Modularity is the key to improving the cost-variety trade-off in product development. To achieve the functional independency and structural independency of modules, a method of clustering components to identify modules based on functional and structural analysis was presented. Two stages were included in the method. In the first stage the products’ function was analyzed to determine the primary level of modules. Then the objective function for modules identifying was formulated to achieve functional independency of modules. Finally the genetic algorithm was used to solve the combinatorial optimization problem in modules identifying to form the primary modules of products. In the second stage the cohesion degree of modules and the coupling degree between modules were analyzed. Based on this structural analysis the modular scheme was refined according to the thinking of structural independency. A case study on the gear reducer was conducted to illustrate the validity of the presented method.