THE SUPPLIER SPEAKS

Big investments in seat acquisitions are starting to pay off

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Contrary to some press reports, Johnson Controls Inc. is not bailing out of the seating business, says Beda Bolzenius, chief of the company's seating operation.

He says his $16.3 billion unit is finally reaping the benefits of its ambitious expansion over the past three years.

In a Jan. 15 interview with Special Correspondent David Sedgwick, Bolzenius explained why JCI made a big bet on seats -- but not interior components or electronics.

Q: Is Johnson Controls' seat division for sale?

A: It is not. It is absolutely core to our business strategy. We are in the lead position in every region in the world. We have more than 30 percent global market share. It's a good business.

What are the major portions of your business?

Seat assembly and components. The just-in-time [seat assembly] has low returns [on sales] but high returns on invested capital. [You have low returns on sales] because you are assembling materials that you buy from other suppliers.

What is your profit margin on just-in-time seat assembly?

It bounces around from 2.5 percent to 3 percent. But that's the nature of the business. If you look at return on invested capital and cash flow, it's a good business.

Is the big money in component production, rather than final seat assembly?

Yes. We recognized that about three years ago. We converted that to our advantage by [pursuing] vertical integration. We started with the acquisition of Keiper, Recaro, Hammerstein and a couple of smaller companies. We spent $1.4 billion.

So now you can make nearly all seat components. Are you happy with the outcome of your expansion?

We filled our plate too full. It was a pretty tough journey.

Was it tough to integrate those businesses into Johnson Controls?

Absolutely.

Did it chew up your management's attention?

It was unbelievable. We bought those businesses because of their technology and their good book of business. Hammerstein, for example, was about to double its sales in the next two years. But it had to be managed.

So you had to close plants and eliminate jobs?

We did so. And our engineers had to get over the "not invented here" attitude. Keiper is the absolute market leader in recliners, latches and rails. They are really good. We used Keiper's design for the rails, and Hammerstein's manufacturing approach.

So you adopted their methods. To do so, I suspect you had to do some head-banging within Johnson Controls.

Exactly. We needed to convince our engineers to go to our customers and say, "We were wrong and they were right, and we are going to change."

I'll bet your engineers were real happy about that.

You can imagine.

Would you do it again?

We didn't have any choice. We would do it again. But this time, I would ask for more patience in financial expectations.

Did those acquisitions drag down your profits?

That's one of the reasons why investors got nervous. The payback did not materialize immediately.

But you had to do it?

At the end of the day, the strategy of vertical integration was absolutely unavoidable. With the money we spent, we put ourselves in the leading position in foam, trim, fabrics, mechanisms and just-in-time assembly. We are absolutely the market leader in all the dimensions that matter. And it's starting to pay off.

Last year, your profit margin was 3.8 percent of sales. You told investors you would reach 5 percent this year and 7 percent in 2018. Are you going to make it?

We reconfirmed that it is our strategic goal for earnings.

Recently JCI sold its HomeLink electronics unit to Gentex for $700 million and its cockpit electronics unit to Visteon for $265 million. Electronics is a fast-growing segment. Why did JCI get out?

It was clear that the electronics [sector] was going to change in a dramatic way. We knew we'd have to throw a couple of billion dollars at it to get in the ballpark with suppliers like Bosch, Denso and Conti. It would have been a real serious investment.

So you didn't want to invest in electronics because your other divisions needed investment?

Exactly. We had to defend our core business, seats. There was no choice -- we had to defend that first. I would have loved to stay in electronics. As everybody knows, we tried to buy Visteon's [electronics unit] at least twice.

Visteon was in bankruptcy proceedings, but they fended you off.

There was a discussion. At the time, we both agreed there were a lot of synergies, a lot of overlap.

So both companies believed they had to get bigger or get out of electronics?

Exactly. We ended up doing it the other way around. The deal made sense. I think it's good for everybody. We had to make a choice.

Now Johnson Controls is exploring options for its $4.2 billion interiors unit. Does that market segment have too much production capacity?

Nobody is happy, and nobody is making the necessary return on capital to finance growth. It's more dramatic in Europe, where you can see a lot more pain. But the structural problems are the same in North America.

Are there too many suppliers?

Overcapacity is an issue. You also have to deal with late design changes, midcycle enhancements, no time to pay off the tooling.

So it's a constant drain on your cash, and you get a low return on investment?

Yes. And you still need to defend yourself against [suppliers] who are trying to push into the market. That business is totally broken. The stress is unbelievable.

Does the interiors business chew up management's attention?

There are no small mistakes anymore. You have to control it tightly.

Are automakers causing problems with late design changes?

If a big executive takes a final look at the interior, the hardness of the seat will change, and the cupholder will change -- all because he says he doesn't like it. "I don't like this, I don't like that." It's the nature of the business, and it all comes up three months before start of production.

What can automakers and suppliers do to fix the interiors segment?

If there is a consolidation in the number of players, it can be a good business. But we cannot continue running it the way we do today.

Didn't Johnson Controls try to cut costs?

We threw a lot of tough managers at that business. We tried different turnarounds. We made a lot of progress, but we were not able to generate the right returns.

When will the company decide what to do with the interiors business?

I think you will see an announcement in the second half of the year.

You can reach David Sedgwick at dsedgwick@crain.com.


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