CELLE, Germany - Continental AG has a few product holes in its blueprint to offer complete chassis management, but the company's shopping list is being written.
The German supplier already makes tires, brake systems and suspension components. Mechanical steering components, adjustable shock absorbers and electronics are capabilities Continental seeks to add in its bid to control vehicle ride dynamics. Acquisition and joint ventures are possible avenues to gain expertise in those areas, company leaders said.
Planning is under way, and the company has had talks with potential partners, but those negotiations are at a confidential level, Continental Chairman Stephan Kessel said. But the company's top executive revealed a key direction for him.
'If I could do only one acquisition, I would have electronics on the top list as a priority,' Kessel said.
With braking products such as antilock brakes and electronic stability control, Continental already has electronics expertise. But more is necessary to optimize crucial elements of a chassis system using data from suspension, steering, braking and tire systems. The company especially is looking for more sensor capability, Kessel said, as well as other electronics software and hardware.
The strategy is sound, and Continental is a company ready to succeed with it even in light of the apparent downturn in the automotive industry, one automotive consultant said. Demand for high-tech electronics and system integration is growing, offering higher margins for suppliers that comply, said Scott Upham, president of Providata Automotive in Ann Arbor, Mich.
'That is the key to doing this whole thing - getting the electronics portion right,' Upham said. 'They are poised to make a major entrance into total ride control and integrate steering, suspension, the corner modules and braking technology.'
Continental already is providing some corner modules. Although other competitors have expertise in several of the chassis areas Continental is targeting - notably TRW Inc. and Robert Bosch GmbH - Continental remains the only member of the group with its own tire unit.
TRW, however, is ahead of Continental in becoming a complete chassis supplier, Upham said. Its $7 billion acquisition of LucasVarity in early 1999 gave the Cleveland company braking systems, and it already had steering and suspension businesses.
Even so, TRW, which also has substantial aerospace business, hasn't packaged those chassis components quite as aggressively as Continental, said Upham, a former TRW employee. TRW executives could decide to raise cash by selling its steering and suspension division and invest the proceeds elsewhere. That business has performed marginally of late for TRW but would be attractive to a company such as Continental, Upham said.
Tenneco Automotive Inc.'s shock absorber unit is another chassis business that may be on the auction block as a possible target for Continental, he said.
On the electronics side, a partnership with a company such as Motorola could give Continental the engineering horsepower it needs, Upham said. The purchase of a smaller electronics player - a company such as Temic Automotive, for instance - is another possibility.
To complete its bid to become a complete chassis integrator, Continental also would need an axle partner of some sort, Upham said. But that's not a likely move, as the axle isn't the most crucial element in controlling ride dynamics. It also is a lower-margin business dominated by such heavyweights as American Axle & Manufacturing Holdings Inc. and Dana Corp.
Continental's ability to pull off its strategy depends on the rapidly changing economic environment in the supplier industry. With automakers slashing production and seeking ever-larger price breaks from material providers, suppliers are taking hits on their balance sheets and on Wall Street.
Continental's Kessel acknowledged the uncertainty in the market, especially in North America, where DaimlerChrysler wants price cuts of 15 percent over two years. DaimlerChrysler is Continental's largest customer in North America.
Nonetheless, Continental still plans to vault North American sales to $1.7 billion by 2002. Continental is No. 38 on Automotive News' ranking of original equipment parts suppliers in North America with $1.1 billion in 1999 sales.
The bulk of the growth is grounded in electronic braking systems such as ABS and stability control, the latter of which has a low installation rate. So even if vehicle production falls in a weakened economy, demand for high-tech, high-margin systems will grow, Kessel said.
With a strong product base keeping its bottom line robust, Continental may be able to take advantage of other suppliers' misfortunes. As stock prices fall but need for cash rises, it will be easier for healthy suppliers to cherrypick the competition. Delphi Automotive Systems Corp. already has acknowledged it plans to shed unidentified business operations that are not market leaders.
Said Upham: 'I think there could be a shakeout with some of the suppliers, and I think a company like Continental could be a major player in picking up the pieces that fit their strategy at a bargain price.'