After two profit warnings, the boss of Continental has told his top managers they had better shape up. Elmar Degenhart sent a letter, in German and English, to the top 400 executives at the world’s second-largest maker of car parts, co-signed by his seven board members. “Our situation is very serious,” he said.
The family-controlled tiremaker – based in Hanover, Germany and listed in Frankfurt – has seen a rough year. More than six of the company’s 27 divisions have failed to meet their profit targets. And last month, the company reduced its outlook for sales and margins, due to higher cost of developing technologies, lower sales, and warranties.
Conti, as it’s known in Germany, makes tires, powertrains, interior electronics, chassis components and sensors, and supplies to the likes of VW, BMW as well as Google and Tesla. It’s seen numerous changes since it was founded 147 years ago, but the years ahead are complicated as it transitions from being a maker of tires to a maker of technologies, offering gadgets like cameras for autonomous driving and networking systems for e-vehicles. They don’t come cheap, and Conti is playing catch-up with rivals such as Delphi which embraced digital change earlier.
This summer, the company announced further structural changes, with plans to split into three separate companies under a holding. But what’s really raising the stakes is the planned listing of parts of the company. Powertrain – where injection systems, engine controls, hybrid and electric motors are made – will float a minority stake on the stock exchange next year. Another division, Continental Rubber, which makes traditional tires, could also seek a listing.
But two profit warnings – in April and August – are leading investors to question the company’s ability to forecast financial targets. That sends “an alarming signal” to stakeholders, said Mr. Degenhart. He told his managers that if they didn’t get the business under control, they would face job cuts. Conti has already lost a third of its market value this year, some €1 billion.
An engineer, Mr. Degenhart has been running the company for the past nine years, but he’s struggling with some divisions resisting change. Nonetheless, experts criticized his approach, saying he was blaming his management cadre rather than dealing with problems himself. “Is that how he’s going to motivate people?” said Manuel René Theisen, an expert in corporate governance. “The only thing that’s missing is his resignation.”
Mr. Degenhart’s contract is up for renewal at the next meeting of the supervisory board at the end of the month. Sources within the company, and the Schäfer family that owns the majority of shares, said the two profit warnings won’t damage his chances, though the timing could be better. And apparently, the letter was a wake-up call; the company is “galvanized,” sources told Handelsblatt.
It will need to be. Conti’s to-do list includes establishing Powertrain as a separate unit by the end of a year, an important step ahead of a listing, though experts don’t expect that before the second half of 2019. And then there’s winning enough trust with investors to keep them interested in buying the shares, otherwise the listing would have to be called off.
Tellingly, investors welcomed the boss’ letter. “It shows managers how serious the challenges are and how badly he wants to improve the situation,” said Christian von Engelbrechten, a funds manager at Fidelity International.
Markus Fasse and Stefan Menzel cover the auto industry for Handelsblatt. Dieter Fockenbrock, Robert Landgraf, Anke Rezmer and Ulf Sommer contributed to this article. Allison Williams adapted it into English. To contact the authors: firstname.lastname@example.org, email@example.com