When seeking insight on the industry's transformation, it helps to speak with Thomas Schmall.

The head of VW Group Components is methodically restructuring the company's 35-billion-euro parts business, which is at the epicenter of the massive shift to electrified cars.

An example of this is the battery-powered Volkswagen ID3, which will be on the road next summer. The Golf-sized hatchback still uses a lot of conventional components but its powertrain is vastly different.

As a result, Schmall's components division has had to adjust, starting with VW's powertrain factory in Salzgitter, Germany. The plant now produces electric components and is starting a pilot for small-series battery cell production.

The next major step will be the addition of a 16-gigawatt-hour battery cell factory in Salzgitter. The joint venture plant with Northvolt is set to open as early as 2023.

"The biggest transformation we will see will be at Salzgitter, and I believe it will serve as an example for the entire German auto industry," he told Automotive News Europe, citing three major challenges facing his company.

"We must keep our engines viable by making them Euro 7 compliant, adjust production capacity in Europe due to the shift away from diesel to gasoline, and ramp up production of electric drivetrains," he said.

Formed in January after a carve-out process that took more than three years to complete, VW Group Components incorporates nearly 80,000 employees across 47 global locations building everything from driveshafts and dampers to front axles and steering columns.

The unit's main task, however, has been building more than 10 million combustion engines and transmissions a year, a volume that will have to be completely wound down by around 2040, without causing a sustained hit to earnings.

According to sources, VW Group Components earns, on average, a margin of about 4 percent to 5 percent depending on the product. A tenth of the workforce is already slated to be eliminated in the next four years to protect profitability, but a labor pact in Germany means layoffs at its high-wage sites in the country are not an option through the next decade.

Schmall declined to confirm VW Group Components' margin but said his aim remains to achieve the strategic target set by his bosses: 6 percent.

While he predicted suppliers making the shift to EVs would find it difficult to boost returns above 10 percent, he said VW could rely on scale effects to help it through the transition.

"By 2025, our site in Kassel plans to manufacture up to 1 million electric drivetrains, making us one of the largest suppliers in the market. With those kinds of volumes you shape the global competitive landscape," he said.