Honeywell Transportation Systems says it won nearly half of all new global turbocharger contracts negotiated last year.
"We're the market leader and will continue to be the market leader for the next five years," says Alex Ismail, 45, CEO of the wholly owned unit of Honeywell International Inc.
He predicts the world's turbocharger market will grow about 10 percent this year as automakers seek powerful and efficient powertrains.
Ismail discussed turbochargers and other issues with Industry Editor James B. Treece and Special Correspondent David Sedgwick.
Q: What are your sales projections for this year?
A: We expect Transportation Systems to range between $4.5 billion and $4.7 billion this year, up 8 to 12 percent over 2010. Turbochargers are 60 percent of that.
It's a pretty good story. It's a great spot to be in the automotive industry globally. The turbo revolution, and the turbo massive adoption in the key markets around the world, is happening as we speak. It's available at your dealerships, and we're pretty happy to see momentum picking up in the United States as well.
Who are your biggest customers?
All of them. We work with all of the big companies.
But in terms of size, who are the largest for you?
The Volkswagen Group, Ford, GM, the French companies, Hyundai, Caterpillar.
In Europe, it's mainly the turbodiesels. Is the European market for turbos saturated? Aren't all the diesels turbocharged already?
I wouldn't use saturated. It's growing. Turbo use is up and will be up in 2011. It's still growing.
I'm talking about all of Europe. To highlight western vs. eastern Europe, it's up in western Europe, and will be up probably two to three points this year.
What percentage of your turbo business are light vehicles?
Seventy percent are light vehicles, and 30 percent on- and off-highway and marine applications. At Honeywell, we do it all. We do everything from 0.8 liters to 100-liter engines and everything in between -- in all fuels, segments and regions. We cover probably the broadest and deepest range in the industry.
What is your market share in the light-vehicle segment?
We don't communicate market shares by region or globally.
But if you look at overall turbo [new business] win rate three years out, in dollars, we've won about 47 percent of all industry turbocharger orders -- in all fuels, in all regions, in very small vehicles to off-highway and mining trucks. We are launching about 100 turbos on new vehicles in 2011, globally. And we're working on 500 applications.
We're the market leader and will continue to be the market leader for the next five years.
That includes commercial vehicles, right?
Everything in. We look at all sizes.
And by 2015, most of the applications are already on. We've won $3 billion more business just in 2010.
Where do you need capacity next?
China, eastern Europe and the Americas.
Have you announced any new turbo plants for North America?
I haven't announced anything, other than investing in our existing footprint in Mexicali. And in a [global] market growing about 10 percent a year, we'll adjust that capacity accordingly.
What keeps you awake at night? What do you worry about?
We are very fortunate to be in the sweet spot of the automotive industry. We have very favorable long-term macros, tightening fuel-economy legislations, more stringent emission regulations, more demand for fuel-efficient vehicles. I don't think that's going to go away anytime soon, frankly.
I, as any business leader, am watching the developments of the key markets around the world, whether it's Middle East political challenges or anything else that could affect the global recovery. We watch it very carefully. We obviously worry about any impact on consumer confidence.
But I'd say we're pretty fortunate. Even in a global flattish vehicle production environment -- which we don't have right now, because we're seeing vehicle production up 5 percent globally going forward -- we know that turbo penetration will go up day after day, year after year.
The companies need to downsize engines, and turbos are that magic enabler. We're seeing turbochargers being adopted widely across all markets.
Every supplier we've spoken to this year has been concerned about raw-material inflation. Which commodities are you watching?
We watch commodity inflation and raw-material inflation very closely.
It's no surprise to Honeywell to see inflation on a number of materials. We plan for it and we contract for it. It's something we continue to watch, but frankly, not a surprise to see it up.
We tend to make sure that our contracts, specifically around the big commodity drivers -- nickel, copper and steel -- have coverage for it.
Are you talking about pass-throughs granted to you by your customers for commodity price fluctuations?
Do you offer those same pass-through terms to your suppliers?
It depends. In some areas we do, because those commodities are driven by global market prices and there's a reference that we all adhere to, I'm thinking about nickel, yes. For others, no.
For the most impactful ones, it tends to be LME [London Metal Exchange] driven.
Copper is one everyone whines about.
Copper has less of an impact on us, but it's one that we watch.
Do you hedge?
We tend not to do hedging in general. It's a little bit of a difficult thing to predict, and has anyway a short-term horizon that you can cover. We tend instead to have natural hedging through contracts and our supplier coverage and the combination of the two.
Are you affected by what seems to be a slowdown in China for the first time in years?
There is a slowdown, but you have to go back to China versus the rest of the world. It's still largely going up.
Think about Honeywell being in the sweet spot of the industry. We benefit from vehicle production going up and recovering everywhere in the world -- and China is continuing to grow year over year. In addition to that, we benefit from turbo penetration accelerating around all the key markets.
Turbo penetration goes up. Vehicle production goes up. That's what I describe as being the double lift for Honeywell. We feel that our Chinese business is going to go up in 2011.
What are your revenues in China now?
We don't split it by region.
But you can look at the overall automobile industry in China for us.
In China, you can see that turbo penetration is going to go up by 2 points [to 20 percent], in a growing market. And this reflects already the slowdown you talked about, because we see it growing by 6 percent. That combines light-vehicle and commercial vehicle, on- and off-highway.
What kinds of vehicles are using turbos in China?
Light vehicles using gas for the Chinese OEs as well as the global OEs, and commercial vehicles using diesel. It's going turbo everywhere in China.
Are you building plants in China? Are you expanding?
We may in the future. We haven't made any decisions. We have a very good footprint already in China, having been there for over 15 years. We have over 1,500 engineers based out of Shanghai at one Honeywell engineering center. And we have more than 200 turbo engineers fully dedicated to us.
How many suppliers do you have?
Several hundred globally.
At the depth of the recession, how many were in trouble? A couple dozen?
Less than that. We tend to switch from one to the other. We hedge our bets.
I haven't seen, through the recession, major impact to us driven by our suppliers because we've helped them through the recession. We've been proactively planning and helping our suppliers go through these issues.
Did you help them by accelerating payments?
We've worked with them every day, giving them visibility to our planning. We helped them reprioritize their shipments to us where it mattered and, in some cases, by accelerating payments.