Continental employees
The supplier is investing more in e-mobility.
(Photo: Bloomberg)
Dusseldorf Less turnover, less profit and rising debt – Continental has already experienced better times. The worldwide decline in automobile production is dehumanizing the Dax Group.
Sales in the second quarter fell by one percent to 11.3 billion euros, adjusted EBIT by almost 25 percent to 868 million euros, resulting in a margin decline from 10.2 to 7.8 percent. Debt rose by 1.4 per cent to around 5.7 billion euros as at 30 June 2019.
However sobering the numbers are, surprisingly they do not come. On July 22, Continental had already issued a profit warning and adjusted its business forecasts. The surprise lies in the announcement of a “portfolio adjustment”. Hiding behind this technical word is Continental’s long-term farewell to the internal combustion engine, which is now becoming reality with the publication of the figures for the second quarter at the Hanover-based supplier.
In order to stem the change in the automotive industry and the resulting decline in demand for internal combustion engines, plans Continentalto discontinue the business with hydraulic components. This includes the production of injectors for petrol and diesel engines.
In addition, Continental is reviewing the exhaust after-treatment and fuel-extraction components business. In contrast, the Group’s propulsion division, which will operate under the name Vitesco Technologies in the future, intends to focus even more strongly on electromobility in the future.
For a long time, Continental had been reluctant to turn to the new drive technology. The Group repeatedly pointed to the increasingly important electromobility and digitization and also invested something in these areas. However, the business with components for internal combustion engines continued to be the central building block of the group. That changes now clearly.
For pure combustion components, only selective growth opportunities would open up in the future, according to a statement from the Group. That’s why Continental is now focusing its investments on e-mobility. Great hopes rest on Continental’s newly developed 48-volt mild-hybrid drive, which can prove to be a guarantee of success in the age of drive change in the auto industry.
However, observers criticize that Continental overslept for too long. It has been known for years that electromobility will play an increasingly important role. The political pressure from Europe regarding the stricter exhaust gas specifications alone would have been reason enough to begin electrification of the product portfolio much earlier. In the meantime, the economic conditions have worsened.
The US-led trade war with China causes great uncertainty, as does the weakening global auto market. “Car production is already falling for the fourth quarter in a row. That’s why we can already speak of a worldwide recession in the automotive industry, “says Continental CFO Wolfgang Schäfer. And a recovery of the automotive market is not in sight.
At this very time, the supplier is pushing ahead with a cost-intensive restructuring of the group structure towards a holding company and at the same time has to invest in the three megatrends of the automotive industry – autonomous, connected and electric driving.
Without savings, this is an impossible task. “We are reacting to the declining market with strict cost discipline and increasing our competitiveness,” says Continental’s CEO Elmar Degenhart, The company management had already discussed with the supervisory board the strategy, how this should succeed. According to a spokesman, talks with employee representatives would begin promptly.
In contrast to the major Conti shareholder Schaeffler or competitor Bosch the corporation does not speak of job cuts. “The majority of our customers are located in Europe, North America and China. If we have to take action in any way, that usually affects all three regions, “says CFO Schäfer. According to this interpretation, German locations would also be affected.
Jobs are at stake
Group Works Council Hasan Allak, on the other hand, does not expect job losses Germany, “In contrast to the competition, Continental has not yet clearly announced its job cuts,” says Allak. “I do not expect that in the case of job cuts jobs at German sites will be affected.”
According to Allak, the works council had alerted the group management at a very early stage to the personnel challenges that are now emerging as a result of the change in the automotive industry. “Works council and corporate management would have needed stable structures to take employees through this disruptive change through training and education,” says Allak.
In the transitional period, however, Continental can rely on a well-filled cash register. The Group has cash and cash equivalents of 4.8 billion euros available. Frank Schwope of the NordLB Therefore, the company sees itself as well prepared for times of crisis.
And the still stable tire business is also putting a bit of pressure on Continental. In contrast to the automotive sector, where sales in the second quarter declined by 3.1 percent to 6.8 billion euros, revenues in the Rubber Group increased by 2.5 percent to 4.5 billion euros. Nevertheless, Continental must press on the pace, not to lose the connection to the electrified competition.
For the future Vitesco CEO Andreas Wolf, “the future is undoubtedly electric.” The transformation phase will initially be characterized by a drive mix. Here, the 48-volt hybrid drive will play a central role. Market researchers from IHS Markit expect that the number of these drives worldwide will increase by almost 530 percent between 2020 and 2030.
With VW Conti has already found a major customer. The Hanoverians are in the field of 48-volt drive system supplier of VW, The Wolfsburg resort in the new Golf, which will come at the end of the year on the market, back on Continentals 48-volt drive.
Continental also has great hopes for a newly developed 48-volt mild-hybrid drive, the supplier at his techshow in Laatzen at the beginning of July presented. With it, vehicles can be moved electrically up to 90 kilometers per hour. So far it has not been possible to electrically drive tons of hybrid vehicles with such low voltages.
The advantage of mild hybrid drives over full hybrids is the low cost. These are crucial if suppliers like Continental want to earn money with electromobility. So far, the e-mobility for the Dax Group is a loss. “The field of e-mobility makes no profit contribution,” says Schäfer.
But the 60-year-old sees a turnaround: “We had hoped for many years for significant growth in the field of e-mobility, which then did not come,” he says. “But now we see that customers are asking more and more components and systems for electric drives and that growth momentum is increasing.”
At the same time, however, Conti CEO Elmar Degenhart decides, as in the case of cell production for lithium-ion batteries, to dispense with the production of solid-state battery cells – the next generation of batteries. “With the solid state technology, which will probably be available only after 2030, Continental will no longer be able to develop an attractive business model,” says Conti CEO Degenhart.
Another reason could be the high investment requirement. Volkswagen is currently investing tens of billions to set up its own cell production. Continental can not afford such sums against the background of the planned cost savings.
On the contrary: “Planned investments are being put to the test. However, we are sticking to construction projects that have already begun, such as new plants, “says Schäfer. “Overall, however, we will adjust our investment ratio. So far, this should be over eight percent. Now we are planning with a quota just under eight percent. “
More: Jobs are canceled, works closed: Suppliers such as Schaeffler, Mahle or Eisenmann are responding to the slack in the auto industry with tough measures.