rubber to the road

Continental splits into three units amid shifts in auto industry

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More than horsepower. Source: Reuters

Auto supplier Continental has undergone numerous transformations since its founding 147 years ago as a producer of soft rubber and bicycle tires, but now the company is launching what it calls the biggest restructuring in its history to keep pace with the industry’s revolution.

The Frankfurt-listed maker of tires, powertrains, interior electronics, chassis components and sensors will split into three separate companies under a holding. One of these, “Powertrain” – focused on injection systems, engine controls, hybrid and electric motors – will float a minority stake on the stock exchange next year. “Continental Rubber,” focused on the traditional tire business, may also seek a stock listing in the future. The third company, “Automotive,” will combine traditional auto parts with the autonomous driving components of the future.

The drive systems business makes most of its money by selling parts used in gasoline and diesel-powered vehicles. The shift to electric cars could decimate demand for these motors in the long run. Diesel engines have already fallen in popularity in Europe since VW’s diesel emissions scandal emerged in 2015.

“Continental sees that the end of the combustion motor has come and is pulling the plug in time,” said Ferdinand Dudenhöffer, head of automotive research at the University of Duisburg-Essen. “Anyone who goes into this transformation process with old structures will have a ball and chain that keeps them from running.”

Continental CEO Elmar Degenhart, who has been at the helm since 2009, was a bit more diplomatic, saying in a statement: “In the coming decade and beyond, the automotive industry will undergo the greatest and most profound change in its 130-year history. We are approaching this change early on and proactively.”

19 p15 Restructuring Continental-01

The company, with €44 billion ($51 billion) in annual sales and the world’s second-largest auto supplier after German rival Bosch, has hinted at the restructuring for some time. Non-executive directors will approve the move next week and the workforce is on board after receiving guarantees on locations and staffing. The Schaeffler family, which controls 46 percent of Continental’s stock, is expected to support the restructuring. Proceeds from the stock flotations will be plowed into investment into autonomous driving, the chief executive said.

Continental’s announcement follows a general trend in the automotive industry as automakers and suppliers look at decentralizing their integrated operations to adapt more quickly to changes in the industry. US rival Delphi last year split into two, spinning off future-oriented products like information technology, electrification and autonomous driving into Aptiv, and leaving the classic powertrain business in Delphi. VW spun off its Scania and MAN truckmaking units as “Traton,” and Mercedes-maker Daimler is contemplating a split into “Mercedes-Benz Cars” and “Daimler Trucks.”

The Continental move adds to the pressure on Bosch, the world’s biggest auto supplier, to wean itself away from its reliance on combustion engine technology and invest in future-oriented production. Bosch recently decided not to undertake the investment for producing battery cells for electric cars because margins are already too thin in what has become a commodity business. Continental’s Powertrain business might start producing solid state battery cells, but it will only decide on the potential investment no earlier than 2021.

Stock market expert Marc Tüngler, head of the DSW retail shareholder association, questions whether all this splitting up is necessarily beneficial to investors. “A group with three or four mainstays is significantly less vulnerable, as weaknesses and strengths within the group balance each other out,” he said. “This natural balancing-out is eliminated when the corporate divisions go their own way.”

Mr. Tüngler also questioned whether the spin-off trend could withstand an economic downturn. “This move is buoyed by low interest rates and cheap money, which are pushing valuations to new highs. If market sentiment would turn, the opportunity to pull off these types of deals could quickly vanish.”

Markus Fasse specializes in aviation and automobile industry news and works from Handelsblatt’s Munich office. Franz Hubik is an automotive reporter for Handelsblatt.  Martin-Werner Buchenau reports from Stuttgart as Handelsblatt’s Baden-Württemberg correspondent and closely follows Bosch. Darrell Delamaide adapted this article into English for Handelsblatt Global. To contact the authors: fasse@handelsblatt.combuchenau@handelsblatt.com, hubik@handelsblatt.comd.delamaide@extern.handelsblatt.com.

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