STUTTGART -- ZF Friedrichshafen, the German driveline and chassis giant, is feeling the strain.
Operating margins, which fell to 2 percent last year from the previous year's 2.8 percent, are far short of the level that Paul Ballmeier, executive vice president of finance and IT, regards as necessary for a technology-led Tier 1 supplier.
"The fact that these figures are unsatisfactory is quite clear, but in this year and in the past year we invested very heavily knowing that the number was low," he said. "It should really be in the region of at least a 5 percent return."
ZF's margins were under attack on several fronts. The aggressive r&d and investment program of the past two years continues this year. This will combine with anticipated flat sales this year, increasing competitive and pricing pressures, and demand from customers for better service and products.
"ZF's sales in 2003 are expected to remain at last year's levels, but a slight decline can't be ruled out," Chief Executive Siegfried Goll warned at the company's annual press conference in Stuttgart.
The challenge for ZF is to lift margins and sales in 2004-2005. Unless it can persuade vehicle manufacturers to pay higher prices - a similar challenge faced by Bosch - other measures are key to higher profits.
Productivity and cost-cutting initiatives are under way, and some reduction in the work force appears inevitable.
The modular production system used at Saarbrücken, Germany, is likely to be extended. A pilot facility near Passau, Germany, employs new working patterns agreed with trade unions. It could point to a more extensive overhaul of manufacturing.
But ZF is also looking to reduce its purchasing bill, which amounted to E4.7 billion in 2002. It anticipates tough pricing pressure on materials and components in 2003 due to changes in legislation and rises in steel prices.
But Goll added, "In light of the current turbulent economic conditions, we are basically satisfied with ZF group performance in Q1 2003."
The challenges facing ZF were evident in the 2002 financial results. Sales were E9.17 billion, a 3 percent increase over the previous year. But operating profit margins slumped for the second year running to 2 percent, or E180 million.
ZF is spending E650 million on investments this year, just E50 million less than in 2002.
According to Goll, "This will require a higher level of productivity flanked by the cost-cutting program we have already initiated. Our technological leadership position will be the key to ZF's success in the coming years."
Construction at ZF's new facility at the Chicago supplier manufacturing campus in the USA is complete. Deliveries of front and rear axle systems for the Ford Freestyle and Ford Five Hundred will boost sales in 2004.
Investment at five of ZF's 22 North American facilities - $700 million in 2002-04 - is expected to drive NAFTA sales to more than $3 billion in 2004. The region will contribute 30 percent of global sales in 2005.
Growth in Europe will be driven by the 6-speed automatic transmission range, especially in high-torque applications, transaxles for SUVs, electrical steering systems, CVTs and complete front and rear axle modules, including for the forthcoming BMW X3.
A new active steering system developed by ZF Lenksysteme, the ZF/Bosch joint venture, is featured on the new BMW 5 Series. "This makes an advantageous step forward in driving comfort and safety, comparable to that of Bosch's ESP in the brake sector," says ZF.
Ballmeier remains relaxed about the company's overall financial depth. "If you look at our balance sheet, we have net debt of under E200 million, and that in a company with a turnover of E9 billion. It is more of a mini-debt, so financially we are quite healthy."