Johnson Controls Inc., the world's biggest producer of automotive seats, is looking for a way out of that business. Huh? What? Why?
With annual sales of $22 billion, JCI's seating and interior trim units have achieved economies of scale that rivals can't match. But the auto industry goes through boom-and-bust cycles that can wreak havoc on a company's cash flow. And the seat business needs serious capital investment to maintain growth.
Moreover, automakers have quietly transformed the way they buy seats -- driving down costs and leaving seat makers with modest profit margins.
The auto industry always has been cyclical, of course, but conventional wisdom has it that top dogs make good money. An exit by the world's biggest automotive seat maker may force the industry to rethink that assumption.
Last week, JCI CEO Alex Molinaroli said he would explore "strategic options" for the company's $17.5 billion seat operation and also its $4.5 billion interiors unit, which was repackaged last year as a joint venture. In plain English, they're for sale.
In an interview with Automotive News, Molinaroli cited those boom-and-bust cycles and the need for capital investment.
Molinaroli prefers to invest in nonautomotive ventures. The seat unit "competes well in the businesses it is in," Molinaroli said. "To continue to be a leader, they need a source of capital."
Although he didn't say so, Molinaroli could have cited a third reason for bailing out: The profit margin on a seat is nothing to brag about.
In recent years, the seating business has been transformed. Automakers now prefer to make bulk purchases of individual parts. Different suppliers deliver the cushion foam, recliners, seat tracks or frames, while yet another supplier handles final assembly.
Automakers thus enjoy lower prices, but it also ensures that seat makers won't have much money left over to invest in new products.
"Seats are capital-intensive," said an industry insider, who asked not to be identified because he does business with seat makers. "If you start laser welding, or switch from a simple, cheap steel to dual-phase steel, you've got to constantly reinvent your manufacturing processes."