigan. He outlined his strategy to grow the companys $8 billion in revenue by mid- to high-single digits annually over the next seven years by increasing the average content per vehicle coming from BorgWarner turbochargers, drive systems, clutch modules and other products, as well as by growing its penetration among auto manufacturers. He also explained how BorgWarner is well positioned to supply propulsion technology for combustion, hybrid and electric vehicles: Were very well balanced, he told the 70 investors in attendance.
Verrier, who has a degree in metallurgy and materials science from West Midlands College outside his hometown of Birmingham, England, is among a handful of CEOs including Mary Barra of automaker General Motors, a BorgWarner customer who worked in human resources during their ascent up the corporate ladder. The 53-year-old began his BorgWarner career in 1989 as a quality engineer at a large manufacturing plant in South Wales. Within a couple of years the quality function which had become more about cultural change, employee engagement and teamwork was merged into HR. In January 1996, Verrier came to the U.S. as director of HR for BorgWarner Controls in Dixon, Illinois. Later that year he moved to Warren, Michigan, as vice president of HR for BorgWarner Air/Fluid Systems. In 1999 he decamped to Indianapolis as head of HR for BorgWarner Turbo Systems. The next year he was tapped to move into operations and run its North American turbo business.
Following a two-year stint in Germany running BorgWarners European turbo operation, Verrier returned to Michigan in 2008 to head up its global light vehicle turbo business. In March 2012 he was made president and chief operating officer of the entire company; the following January he became CEO. Verrier, who loves cars and drives an Audi S7, recently spoke with Institutional Investor Editor Michael Peltz about his vision for BorgWarner.
Institutional Investor: The auto business has changed significantly since you joined BorgWarner.
Verrier: Yeah. Its evolved a lot in a few dimensions. When I started with BorgWarner, there were only really two markets in the world. It was the U.S. and Europe. And now we have this big market called China. So geographically the industry has evolved. But probably the bigger evolution is technology; the technology in the vehicle has just continued to evolve over time. And one of the really neat things of being part of BorgWarner is weve always been at the center of that evolution.
During BorgWarners recent investor day, you spoke about several major trends shaping the auto industry.
As I said, there are really four big trends right now in autos: autonomous cars, which youve heard a lot about; the whole notion of ride-sharing and ride-share-type approaches; the whole notion of connectivity of the vehicles; and then the fourth one is all around emissions and efficiency. The really cool thing for us is that were connected in with all of those big trends. We understand whats going on with autonomous cars and ride-sharing. We understand whats going on with connectivity. Clearly we have a lot of insight into fuel economy and emissions.
One of the key things is that theyre all vehicles and theyre all going to move from point A to point B. And if you move that vehicle from point A to B whether its autonomous, whether its ride-share, or whatever you need some form of propulsion system to move the vehicle. And thats where we play and thats where we lead with our technology around propulsion systems.
How much life is left in the internal combustion engine?
A lot is the quick answer. Its a really interesting thought because I think a lot of folks look at the situation are we all going to go to electric cars and hybrid cars? and [conclude that] we dont need the conventional engine. We dont see it that way at all. I think we will need electrics. We will need hybrids. But were going to continue to optimize and refine the internal combustion engine.
So in our view, theres still tremendous opportunity to make the internal combustion engine more efficient with better fuel economy and not giving up power and performance. And thats where BorgWarner plays very strongly with our types of products that enable automakers to deliver better fuel economy and better efficiency. Probably our greatest claim to fame is turbochargers. Thats a great example where you can make the engine smaller, you can make the engine more efficient, but you dont give up any performance of the vehicle by using our turbochargers.
So the bulk of your revenue currently comes from traditional combustion?
Yeah. As we look today we line up pretty similarly to other market lines. Over 90 percent of our revenue is tied to combustion products, which actually makes sense because still well over 90 percent of the vehicles on the road are combustion-powered vehicles. And then we have a small 1 or 2 percent of our products revenue tied to hybrid, and then a small amount to electrics.
But the core story is what does that look like seven years from now? And seven years from now the world will change. Over 80 percent of the vehicles will be combustion products. About 84 percent of BorgWarners revenue will be the same. And then a large part will be for hybrids, and then a piece for electrics.
How do you increase your market penetration and grow the percentage of cars that have BorgWarner parts?
The way to think of it is that the automakers still need to deliver on their appropriate fuel-economy requirements, their emissions requirements, primarily driven by the government. To do that theyre going to have to make the transmissions or the engines or the all-wheel-drive architectures much more efficient.
And they dont want to really increase the cost of the engine. They dont really want to increase the cost of the transmission. So what theyre looking for is, Could you give me a product, BorgWarner, that makes the car more fuel efficient without a lot of dollars spent? Thats the whole equation here. So if you think about it on turbochargers, you increase the fuel economy or efficiency of the vehicle anywhere from 15 to 20 percent better fuel economy, better emissions performance. And a turbocharger is $200 to $300, so thats a pretty good equation. And we have many other products like that that fit that mold of helping them meet their government requirements on fuel economy and emissions for minimal cost.
And that model translates to the world of electric cars?
Yeah, very much so. So when you look at electrics today theres about half a million cars on the road. BorgWarners content on those is relatively small. Were low-single-digit content today. But as we look out seven years, therell be about 2.5 million electric vehicles on the road. And our estimate is about 30 percent of those cars will have BorgWarner products on them.
Youve worked with Tesla?
Yeah, we worked with Tesla. We have a really good relationship with Tesla. When they launched their first vehicle, which was the Roadster, the transmission that powered that car was a BorgWarner-designed and -manufactured transmission that got Tesla off and running, if you pardon the pun. Tesla now produces that transmission themselves using our design. That relationship was cemented a number of years ago, and thats enabled us now to leverage it to work with them on thermal management and power electronics. So Tesla has historically been a good customer for us, and I believe will continue to be one as we go forward.
Is Tesla going to play an important role in getting broader adoption of electric vehicles or will that depend more on traditional car manufacturers?
First I would give a lot of kudos to what Tesla did many years ago where they really pushed the envelope a little bit with pushing electric vehicles into the space with some really great products. And I think they did a really terrific job. Their next phase, which theyre in now, is broadening their portfolio. Theyve gone from one vehicle to a family of vehicles. That would all point to me that theyre going to participate well in the rapidly growing electric vehicle market.
But as we look out, we see a mixture of players in that market. So I think the traditional current OEMs whether its the Nissans, the Fords, the Volkswagens will have their own electric vehicle fleet. But theres a space there for Tesla and maybe other new entrants.
Do you think there could be mass adoption of electric cars?
I think there could be a higher growth rate for electrics. Our view, as I said, is fairly consistent with other external views where going from half a million units today to 2.5 million in seven years is a pretty big trajectory. Does the market have the capacity and the potential to go higher and get to 4 or 5 million? It does. But I think there are a couple of fundamental challenges ahead. The biggest is the battery cost; it is clearly still a challenge in the industry to get that down. And then the other, obviously, is range anxiety. So I think if those problems get solved, range anxiety and battery cost, so it becomes more on par with a combustion or a hybrid vehicle, theres the potential for electrics to have a little higher trajectory. But from a BorgWarner viewpoint, were comfortable if electrics go higher or hybrids go higher or combustion because were playing across all three architectures.
Do you think the hype around autonomous driving is overblown?
We certainly think the trend is for real and that theres going to be an increased adoption rate of autonomous vehicles. But the speed with which that evolves will still play itself out a little bit. I think the technology is moving very rapidly to provide for the increased levels of autonomy in the vehicle. But theres a big challenge called safety. We want to get it out there, but weve got to do it somewhat in a controlled and safe manner because its still a little scary for people like me to think of cars running around with nobody driving them. So I think the technologys rapidly advancing. It will come. Its just going to be whats the adoption curve and whats the timeline for that adoption curve in a safe manner? I think well need another year or two to get a better view on that.
And what are your thoughts on ride-sharing? Will it change the way people think about car ownership?
The one thing I hear a lot on that subject is everybodys good with ride-sharing, providing its their car thats being used. I think there is a little bit of that. Theres definitely a space and a place for where ride-sharing will make sense, particularly as you look at the macro trend of urbanization. And the big cities in the world are getting bigger and more congested. Its going to make sense for people to share a car rather than buy or own a vehicle. And its going to make sense in certain cities that you get three or four people leveraging a vehicle, as opposed to one person. But I dont see a massive shift to ride-share. So our view is were not going to see an impact on global car production over the next several years.
Your most recent annual report portrays BorgWarner as a green company concerned about protecting the environment. Is that just branding?
No. Its in the core of us, actually. Weve felt that way for a long time. Weve not just been one of these that, Oh boy, thats a cool thing to do, so lets put that on the website that we can tick the box and be the green company. Not at all. Our whole purpose is around this clean, energy-efficient world. Every product we have is driving better fuel economy and better emissions and cleaner air. Thats fundamentally what we do.
And then the other side of it, which gets us just as excited, is what we do in how we run the company. So we have a big passion about how we manage our manufacturing facilities. What are we doing around energy reduction? What are we doing around waste re-usage? What are we doing when we build a new facility in terms of energy efficiency? Are we using solar? Are we using recyclable water? Thats a lot of what we do as a core purpose of how we run our manufacturing facilities, as well as our end product.
Do you believe in climate change?
Absolutely. What were all about is providing for a cleaner, more energy-efficient world. And we do. We have to play our part in making our world a better place.