BorgWarner Inc. (BWA) Earnings Call Transcript & Summary

Thanks for joining us this morning. I'm Luke Junk, and I cover vehicle technology and mobility for Baird. We're very pleased to have BorgWarner with us today. BorgWarner is a leading global supplier of systems and components, primarily for automotive powertrain and drivetrain applications, increasingly with an eye toward electrified applications. Joining us this morning, we have Kevin Nowlan, Chief Financial Officer; and Patrick Nolan from Investor Relations. We do have 45 minutes for this session, so I'll do my best to weave in any questions that you might have. [Operator Instructions] With that, why don't we jump right into Q&A?

And I know it's on everyone's mind. So why don't we start with electrification. Kevin, net new business backlog has now stood at over 100% electrified for 2 straight years, including, you disclosed with fourth quarter results, 45% that's now BEV related. To start, can we just talk about that journey and the work that's already been done to reposition the company for an electrified world?

Yes, sure. Thanks, Luke, for having us. We're excited to be here today. Just one quick correction on that. The 45% is what we call our e-products, of which 40% out of the 45% is actually on BEVs. The other 5% is on hybrid. So we're kind of talking in terms of the 40% on BEVs here. But when we talk about how we position the company, I think I'd highlight 2 things, because we've really had a twofold approach to how we've been growing. One is through what I would say is disciplined organic investment. And the second is, really, we've supplemented that organic investment with M&A. And we think that combination is what's been successful for us, really in driving that outgrowth, driving that backlog you referred to and positioning us for future success. So the talk about maybe that journey from an acquisitions perspective, just to refresh everybody's memory, it really started back in 2015 when we did the Remy deal. That really gave us electric motor and rotating electric capability. And we felt like that was a natural extension for us of the internal expertise that we had in torque management and transmission capabilities. Then you roll forward to 2017, and we purchased Sevcon, which was really our first step into power electronics. We like to call that planting a seed, gave us the chance to learn the business. And what did we learn? Well, we learned that we really needed more scale in order to be competitive there in a space like the light vehicle space. And that's really what led to Delphi Technologies, that acquisition, where we brought power electronics into BorgWarner with very strong depth of technology expertise and scale for light vehicle. And then the last piece I'll just touch on here is in 2019, Romeo Power. That was our first step in the battery packs. Again, much like Sevcon, this was about planting a seed, gave us a chance to learn the business, learn the players in the business, and we grew increasingly interested based on what we saw. And that's why we committed even further here just a month or so ago, led to the announcement of our AKASOL transaction, which should close later in the second quarter, opportunity for us to really compete in a more significant way. So just to wrap up. You're right, it's been a journey here. We're excited about the positioning we've executed both organically and inorganically. And I think you should expect that twofold approach to continue.

What about from a geographic standpoint, any important implications of what's in your backlog right now? I know Borg has historically been strong in Europe, but you also have a strong mix of China business in your backlog right now as well. Is that right?

Yes, that's exactly right. I mean fundamentally, if you take a step back, we make products that make vehicle movement more efficient. And so what you do is look at each market and what the demands are right now. That gives you a good signal as to what types of growth opportunities we have because the markets that are having the greatest challenges or greatest, I'll say, regulatory environment for managing emissions and efficiency standards are the ones that are going to demand our products more. So when you look at China, it is about 45% of our current net backlog. And when you look at that market, you see the push for improvement in efficiency. And that's really whether it's EV or combustion. And the good news for us is many of our efficient combustion products are actually relatively low penetration in that market, which is why we're continuing to see nice growth in the combustion piece of our business. But at the same time, the market is pursuing BEVs and advanced hybrids, and we're seeing nice growth there as well. I think when you look at Europe, it's 20% of our net backlog. And you might have noticed, that's a step up from actually what we were reporting a year ago. When you look at what's going on there, you have the combustion piece of the portfolio, which is more mature. We tend to have relatively high penetration rates already. And then obviously, we have the diesel headwinds, particularly in the Delphi portfolio. And since we report our backlog on a net basis, which means growth net of areas that are shrinking, it means that's a headwind for us. But our backlog is positive in Europe. It's 20% of the backlog, which means what? it means those products that we're seeing, particularly at the tail end of that '22 to '24 horizon, are offsetting or more than offsetting the nearer-term headwinds we're seeing from diesel. And that's particularly true when we talk about the EV launches and some of the inverter capability we have there. And then finally, to wrap up the global walk here. In North America, obviously, we could see more stringent regulatory standards as we go forward, but it's currently a market with the smallest pull for electrification. So it's nowhere near what we see in China and Europe right now. But there's still significant opportunity for us in some combustion-related growth because we tend to have lower penetrations there. So that's maybe a walk around the world for our backlog.

Yes, that was helpful. And maybe more of a qualitative question here. But clearly, the industry has gone through a lot of change in the past year. And just wondering, as you interface with your customers, how did the conversation around electrification change through 2020 and carrying into this year, from BorgWarner's point of view?

Yes, we've been reflecting on that quite a bit. And if we just take a step back and look at the last year of conversations with customers, I'd say we've seen a notable acceleration in those discussions coming from customers about their interest in moving more aggressively into electrification, whether that's advanced hybrids or battery electric vehicles. And so as that pertains to BorgWarner, I think there's a few observations I would make. I'd say, first, the timing of that Delphi Technologies transaction was actually perfect. It's really positioned us strongly to capitalize on those higher demand prospects we're seeing. And frankly, we are seeing strong pull, particularly inverters, coming from our customers. I think second implication, as you've seen us talk here in the last few months about stepping up our R&D investment significantly, 5% plus in '21 and beyond versus the low to mid-4%s where we were running before. And you notice in 2020, we even maintained our R&D dollar investments at the same level as what they were in '19 despite COVID, where we saw peers in other companies pulling back on investments. We did not. We sustained and made a conscious decision to sustain that investment level. And the reason we're doing that is because we're supporting some of these targeted business pursuits. This isn't skunkworks R&D. This is pursuing actual opportunities and getting into the launch cadence of focusing on the execution. And we're able to do that in terms of stepping up that R&D because of the way we've been proactively managing our cost structure. A year ago at this time, we were talking about some of the proactive restructuring initiatives we were taking. And that was even for a company that was already a top-quartile margin company pre-COVID and on track to deliver 11% margin in '23. So being proactive has given us line of sight to be able to invest more R&D dollars to pursue these new business wins that we're getting -- seeing from our customers while staying on track for that margin profile. And I'd say the last theme maybe for us is just, we're seeing electrification opportunities in commercial vehicle and off-highway as well accelerating. So we tend to focus a lot on light vehicle. But from our conversations with our customers, we're definitely seeing it there as well. And if I'm honest with ourselves, it's probably an area that we've had less focus on in the last couple of years. We've really been focused on executing on the light vehicle side. But I think you should expect to see us more aggressively moving in that direction as we look ahead. So -- and that's part of the reason you saw us, for example, do the AKASOL deal or you saw the motor win we talked about a month ago. So those types of things are indicative of our focus there. So overall, we're excited by that trend. But definitely, the acceleration and I think we're positioning ourselves to capitalize on that acceleration in electrification.

Yes. And let's put a pin in the commercial vehicle electrification discussions, because I absolutely want to come back to that in a few minutes here. Going back to the auto side, I'm wondering if we could also speak about the company's positioning if the market evolves to BEVs versus hybrids sooner than expected or faster than maybe you thought was going to be the case 18, 24 months ago, how that impacts BorgWarner?

And I think the good news is we've spent a lot of time really positioning the company for that potential that we see a ramp-up in electrification. And the way we've actually been talking about it, I think -- Pat's pulling up a slide here. We talk about it in terms of addressable content opportunity per vehicle. And that's what's displayed on the slide you see here. Let me explain what that means. When we say content opportunity per vehicle, it really means the potential revenue that we could generate at BorgWarner if we obtained 100% share on all the products we offer. What's the maximum opportunity we have for each of a combustion, hybrid or electric vehicle. And so if you look at the data on this slide, what does it tell you? It says for any combustion vehicle in the world, the content opportunity we have out there is about $940 a vehicle. For hybrid, it's north of $1,900. And for a pure battery electric vehicle, it's over $2,400. And so when you look at this data, the key takeaway is this. It's how much larger the hybrid and electric opportunities are for BorgWarner. Obviously, we have to capitalize on them, but the opportunity is there the way we've positioned and constructed the portfolio. Hybrids being 2x the combustion opportunity, BEV as being more than 2.5x, more than $1,500 per vehicle. So it's a significant opportunity for us. And this is part of what I talked about earlier. The acquisition strategy we've had over the last 5 years has really positioned the company in this way to have the electric vehicle opportunity that we show on this slide. And that's why we continue to focus our investments there, both from an R&D perspective, why we're stepping it up, and inorganic, just like we talked about with AKASOL, like we talked about with Delphi last year, focusing really on that electrification space and capability.

Well, related to that and sort of building on the content per vehicle opportunity that you have with hybrid and battery electric. One of the questions that I field most often on the company relates to the ongoing debate around insourcing and outsourcing and hoping we could talk about your current perspective on that, regarding some of the key components, I should say. And then IDM, maybe starting with the e-motor and the gearbox and moving into the inverter and car electronics as well.

Okay. Yes. And definitely, over the last 9 to 12 months, I'd say, we know there's been a lot of focus, a lot of discussion on this area. What are the OEMs' in-sourcing plans? And so when we think about in-sourcing and the discussion about it, I think the best way to look at in-sourcing, outsourcing is really at the component level. And that's independent of the customer's decision as to whether they're going to in-source or outsource the module integration. And that's because the customer's decision may be independent. So if you take inverters as an example. When we talk about the outsourced volume for an inverter as a component, it's equal to the inverters for outsourced modules plus the inverters purchased by the OEs who are doing final assembly in-house. So we have to keep that in mind, that sometimes customers talk about that final assembly in-house, but they're oftentimes purchasing components from outside. So if you go around the slide that you see up on the screen and you start with motors like you requested here in the top left, you can see the market opportunity there, about $3.3 billion outsourced content opportunity in 2025. It suggests outsourced motors are somewhere in the 55%, 60% range, which is relatively consistent with what we've been seeing and consistent with what we've told people to expect for the last couple of years. When you go to gearboxes, top right, the trend is a bit more towards in-sourcing, about $1.5 billion opportunity for outsourced. So why is there more insourcing there? Well, it's because the OEs can take advantage of their fixed labor structures. Maybe that changes longer term. But in the near term, at least for the next 5 years or so, we would expect to see more in-sourcing versus outsourcing there. When you go then to the electronics at the bottom of the slide, whether you're talking inverters on the bottom left or the power electronics -- other power electronics, say -- on the bottom right, we actually see a big trend toward outsourcing these components. Part of the reason is lower labor content. Part of the reason is the scale benefits that companies like BorgWarner and other suppliers can bring. And so we see that more than 80% of this space, power electronics, whether it's inverters, whether it's other power electronics -- which is onboard chargers, DC/DC converters, battery pack control, [Technical Difficulty] the percent of the global market environment. So obviously, the size of this market has the potential to grow even further as EV adoption increases.

Okay. Great. And then building on the last bit of that discussion about the inverters and power electronics. Can we talk about the success that you've had with inverters in Europe, specifically, Kevin, including your most recent award? And what your top 3 customers alone mean in unit shipments as we look out over the medium term?

Yes. I mean I think the reason we feel like we're winning in the power electronics space, especially with the inverters is -- oh, yes, sorry, I didn't realize you're going to pull up that slide -- is that we see really a few key competitive advantages that we think we have. And the first is we have breadth in the product portfolio. And the importance of breadth is that it allows us to be faster and more effective at bringing products to market. So specific customer pursuits that are out there, we have a range of products that can meet their needs a lot more quickly than somebody who has to develop those from scratch. Second, we have the ability to innovate our power module technology, this Viper technology we talk about, the power switch. That allows us to continue to innovate because we have the vertically integrated components within the inverter here. And then third, we have the ability to leverage electronic scale. And that's important because as you really grow in electronics, there are purchasing advantages you can get as well as leveraging other software capabilities we have across BorgWarner even, for instance, in our engine control unit capabilities from a software perspective. And so those are 3 things that we think we bring that give us advantages. And we think the result is the significant new business wins you refer to. And the chart that Pat pulled up here on the right, you can see those 3 large premium European OEs alone, with those, we expect the ramp-up inverter volume to over 1 million units in 2025. So pretty sizable just from those 3 customers alone.

Okay. Well, yes, moving on from the inverter discussion. And again, stepping back and thinking about sort of the role of suppliers in an EV world. Wondering what your perspective is on these EV-only companies that are looking to take what I'd call the fabless approach to their manufacturing strategy? How can BorgWarner help those types of companies as a supplier?

We're actually set up to do that in a couple of ways. And it really starts for us with our Cascadia Motion business. This is the business we acquired just over 2 years ago. It was a combination of 2 companies, AM Racing and RMS, that we put together, that's really set up to support, I'll say, companies that are more in the start-up phase with little to no volume. So this Cascadia business we talk about has full EV system capabilities and can provide effectively turnkey solutions for these customers. So it's a way for us to be nimble and to work closely with start-ups like this without necessarily slowing down the more mature parts of the portfolios that we have that work with our larger customers. So as these start-up customers start to become more mature, like the bigger OEs that we oftentimes talk about, then we have the opportunity to really transition them from being supported by Cascadia Motion to, I'll call it, the larger BorgWarner enterprise. So for us, it's really a balance, a balance of supporting customers depending on where they are in their life cycle while minimizing the financial risk for us. So it gives us the ability to effectively partner with all customers, no matter where they are in their life cycles.

Okay. That's helpful. And then last question that I wanted to ask you before we leave this particular discussion is just how you see the competitive landscape right now between the incumbent suppliers as we move into a world that's increasingly electrified versus newer entrants that are trying to come into the space?

Yes. I mean there's definitely certain areas in electrified propulsion that are more competitive. I would say, like on the light vehicle side, motors, for instance, is an example of that. But in terms of the competitive set, we really focus on the things we can control. And we think that comes down to things like product leadership. That's a must. We feel really good about our technology positioning in electrification and our ability to commercialize that. We look at our strong customer relationships, which is evidenced by our broad global portfolio. We supply to virtually every major OE across the globe. And you can even see that with our more recent wins on inverters. We think that's a testament to the strength of the relationships we have. We think maintaining best-in-class cost structure really gives us a competitive advantage and allows us to effectively proactively sustain our top-quartile margin while reinvesting in the business. And then we feel like at times, you have to be willing and able to walk away from certain parts of the business if you don't think you can develop or achieve an acceptable return. And if you're kind of a one-trick pony or you're reliant on really 1 or 2 key products, that's harder to do. But we have such a wide variety of products, we can make some of those tough choices where we need to. And so in the end, for us, those are the things we look at: the product leadership, the customer relationships, cost structure and our ability to walk away, because those are the things that differentiate us more so than, hey, how many competitors are we competing against? If we execute on what we control, we think we'll continue to be a leader in the places in which we play.

Okay. Thanks for that perspective. I'm going to go back to the topic that we put a pin in, and that's commercial vehicle electrification. So let's move the conversation there. Why don't we start with the agreement to acquire AKASOL. What was the background on that deal? And importantly, what does it signal in terms of your intentions around commercial vehicle electrification going forward?

Yes. I mean AKASOL really started again with this notion of planting a seed in the battery system space when we made our investment at Romeo a couple of years ago. It gave us exposure to different players in the market. And one of the players that we kept seeing out there was AKASOL. I mean they're a proven leader in the space. They obviously have significant growth potential based on some of the numbers you've seen us put out. And there's really a few things we liked about them in particular. One is the fact that they're cell-agnostic, which means they produce battery modules and packs for pouch, prismatic, or cylindrical cells. Second is they're already in serial production today. They've got 1.0 gigawatt hours of capacity already installed in 3 manufacturing plants, and they'll be up to 4.7 gigawatt hours in 2022. They've got a $2.4 billion backlog already booked with major OEs carrying them through 2027. And their focus is really on commercial vehicle and off-highway, which is where our focus is in this particular space. So AKASOL, because of those things, has been on our radar for awhile and as we started interacting with them more seriously over the last year, we really saw the potential for a value-maximizing transaction. And so to take a step back, there's an overarching theme here, and we touched on it earlier. Our high-level view is that the electrification opportunities in commercial vehicle and off-highway are accelerating. And we're seeing this in our customers' conversations with us. And it's driving wins in our existing portfolio, like the 800-volt motor award we announced last month. And it's supported by our organic investments. But it's also prompting us to look at inorganic opportunities also to accelerate our path here, just like we're talking about here with AKASOL. So we're excited about what we see in ECD and think these are going to be additive to the opportunities we were already pursuing in light vehicle.

And you've mentioned it a couple of times, the Romeo Power JV is sort of your initial entry into the battery space. Just wondering, strategically speaking, how the acquisition of AKASOL fits in with what your existing capability set is with that joint venture?

Yes. And it's -- when you look at Romeo, that was, as I mentioned, our first step into the battery module battery pack space. And I think it's fair to say that, that investment has been a success financially and otherwise to date. Now since this investment, again, we planted the seed, that gave us a real opportunity to learn the business, understand it, to see did we like it and want to grow it. And so our interest and commitment in this particular area, battery systems, has only increased since we made that initial investment. And the AKASOL deal is the important next step as we advance and accelerate our strategic objectives here. So back to your question then on Romeo. We remain a significant investor in Romeo. We have a 13% stake on a fully diluted basis. We continue to operate the 60-40 JV, which is predominantly focused outside of the North American market. And I would imagine between now and the closing of the AKASOL deal, we'll likely have a discussion with our partners at Romeo on how the 2 companies might interact going forward. So I think TBD how that's going to play out. But you should expect that we'll probably be in dialogue with our customers between -- or with Romeo between now and then.

Okay. Yes. We'll stay tuned there. So you mentioned it briefly, I want to circle back to it because I think it's an important award. You also had recent a major award for a commercial vehicle, e-motor. Can you discuss the scope of that award? And maybe just as importantly, the technology that BorgWarner is bringing to the market with that particular product?

Yes. I mean you're right, I've alluded to this a couple of times here in the discussions. And it is an important win for us as we seize organic opportunities in electrification space on the CV side. And so what we did is we secured an 800-volt electric motor award with a global commercial vehicle customer. So this program launches in 2024, and it uses our latest hairpin motor design for 4 different variants of the customer's products. And so why an 800-volt rated machine? What does that do? What does it mean? It means it can significantly reduce the charging time for customers and achieve higher power density because of the 800-volt architecture. So we're pretty pleased with this program, as you can sense from my remarks and continued focus on it. And I think you should expect that we're going to have continued focus on electrification opportunities in commercial vehicle and off-highway going forward in addition to what we've already been pursuing in the light vehicle market.

Okay. So yes, taking a step back and looking at the bigger picture around commercial vehicle electrification at BorgWarner and looking really at the whole product offering, how do you say it stacks up right now versus your light vehicle offering? And if we also look at gearing and power electronics, what can you build on organically in the portfolio? And where might you be inclined to look towards the M&A market, if at all, on a go-forward basis?

Yes. I'd say a couple of things as I look at the existing product portfolio. Just like we talked about with the 800-volt motor win, I think there are great motor options that we have for commercial vehicle applications. And we have ranges of motors that are similar to those that we use in the light vehicle applications up to the large 800-volt motors just like that program. I think on the power electronics side, our light vehicle inverters can actually be used for certain medium-duty applications. But with some incremental investment, we think we can actually serve the heavier-duty applications as well from a power electronics standpoint. So I think those are a couple of things that I would look at in particular. From an M&A perspective, I'd just say, hey, overall, it's an opportunity that we're going to look to leverage to accelerate our positioning and growth in electrification. And that's a comment for both e-light vehicle and e-commercial vehicle. That's a priority for us in 2021 and as we go forward. So AKASOL's may be the first of that, that you see, especially focused on the commercial vehicle side, but more to come there.

Okay. And then lastly, what about in-sourcing versus outsourcing on commercial vehicles, maybe if we could just talk at a very high level here. How do those dynamics differ, would you say, versus the conversation and dynamics in the light vehicle space?

Yes. I think in commercial vehicle, it is a little bit different. I think one of the big things that you have to consider and that our customers consider is the significantly lower volumes in the CV space and, in some cases, some level of proliferation as well. And so what can we bring to the table to help mitigate that? Well, because of our scale, our ability to scale, our ability to develop product variants and leveraging what we already do from a scale and product variant perspective in the light vehicle space, we can actually help supply the CV customers in a way that probably lowers the cost and the investment upfront to scale -- use that scale benefit to support the lower volumes in the CV space. So in general, because of the lower volumes, the proliferation there, we would expect that the in-sourcing in the ECV market is likely going to be lower than what you see on the light vehicle side. But it's going to vary. It's going to vary by customer, probably vary by component to some degree as well. But in aggregate, less so than what we see from an in-sourcing perspective on the light vehicle side.

Okay. So yes, why don't we talk about Delphi for a few minutes here, hoping that we could start with the early returns that you're seeing, I guess mainly qualitatively for now, on the first tranche of customer conversations that you had post close. I think you had a fairly aggressive schedule of meetings set up in the first 4 months, so hoping that we could talk about what you learned, having met with all those customers.

Yes. I think -- and we completed those meetings, just as you referenced, the meeting with 70% or so of global customers in the first 4 months following the deal, and so those took place. And I'd say, in general, the customer feedback has been very positive. And I think you can see some of the evidence of that already. And we've already announced a new inverter award since we closed on the transaction. There was 1 since we signed it, but also another 1 since we closed the deal. But even beyond inverters, we're actually seeing momentum in other parts of the business where we've had some wins as well. Good example is gas direct injection where we had an important win that we talked about as well. So I think that's a testament to not just the product technologies that Delphi had, but also the customers' confidence in our ability to support them and the capabilities that we have as BorgWarner, leveraging those technologies and commercializing them in a way that's strong from a quality perspective, delivery perspective and meets the customers' needs.

Okay. And then we talked about inverters a little bit already, and I want to bring the conversation back to this topic. And what I'm wondering is your ability to leverage Delphi's inverters as a conversation starter with customers. And is it right now that you're the primary inverter supplier to 3 of the top 4 luxury OEMs in Europe, is that right?

Yes. Well, I'll say we can't comment on what customers we're actually supplying. But obviously, we're talking about 3 major premium OEMs. And you can see the volumes that suggest that they must be pretty sizable, 1.1 million in inverter volume in 2025. So these are some pretty sizable customer as you can imagine. And overall, I think we're very excited with the technology that we've acquired here with the Delphi deal. I think it's positioned us to be able to execute on these things. And so to your question, though, is it a conversation starter? I think the strong capability in inverters absolutely is. I think it's credible. Delphi had great technology, has great scale and great ability to leverage that as they grow going forward. But I think just as important to the capabilities that Delphi brought to the table, I think when you combine their technologies with our reputation for quality, our strong customer relationships and our financial strength, I think the interest from the customers absolutely increases from there.

Okay. Great. Well, you mentioned earlier in the conversation, and I want to come back to this, the timing of that acquisition. It's obviously announced early last year, closed last fall and really coinciding with this big upsweep in momentum around electrification. And yes, curious if we could just talk about the evolution of Delphi's opportunity set over that time frame. I think you had laid out initially 15 or so kind of theoretical top awards that you're going after. And as you updated that with the close of the transaction, there was some movement there. And yes, if we could just talk about how that's evolved and what even within Delphi has changed from the time that you announced that deal through close, and where we stand today in terms of the product mix, let's say?

Okay. Yes. And you're right, as we announced the deal shortly after signing, we did call out a number of combination product programs that we intended to pursue post closing. And you can imagine, we're actively pursuing those programs right now. But to take a step back, I think when you really think about it, I think there's really 3 areas of revenue synergies when we think about the Delphi acquisition. First is, Delphi is bringing technology and scale in electronics, and that's something we didn't have. But now because we have that, we're able to win business there. The second thing is the financial strength and customer relationships that BorgWarner brought to the table that, frankly, Delphi didn't have. I would tell you that we believe the recent inverter award that we talked about a month or so ago, we absolutely won in part not just because of the technology, but because of BorgWarner's relationship with the customer. Absolutely critical. And so I'd call that a second piece of thinking about revenue synergies of having brought the 2 together. And then the third is those product combination and system offerings that you alluded to upfront. Now as you can imagine, these take a bit longer because you have to develop the products. They didn't exist on September 30, leveraging Delphi's inverter product with BorgWarner's mechanical and rotating electric. We weren't allowed to work together until you close the deal. So now we're in the process of actively pursuing those and along with that, developing the products that actually can support those customer pursuit opportunities. So we're working on those, and we would expect to see some bookings there as we move forward. But I wouldn't lose sight of the other things as well, in terms of just the ability to win inverter business because of what Delphi brought to the table, but also because of what we bring to the table that may have limited Delphi's ability to be successful on a go-forward basis.

Okay. That's helpful. And then if we put the 2 companies together, you recently provided some perspective on outgrowth going forward. And yes, if we could just speak to nearer- and longer-term outgrowth for the combined company on a go-forward basis?

Yes. We were pleased here a month ago when we announced the new backlog and what it implied about outgrowth, that it was continuing to support that mid-4% outgrowth range for that '22 to '24 horizon, which was pretty consistent with the prior guidance that we announced at the time we signed the Delphi transaction. Then what does that mean in terms of longer-term outgrowth for growth prospects? I'm going to defer to Investor Day. So 2 weeks from today, we're actually going to get into that a little bit more, how do we see the journey beyond even 2024 for this company. So maybe you can look forward to hearing more about that at that time. So hopefully, we'll see you there virtually.

We will -- yes, we'll look forward to that. And maybe just to pry a little bit in terms of some clues what that might look like without pinning you down to an actual number. Certainly, part of the dynamic here is the diesel headwinds, which I know are intentional in Delphi's portfolio that you're working through. So maybe if you could just touch on what that looks like in the very near term and how that rolls out in terms of what you've shared with The Street already over the next couple of years?

Yes. I mean the diesel headwind for Delphi Technologies is pretty sizable, and we knew that when we did diligence on the company. Coming out of the diligence, we could see the significant impact that was having on their portfolio. And if you want to dimension the impact, look no further than look back at the progression of that company's margin from the time they became a public company until last year, you can see the real margin erosion. And that's driven by the diesel headwind. So we knew that would continue into '21 and lessen each year as we go forward, but still a headwind as we go through 2021. It's about $140 million revenue headwind, meaning the decline from '20's portfolio into '21. And you mentioned intentional, you're absolutely right. I mean this is driven not just by Delphi moving down with the market. It's really driven by the management team's prior decision there to stop pursuing new European light-duty diesel business. And so it's not that they're moving down with the market. They're just not on any of the replacement programs. So that's about 400 basis points, maybe a little bit less than 400 basis points of negative outgrowth on that legacy Delphi portfolio in 2021 alone. But the good news is, overall, the Delphi portfolio is roughly flat to slightly down from an outgrowth perspective, which just means the rest of the portfolio is largely offsetting that diesel headwind in 2021. And just to take a step back overall, as you think about the market for diesel, we do anticipate we're going to see the market in Europe have another 400 basis points or so decline in diesel, and that's going to be a headwind. That's part of what's embedded in that assumption about legacy Delphi. It also has an impact on the legacy BorgWarner side as well. Because we've been outperforming the market actually from a light diesel perspective since Q3 2019, but we think we're likely to move more in tandem with the market as well. So embedded in our outgrowth is a little bit of that headwind as well, but not as big as what you see on the Delphi technology side.

Okay. And then lastly, if we could talk about the synergy road map overall. And specifically, what are some of the key actions that are in front of us here as we move past the first 100 days post close essentially, which you did in the fourth quarter, and into the first full year for the combined company?

I mean from a synergy perspective, we took a lot of actions. As you saw in the fourth quarter of last year, we generated about $15-or-so million of savings in the quarter, which annualized, call it about $60 million. So as we get into 2021, we expect to take more of those SG&A-focused cost actions, in particular, that get us to about $90 million cumulatively through 2021 in the P&L. But from there, there's still another $85 million or so of P&L benefit that we expect in the subsequent 2 years, '22 and '23. The bulk of what we've seen upfront is really a lot of the SG&A cost-related synergies to achieve. The back end, there's still some more of that as well as some of the purchasing synergies, which just take a little bit longer to execute on. And those tend to be more back-end weighted, which is why there's still more to come in '22 and '23. But so as we go through 2021, what's our focus? Well, it's making sure we bring those synergies home because that allows us to deliver on our near-term financial commitments, the margin guide that we had, the EPS guide, the cash flow guide that we had. We're going to continue to focus in '21 on integrating the Delphi acquisition, which means more than just the cost synergies. It also means executing on the legacy restructuring program they had, bringing that to conclusion over the next 18 months, integrating the cultures of the 2 companies and driving some of those new business wins that we talked about. And then in '21, just taking a step back even beyond Delphi, we're going to continue to make the necessary investments. Whether in that legacy portfolio or in the BorgWarner legacy portfolio, doesn't matter. We're making the incremental net investments necessary to continue to progress the journey and win electrification business.

And then maybe if we could just talk qualitatively for a second about the management. So fourth quarter, you announced the new segments of the business going forward. And yes, I was just curious if we could quickly walk through the leadership perspective there, both in terms of legacy BorgWarner management that is taking new responsibility and Delphi managers that are remaining in roles of responsibility?

Sure. If you look at the 2 companies, we operated with 4 businesses preclosing. Delphi -- they were reported in 2 segments, but there were 4 basic businesses there. Delphi Technology is operated with 4 businesses. When we brought the 2 together, 4 plus 4 equals 6. So there's effectively 6 businesses, but embedded in the 4 segments. And so what does that mean? Well, 2 of the Delphi businesses were folded into existing businesses at BorgWarner. And so those businesses, which were basically the E&E business at Delphi Technologies was folded primarily in the PowerDrive Systems business we have under a legacy BorgWarner leader. And then the powertrain products portfolio was actually folded into 2 of our other business units in the air management segment. So those are under legacy BorgWarner leaders as well. If you then look at the other 2 segments, they're effectively the stand-alone segments that Delphi had before, fuel injection and aftermarket. In the case of fuel injection, we actually parachuted one of our strong up-and-coming leaders to be the president of that business unit, to be the president effectively of that segment. And then from an aftermarket perspective, Alex Ashmore, who runs that business, who was at Delphi Technologies, continues to run that business post closing.

Okay. Great. Well, just wanted to briefly touch on your ICE portfolio in the time that we've got left here. Borg would seem to be well levered, certainly, to more rigorous fuel standards in the U.S. under the Biden administration, which seem to be coming. We don't know exactly what that looks like, but it seems like that's on the horizon here. Can you just talk to us about what that might mean in North America in terms of turbocharger, GDI penetration and similar products?

Yes, absolutely. Yes, I mean we'll ultimately see what those regulations look like. But it's clear that the new administration is likely going to push for more stringent emission standards. I think you're right. And I think that's likely going to drive increasing demand for electrification in the U.S. market over time. But it does leave significant room to grow combustion efficiency products, and our ability to penetrate that market more. Because the demand for efficient products isn't just an EV comment, it's also on the combustion-based engine product. So the penetration for many of our technologies, when you look at the U.S. market, is actually quite a bit below what we see in other parts of the world, especially in Europe. And so when you think -- you referenced turbos, I mean, for us today, turbos in North America, we have less than 40% penetration in terms of the market adoption. If you look at Europe, it's 3/4. So I mean it's roughly half the adoption rate here in North America of what it is in Europe. So I think there's opportunities for products, combustion-based products to be able to see some growth here as we see emission standards getting more stringent, as well as the move toward electrification over the coming years. Both of those are a net positive, we think, for us.

Yes, absolutely. Well, in the time we've got left, I feel like I have to ask about the chip situation currently top-of-mind for investors. Just your latest perspective on that, both in terms of direct impacts and how you're managing those as well as, of course, the indirect impact on production.

Yes. As you can imagine, we're working through those situations with our customers. I mean it's a pretty fluid situation still. And we think it will have a real impact on the year. I mean that's part of the reason we gave the guidance we did. The wider than typical industry production range that we gave, it really reflects some of that uncertainty. We think most of the impact we're going to see is in the first half of the year, late Q1 and into Q2. The question is really going to be, to what extent can the volumes be recovered in the second half of the year? And so the low end of our guidance range right now assumes a little over 1 million unit net impact to the full year production. But it's a fluid situation, and we'll continue to watch it very closely here.

Okay. And then 1 minute left. I suppose I have to ask about capital allocation as well, just sort of the headline there coming out of having announced the AKASOL deal?

Yes. I mean I think you should expect that we are going to continue to look to deploy capital aggressively in support of positioning the portfolio to win in the electrification world. So as you look ahead to 2021 and beyond, you should expect to see more of those types of transactions where we can really improve the positioning of the company. That is absolutely a priority from us. And then from there, we'll assess what our buyback capacity is through the balance of this year and future years depending on what M&A opportunities materialize. But to be clear, our focus is definitely shifting more aggressively to deploying capital to support growth initiatives and positioning in electrification. You see it both in increasing our R&D investments organically, as well as pursuing additional M&A opportunities.

Okay. Well, thank you for that. We'll have to leave it there. That is all the time that we have this morning for the presentation. Thank you, Kevin and Patrick, for joining us. Thanks, everyone, for your time that listened in. The next of our presentations does begin at 11:30 Eastern, and that includes EVBox and Carwale. So goodbye for now, and thanks again for joining us.

Thanks, Luke.