Continental AG aims to be a major player in hybrid technology.
The German tire and electronics supplier is focusing on integrating the electric motor into the gearbox. It has won a contract with Volkswagen to supply hybrid components, and has development contracts with three other carmakers in Europe.
In 2005 sales rose 9.8 percent to 13.84 billion euros, or about $16.77 billion at current exchange rates, compared with the year before. Operating income jumped 30.2 percent to $1.81 billion. Return on sales rose to 10.9 percent last year from 9.2 percent the year before.
In February, Continental CEO Manfred Wennemer said acquisitions would continue to be a top priority this year. He kept his word this month when the supplier announced plans to acquire the automotive unit of Motorola Inc. for $1 billion. The purchase enhances Continental's expertise in telematics.
Wennemer spoke with Automotive News Europe Staff Correspondent Edmund Chew about Continental's growth plans.
Your margins must make you a target of every purchasing manager looking to cut costs. How do you defend against that pressure?
As I already mentioned, with highly innovative products and superb quality, we will succeed. And there is another factor one shouldn't underestimate: trust. Continental is a renowned and highly trusted company with a long track record, which provides an excellent basis for lasting business relations. And that doesn't cost any extra.
What are the problems causing slower growth for your chassis and powertrain products, electric drives and body electronics? Analysts have suggested that it is because of the company's historically high dependence on Mercedes-Benz. Is this the case? Does the order pipeline suggest a return to faster growth here?
We bought the electronics business from DaimlerChrysler several years ago, and we still have a lot of business with this important customer. On the other hand, we have been able to win new contracts with other OEMs, giving us the broad customer base we have today. It is also correct that several of these contracts are still in the development phase and have not been put into production yet.
So the business we have been awarded today will generate our sales tomorrow. We are still very optimistic about our Temic (automotive electronics) business.
How is your partnership on hybrids with ZF Friedrichshafen developing?
In the half-year that we have been cooperating, we have been able to win a contract for series production for Volkswagen, and we have development contracts with three other OEMs in Europe. We are fairly confident that these will also lead to series production orders.
You plan to produce a range of hybrids. Will any of your products differ from what your competitors provide?
We will have what we call the power hybrid. We feel this puts ZF and us in an excellent position. The power hybrid has a high-performance electric motor that gives the car a lot of power. Sports-car manufacturers, for example, will view the fun factor as the key advantage, followed by fuel efficiency.
Do the Japanese suppliers have a big lead in hybrids?
There is no doubt that the Japanese have an advantage based on their experience, and they have the advantage in technology. Next to the Japanese, though, we are the only company today to supply small volumes of mild hybrids. So we have some experience, but I would not go so far as to say that it is in any way comparable to what they do in Japan.
On the other hand, we have a very good cost position with regard to the individual components we produce, so we can definitely compete on the cost side. I am also convinced that with our broad-range setup, our work with Volkswagen and the three other development contracts, we can benefit from the experience gained in different projects and feed that experience back to our partners when we come to series production.
No one else is working in exactly the same direction as we are - namely, to integrate the electric motor into the gearbox. I think we have a clear technology advantage here.
What are you doing to reduce the cost of hybrids?
It is very difficult to make money today in hybrids. We see cost as being one of the most important factors determining the speed of hybrid penetration. The good news is that we have been able to cut by 50 percent the cost of the next generation of what we call simulator brake actuation compared with what we offer today.
Here, the experience curve - meaning the more we make, the more we understand the cost - is working in our favor and allows us to drive cost down. By cooperating with ZF, we can combine the relatively small volume at the beginning, which puts us in a position to bring the cost down much faster.
I am convinced that to gain widespread acceptance of hybrids, we need to halve the cost over the next seven to eight years.
Because of the increased electrical capacity of the vehicle, other technologies will be needed in hybrid cars. Which other business areas within Continental will get a push from hybrids?
At Continental, there are two areas that stand to benefit: brakes and electronics. One very important module required in a hybrid is the component that decides when to use the mechanical braking system and when the electric motor is used for regenerative braking. In our electronics division, we anticipate additional business in batteries and energy-control units.
Any other opportunities?
Yes. Today we still have the 12-volt system in cars. With hybrids you can easily have 42 volts and more on board. When you consider steer-by-wire and brake-by-wire systems, there is a whole array of possible new products in hybrid cars. Hybrids present us with a completely new situation. But we still have to see how widely hybrids are going to be used.
What innovation will have the biggest impact on your tire sales in the next five years?
We expect that run-flat systems will continue to grow in the market. We can't give any specific forecasts, but the number of vehicle models with such systems will undoubtedly rise.
How big is the tire-pressure-monitoring-system business for you? How fast do you expect to grow in this area?
This is not a big business yet. We have various products on the market that detect pressure losses or potential tire failure. Continental's Automotive Systems division sells direct and indirect measuring systems. Indirect systems are based on four-wheel EBS (electronic braking system) technology, while direct systems depend on separate systems based on pressure sensors. In the tire divisions, we have products for run-flat systems. So we participate in the fast-growing markets with products for all customer requirements.
A few years ago you talked a lot about potential synergies between tires and brakes. Other suppliers such as Robert Bosch and Michelin have been more skeptical. Is there a big business emerging in this area?
Synergies are definitely possible for chassis and brake control, together with the tires. If the two systems were better adapted to each other, it would be possible to shorten braking distance even further and, in the case of winter tires, achieve extra grip. We currently have projects that are working on these synergies. As soon as such systems are ready for the market, we will be approaching our partners in the original-equipment sector.
Automakers don't like suppliers to have too much power. Since you also are a leading brake supplier, do you believe that area of your business will grow more slowly than other segments in the future?
We don't think we have too much power. We are one of the leading brake suppliers, but the competition is tough. We fight for each project, and the pressure to reduce cost is powerful, too. Our customers do, however, need suppliers with high technological know-how and with a global presence. There are enormous opportunities to participate in growing markets such as Asia. Take ABS and ESC (electronic stability control). There are regions in the world where the installation rate of these systems is near zero, or the systems are not in use at all. But all automotive markets need the same safety equipment we have in Europe. The markets for these systems are growing.
You have had a great run with electronic stability control. Where is that going to go?
That trend will continue. In 2004, we produced 750,000 sets for the U.S., in 2005 it was 1.5 million, and we are pretty confident that we shall top 2.5 million this year.
In 2010, we will see an ESC penetration rate of about 70 percent in North America. By then, North America will be more or less on par with the European market.
What other opportunities are there in North America for Continental?
We see electronics that are outside the hybrid area as a significant growth market. In this field, we are very strong in Europe, and we can boast having top technology expertise. But our position in the U.S. and in Asia is still weak.
Our low-cost production sites in Mexico and China give us excellent cost positions that enable us to gain share and benefit from the integration of active and passive safety. With our braking system, we are very strong in active safety, and we see high growth potential for us in passive safety.
Some of your major competitors in North America are suffering financially. Have more automakers shown an interest in working with Continental lately because they fear some of their partners won't be able to honor their contracts?
I think it is hard for us to quantify any extra interest, but it helps that people are saying, "OK, if I go with Continental, there is a good chance that they are going to be around until the platform end-of-life."
If you do not have a sound financial basis, it is very difficult to invest in r&d and new production facilities. So far we have invested more than 100 million euros ($121.2 million) in hybrids, and we continue to invest heavily in this area.
When do you expect to see a breakthrough in Continental's sales in Asia? What are the key steps leading to that?
We are the major player for brakes in China. Our sales are increasing in other parts of Asia as well, but there is more to come for all four of our divisions. For example, we recently opened a new headquarters for the region in Shanghai. This year we will decide on a greenfield project for a new tire plant in China. In Japan we will expand our r&d capacities for the Automotive Systems division and build a new center in Yokohama. All in all, we are well on our way.