When Fred Lissalde became CEO of BorgWarner in 2018, the company faced an existential threat: electric vehicles would eliminate demand for its core turbocharger business, which generated 35% of revenue. Seven years later, Lissalde's transformation strategy is showing results—BorgWarner now supplies eMotors to Hyundai, battery cooling systems to Ford, and 48V hybrid systems to Mercedes. But with EV adoption slowing (20% of U.S. sales vs. 50% expected) and Chinese competitors like BYD vertically integrating, BWA trades at a steep discount to historical multiples. For value investors, the stock offers contrarian appeal—but only if the company can execute the most complex transition in auto supply history.
Business Model & Competitive Moat
BorgWarner operates across three core segments:
- •Air Management (35% of revenue): Turbochargers, emissions systems, and thermal management for ICE and hybrid powertrains—industry-leading 30% turbo market share
- •E-Propulsion & Drivetrain (40%): eMotors, inverters, 48V systems, and transmission components for electrified vehicles
- •Fuel Injection & Aftermarket (25%): Fuel systems, aftermarket replacement parts, and commercial vehicle components
The company's moat historically stemmed from engineering relationships and co-development partnerships with OEMs—BorgWarner engineers work on-site at Ford and GM, integrating components during 3-5 year vehicle development cycles. However, EV components (motors, inverters) are more standardized than precision-engineered turbochargers, reducing switching costs and pricing power. Fred Lissalde's strategy focuses on systems integration (complete e-drive units) rather than commoditized components to preserve margins.
Financial Performance
BorgWarner's financials reflect the tension between ICE decline and EV growth:
| Metric | 2022 | 2024E | Change |
|---|---|---|---|
| Revenue | $14.8B | $15.4B | +4% |
| Operating Margin | 10.2% | 9.8% | -40 bps |
| Free Cash Flow | $1.1B | $1.2B | +9% |
| EV Revenue % | 18% | 25% | +7 pts |
- •Margin Pressure: EV components carry 8-10% operating margins vs. 12-14% for turbochargers, creating structural headwind
- •Geographic Mix: China (22% of revenue) facing local competition from BYD, CATL, and Huawei entering auto supply
- •Dividend Coverage: 1% yield backed by 30% payout ratio provides safety buffer during transition period
Growth Catalysts
- •EV Platform Wins: Ford F-150 Lightning battery cooling, Hyundai E-GMP platform eMotors, and GM Ultium inverters provide $2B+ annual EV revenue by 2026
- •Hybrid Technology Bridge: 48V mild hybrid systems (20% fuel savings, $1,500 cost) gaining traction in Europe and China as EV alternative
- •Battery Thermal Management: $600M acquisition of Rhombus Energy Solutions (2024) adds liquid-cooling expertise critical for fast-charging EVs
- •Commercial Vehicle Electrification: Partnerships with Daimler, Volvo Trucks for heavy-duty EV drivetrains targeting $400M market by 2028
- •Aftermarket Expansion: $3B aftermarket business grows as ICE vehicle fleet ages (average 12+ years) creating replacement demand
Risks & Challenges
- •EV Adoption Uncertainty: Slower-than-expected EV growth (plateauing at 20% in U.S.) extends ICE dependence while pressuring EV investment ROI
- •Chinese Competition: BYD, Huawei, and domestic suppliers offering 20-30% lower pricing with local content requirements favoring domestic players
- •Margin Compression: Shift from 14% margin turbochargers to 9% margin EV components structurally lowers profitability without volume growth
- •Customer Concentration: Top 10 customers (Ford, GM, Stellantis, VW) represent 60%+ of revenue; production cuts directly impact BorgWarner
- •Technology Disruption: Solid-state batteries or breakthrough motor designs could render current EV component architectures obsolete
Competitive Landscape
Auto supplier industry consolidating around scale players and EV specialists:
| Company | Market Cap | EV Revenue % | Differentiation |
|---|---|---|---|
| Bosch | Private (~$50B) | 30% | Full systems integration |
| Continental | $12B | 25% | Software + hardware |
| BorgWarner | $7B | 25% | Powertrain focus |
| ZF Friedrichshafen | Private (~$20B) | 20% | Drivetrain specialist |
BorgWarner's mid-tier positioning creates challenges: too small to match Bosch's R&D ($8B annually), too diversified to compete with pure EV specialists like Vitesco. Fred Lissalde's focus on partnerships (Tesla thermal systems, Hubei Tri-Ring eMotor JV) aims to bridge the scale gap, but success requires flawless execution across 5-7 year product lifecycles.
Who Is This Stock Suitable For?
Perfect For
- ✓Value investors seeking cyclical recovery plays trading at 10-year valuation lows with 9x forward P/E
- ✓Dividend investors comfortable with 1% yield and patient for 3-5 year transition payoff
- ✓Contrarian investors betting on hybrid technology bridge and slower EV adoption extending ICE revenue runway
Less Suitable For
- ✗Growth investors seeking high-margin tech plays—auto supply is low-margin, capital-intensive business
- ✗ESG investors focused on pure-play EV exposure—BWA still derives 75% revenue from ICE-related products
- ✗Short-term traders—stock volatility mirrors auto production cycles with 30-40% annual swings typical
Investment Thesis
BorgWarner earns a HOLD rating for patient value investors. The company's 9.4x forward P/E represents a 35% discount to the S&P 500 and 20% below its 10-year average—pricing in significant skepticism about EV transition execution. Fred Lissalde's track record (successful Delphi integration, strategic EV acquisitions) demonstrates competent capital allocation, while the $1.2B free cash flow and strong balance sheet provide downside protection. The bull case hinges on: (1) hybrid technology extending higher-margin ICE revenue 5+ years, (2) EV platform wins scaling to $5B+ annual revenue by 2028, and (3) margin stabilization at 9-10% through manufacturing efficiency.
However, structural headwinds are real: EV component commoditization, Chinese competition, and customer production volatility create genuine risks. The stock works best as a value position sized at 2-3% of portfolio with 3-5 year hold period. Investors should monitor quarterly bookings (future revenue visibility), EV revenue mix progress, and operating margin trends. At current valuation, the risk-reward tilts positive for patient capital—but this is a show-me story requiring proof of EV profitability before conviction building.