Claus Möhlenkamp is candid when he sizes up the disruption that his company faces in the coming era of electrification. It's going to take a hit, acknowledges the CEO of Freudenberg Sealing Technologies. The family-owned German giant, which traces its company roots to 1849, makes about $2.7 billion a year selling products such as engine seals, transmission seals, fuel seals and steering system seals that are crucial to internal combustion engines, but less so to electrified vehicles. But Möhlenkamp, who joined Freudenberg in 1994, is eagerly pursuing a strategic shift into new realms, including battery cell manufacturing. Möhlenkamp, 52, spoke with News Editor Lindsay Chappell and Staff Reporter Richard Truett.
Q: Freudenberg is known as an established company with great stability and little change. But things are changing.
A:We have a disruption that's ongoing, and that's electrification. And we are focused on how to effectively counter the disruption. But I would point out that Freudenberg has been dealing with disruptions ever since it was founded in 1849. We lived through the late stages of the Industrial Revolution and then the rise of mass production, and two world wars and the Great Depression in between. So we have been constantly changing and reinventing ourselves.
Will electrification hurt business?
It could hurt us quite a bit. It's particularly disrupting the sealing industry. Freudenberg is an $11 billion business, and about $2.7 billion of that is in sealing solutions. And of that $2.7 billion, about $1.7 billion is in automotive. We anticipate that 70 percent of that $1.7 billion will go away. That's quite a chunk.
EV batteries still need to be cooled. They still need to be sealed. Why will it go away?
You are correct. There will still be a need for water cooling, and there are many opportunities for us. But it is a simple thing to seal a water-cooling cycle. By comparison, for combustion engines and transmissions, we have 80 or 90 products today, for damper seals, axle seals, transmission seals. In the late stage of electrification, 70 percent of that will ultimately go away.
What will Freudenberg do?
The combustion engines will stay for many years, and it's a very long-term transition. But we can see it. As a family-owned company, we take a very long-term horizon. For us, it doesn't matter whether it goes away in five years or 10 years or 20 years. It will still go away. Whether it's 2040 or 2050, we know that we need to reposition ourselves now. The market race is on.
The technology is just being created now and the opportunity is there. But that window will be open for the next one to five years. By then, we need to have a clear strategy to go forward, with a portfolio and the technologies to go forward.
Will the company stick with the materials it works with, such as rubber, and develop products in those fields?
That a good question. For many years, we have evolved to be in materials science and surface coatings, and that will remain the basis of our technology. Even when you think about making battery cells, it's nothing but mixing chemicals and coatings. We know that technology.
The company has made a significant acquisition — was that a move toward what you're discussing?
Yes. Our plan will include some large acquisitions. To create a portfolio of opportunities, you can't build everything from scratch. You have to have a critical mass.
This year, we made two key acquisitions. One was a fuel cell system technology company. For the other we acquired a large share of Xalt Energy of Midland, Mich., a manufacturer of lithium ion battery cells and battery management systems. We have the option of going up to 100 percent of that.
In battery systems and fuel cell management, you need thermal management and cooling, and we have that expertise. Our question was, is it enough to be in thermal management as we are, or do we need to go even further and produce battery modules, and maybe even systems? Should we become a game changer as opposed to just a path follower?
We were screening the battery market for suitable M&A opportunities. We liked Xalt because it was a technology play focused on very specific segments, such as truck and bus or commercial marine. They make battery cells, battery packs and the software for it.
Did the company consider buying Johnson Controls' battery division, which was for sale?
We didn't. We weren't really considering a battery manufacturer until we came across Xalt.
Where is the fuel cell business really going to occur? In Europe?
The business was active, and then it went dormant. And it seems to have resurfaced fairly strong. There is a revival of fuel cell taking place. We do see it in Europe, with BMW and Audi. And there is a lot in Japan. And as you may know, Honda has a partnership with General Motors in the United States, and we're a technology partner for those.
Is the move into battery technologies the result of customers asking for that? Or will the company now have to prove itself from scratch?
Xalt is well-known to its customers. Of interest to us will be their segments, like Class 6 and Class 8 trucks, delivery trucks and transit buses, but then also very high-end applications like ferries and cruise ships.
We will find additional customers for them. But it will be a very fine walk for us not to oversell as we evolve and develop capacity and resources. It's going to be a very strategic approach to batteries.
Will the company have to invest to grow?
We're clearly opting for an expansion strategy at this point. We'll manage our existing business for 15 or 20 years. And on the other side, we're developing completely new opportunities in batteries and fuel cell technologies. And we're at the very beginning of that. So we have to innovate and invest a lot of money into those businesses.
The operation in Midland, Mich., is a 460,000-square-foot facility, fully equipped with production equipment for up to a 1 gigawatt battery.
That's not big enough. That's only the beginning. We're already talking about how to scale it up to 2 or 3 gigawatts, and then we will have to think further. But we also need to partner with other cell manufacturers. We don't need to build every single cell ourselves.
The value chain we're offering is unique. We are a North American cell maker that's building modules and entire battery packs with management software, with disconnectors and all kinds of features. We will also build entire energy racks for storage solutions.
We don't need to build every single cell, but we'd like to understand it and control it.
Does the company plan to exit any businesses along the way?
No. I mentioned that a lot of our business in combustion engines and transmissions will go away over time. And really, from a revenue point of view, the opportunities coming from batteries and fuel cells are larger by far than what we'll lose. And we also have a good billion-dollar business in seals for general industry application, ranging from aerospace, agriculture, construction and so on. That market will grow much faster than in the past.
What other changes are affecting the company?
Think of steering systems. They went from hydraulic power steering to electric. So the products we made for hydraulic systems are long gone. Engine sizes have decreased, from eight cylinders to six, from six to four, and crankshaft seals are smaller. So changes are already occurring.
But our portfolio is so broad that, with multiple applications even within a traditional powertrain, there are still opportunities and change.
Meanwhile, our technologies are evolving. We will be bringing our Levitex crankshaft seal to market soon. We invented a completely new technology that relies on a gas lubricated mechanical crankshaft seal to create an air cushion. The result is a 95 percent reduction in friction. That will help customers reduce fuel consumption and CO2 output.
Where will that be used?
The first application will come this year on Volkswagen.
That's still a very sound business and we're staying with our customers to provide innovations.
How is all of this change affecting the company's r&d budget?
We've had over our history a constant r&d budget of 3.5 percent. We've decided to drive that up above 4 percent — to 4.5 percent, 4.6 percent. Big investments in r&d pay off. Most of the changes we see are incremental — not radical changes.
What's the outlook for the North American business?
Our volume growth is about 6 percent, which we're happy with. I see a stable business going forward. We'd like that to grow organically.
We have more than 20 plants in North America. We are completely independent in North America and produce locally.
How concerned is Freudenberg about trade friction — not just tariffs but about the possibility of Brexit complications?
The tariffs will probably cause some prices to go up. They will cause some grief and you will have to decide whether to pass the increases on or not. But I don't think it will have a fundamental impact on our business. These issues come and go. We've been dealing with such things for 160 years.
But you know, our philosophy is that we have backup supply all over the world. For one seal in particular, we have six facilities, in China, India, Mexico, Brazil, Europe and the U.S., with exactly the same technology, same tools, completely highly standardized. So if something happens, an earthquake or whatever, we can shift around the volume.
That's a survival strategy for a supplier with high volumes. We produce 5 billion seals a year. We have to have risk management strategies in place. So if Brexit has an impact on what we produce in England, we will have a plant outside of England pick up the production.