Valeo SA, a fast-growing star in the European automotive industry in the 1990s, stumbled with the acquisition of ITT Industries' U.S.-based electrical component business in 1999.
To help fix the problem, Valeo promoted Thierry Morin to CEO from CFO in 2001.
Morin has reorganized the French supplier into "domains" of related products and restructured many of the company's development, production and purchasing functions.
Morin expects big things from the domains as they bundle more components to provide customers what he calls a complete package. Morin also expects half of Valeo's growth during the next three to four years to come from acquisitions.
Morin shared his views on these topics and more with Automotive News Europe Correspondent Edmund Chew.
How does Valeo generate technology competitively?
In 2001, we decided that when it comes to technology, we have three paths to follow. The first is to generate more from our teams. Therefore we've allocated a bigger portion of the expenses to longer-term projects, while we generated productivity improvements on the shorter-term projects. We've really increased the productivity of our labs.
Secondly, we created some partnerships in order to be what I call a technology importer. Many technologies are very interesting but do not exist in the automotive industry, while they exist in aerospace or elsewhere. We've created eight or nine partnerships that have given us the ability to generate products such as lane-departure warning systems or blind-spot detection systems.
Point three is acquisitions. The acquisition of JCEED (Johnson Controls Engine Electronics Department), which we now call Valeo Engine Management Systems, or VEMS, really cements our powertrain efficiency domain.
The idea behind this acquisition was not to increase sales. The idea is really that the technology that these engineers have is critical to our powertrain efficiency domain.
And last, but not least, we now have complete control of the air conditioning loop and a very global air conditioning business with the acquisition of 100 percent of Zexel Valeo.
What's the likely split between organic growth and growth through acquisitions in the next three or four years?
I would like it to be 50-50.
Are there enough potential targets ?
If you look at VEMS (which was part of Sagem SA's automotive electronics business before Johnson Controls bought it in 2001), it had been on the market twice. The first time Valeo was not in a position to buy. But the second time it went on the market, Valeo decided to go for it. There will be more opportunities.
Will suppliers consolidate more?
The Tier 1 supplier base is not concentrated enough. We need to have between five and 10 very large suppliers.
There are too many 500 million euro to 1 billion euro suppliers. They do not have the necessary resources, and, therefore, it is important that they join larger groups.
How seriously do you take the rumors of a leveraged buyout of Valeo?
The rumors are permanent. I joined Valeo in 1989, and I don't remember how many times we have been talked about as a target in the years since, but there has been no LBO (leveraged buyout). When there are rumors like that, it probably means that the company is rather healthy. It also means that the (stock) market has not recognized it.
Why hasn't the market recognized Valeo's recovery?
I believe the market has been frustrated with what happened between 1998 and 2001. It takes time for them to forget mistakes and poor results.
I hope that through the new strategy, the differentiation through technology, the fact that sales will increase, and the fact that now our results are back above average, the market will realize that Valeo is a true blue chip.
Is your share buyback part of a strategy to avoid a leveraged buyout?
No, not at all. It's to reward shareholders. I always look at the balance sheet, at the profit and loss statement and at the treasury statements to try to optimize returns for shareholders.
For the last three years Valeo has been through heavy restructuring, and this was expensive. The expense is now going to diminish year after year.
We have started making acquisitions, but I feel that there is some cash left, and I decided that it was fair to send the shareholders who have participated in the (restructuring) during the last four years a positive message.
How will the rising cost of raw materials affect your business this year?
We anticipate that the raw materials impact in 2005 will be nearly double what it was in 2004.
We believe that our role is to find solutions, offsetting the cost increase (by switching) from more expensive to cheaper materials and utilizing less material. But we believe that the price per ton is a given, and that our clients have to pay for the price per ton.
Do carmakers accept the passed-on price increases?
They can't deny the logic of what I have just said, but it's more difficult when it comes to negotiating with them.
What will be your most exciting growth area in the next few years?
We will have three exciting sectors.
First, Valeo will be able to bundle engine cooling plus transmissions, plus the starters and alternators, and now the electronic control ability, to offer an optimization of the powertrain. This is an area where we were not present before.
Secondly, in terms of driving assistance, Valeo is No. 1 worldwide in lighting, No. 1 worldwide in wipers and No. 1 worldwide in park assist. We have very good positions, so synergies are possible across the product lines.
We believe that the headlamps are the obvious place to look for placing radars or front sensors, for example. So you will see more and more content there. Already, dynamic bending lights using bi-xenon have far more content than the lighting systems of the past and provide twice as much visibility.
Lastly, we believe that in air conditioning, with the inclusion now of our compressor business, plus developments on CO2 and developments to reduce the size of air conditioning units, we will have some striking products to offer to the market in the next 18 months.
When will we see a financial jump?
We are expecting that 2005 will be a year during which, relative to the market, we should start to see positive movement.
There has been talk from suppliers about the potential demand for active safety features. But carmakers aren't sure customers will pay the cost.
Car owners today want three things: they want safer cars, they want more comfortable cars, and they want cars that are more environmentally friendly. Valeo has, therefore, adapted its organization toward those three items.
Safety at Valeo has become driving assistance; environmental friendliness means powertrain efficiency; and comfort means comfort enhancement. And these three areas contribute to each other. Valeo park assist will have an impact on emissions because the car will park the first time, thus saving emissions. Once people have driven a car with park assist, or a blind-spot detection system, it becomes a comfort feature as well, and it is very difficult for them to change their habits.
How important are hybrids for you?
You have three types of hybrids: you have full hybrids, such as Prius; you have the mild hybrid; and you have the micro hybrid. Valeo started with the micro hybrid with our stop-start system, which is on the Citroen C3. This product can already save up to 12 percent of fuel and reduce emissions. And we will move up from there to bigger machines. We will have a third-generation product, which will be on the driveline, capable of putting the car in motion for a certain period of time; a kind of mild hybrid.
Today we have not engaged ourselves strongly with the full hybrid. We have developments on that, but (they are) further down the road.
Hybridization is not the only thing. We believe that the story is not yet over for the thermal engine.
Imagine, for example, a thermal, camless engine with electromagnetic valves, plus stop-start, plus the ultimate cooling of Valeo.
You could have an engine with comparable power delivery to (current cars on) the road that would save 50 percent on current fuel consumption. That is better than a full hybrid.
