It’s a bit unexpected to find a global corporation on the north banks of Lake Constance, but that is where ZF Friedrichshafen calls home. After purchasing TRW, the U.S.-based aftermarket car parts company, the firm became a giant with sales of about €30 billion ($32.7 billion) this year and 130,000 employees, making it the third-largest German car parts supplier after Stuttgart-based Bosch and Hanover-based Continental.
Chief Executive Officer Stefan Sommer is working to cut labor costs by €60 million in Germany next year while integrating about 65,000 TRW workers. He discussed the task of melding two companies and the impact of Volkswagen’s emissions scandal.
Handelsblatt: Mr. Sommer, how much is ZF feeling the effects of the VW emissions scandal?
Mr. Sommer: Volkswagen is one of our largest customers and, with a couple billions in sales, of tremendous significance. At the moment, our call-off figures are stable, but VW is in the midst of realigning itself. We have to wait to see how things develop. What worries us is the future of the diesel. Without it, the car industry will not meet the coming carbon dioxide goals for climate protection. If current discussions result in customers becoming unsure and buying fewer diesel cars, it would be bad for the whole automotive industry.
How strongly is ZF dependent upon diesel?
On diesel technology, not a cent, but when customers put off buying a car, the result is we deliver fewer steering systems, braking systems or other products.
VW must cut costs significantly. Do you expect increasing price pressure?
The pressure on prices was always high. The scandal won’t do much to significantly change that. Until now, VW has been a very dependable driver of growth for us, everywhere in the world. That justified the price pressure. More deliveries for us means we can take a cut in price.
We must prepare for a variety of scenarios such as for a diesel crisis or a sharp drop in exports to China.
The trickery at VW was surprising. Could something like that happen to ZF?
We have our own corporate culture and, moreover, we installed a whistleblower system years ago employees can use to anonymously point out serious irregularities in the company. So, I think the threat of a similar situation with us is very slight, though I must admit, it’s true I couldn’t swear an oath for each and every one of our 134,000 employees.
Will you reach your goal of €30 billion in sales this year?
Yes, despite the not so easy overall conditions. At the moment, there is a bright side and a dark side. Five to six years ago, analysts declared the supposedly saturated U.S. and European markets were dead, but today, that is precisely where we are growing. At the same time, China is less dynamic, although market development there remains positive.
Are you entering into e-mobility too quickly?
No. We at ZF were the first in Europe to build electric motors for hybrid cars. And, for example, we supply BMW with transmissions for plug-in hybrids.
Meaning cars with both combustion and electric motors can be charged on an electrical outlet?
Beginning January, our newly formed E-Mobility Division will bundle all activities in the corporate group. We already are doing well in e-mobility sales, but haven’t yet reached the profit threshold.
Is the German automotive industry missing out on a lot of value creation by not building batteries in Germany?
No. The market would need to grow immensely for a battery factory to be profitable in Germany. There already is enormous overcapacity in Asia resulting in a no-holds-barred price war. Many companies are heavily subsidized in the U.S. Just look at Tesla. We lack such stimuli in Europe.
What is left for suppliers when electric cars eliminate everything to do with combustion engines?
It is an opportunity for suppliers. The whole mechatronics, which combines mechanical engineering with electrical engineering, remains. Added to that are e-motors, for example, in the wheel hubs. And the transmission, steering or brakes are being made electrical. The objective is the fully electric vehicle, which we showed with our Advanced Urban Vehicle at the IAA motor show in Frankfurt. ZF has plans for all that and will deliver.
Why doesn’t ZF build its own electric car? You don’t want to compete with your customers?
That’s a good point, but we aren’t planning anything like that. Our expertise is in development and production of innovative and competitive components and supporting our customers in all markets. For them, we are bringing the mechanical and the digital together.
In ten years, no one will talk only about chassis, engines or transmissions.
You announced you are investing in the three future fields: more efficient drivetrains, driving security and automatic driving. What will happen to the current three important areas: chassis, engine and transmission?
The future-oriented fields named are just beginning to contribute to our sales in the lower single-digit percentage range. For that reason, our core business will remain essential in the long term. But I agree with you. In ten years, no one will talk only about chassis, engines or transmissions. That’s why I won’t rule out that one of these days we will only have three or four divisions instead of the current six.
Do you now have everything onboard after buying TRW?
Almost everything, but certainly, we still need more software developers for assisted driving, for instance. For that we bought the software specialists from the engineering services company HDLE and thus strengthened the development of algorithms for camera systems.
How is the integration of TRW in ZF proceeding?
The honeymoon is over. To keep up the image, we moved into an apartment together and are now discussing who gets how much space in the bathroom and how the toothpaste tube has to be to squeezed.
When will the integration be complete?
We gave ourselves three to five years. However, organizational units with direct customer benefits, or immediate cost efficiency, are being more quickly integrated and combined. We already have successfully carried it out with procurement. On the other hand, integration is very complex and expensive with IT systems. There, we need more time.
Daimler also allowed itself a lot time after the takeover of Chrysler in 1998 and failed as a result. Are you certain that won’t happen to you?
Yes, because it’s a matter of an acquisition and not a merger. Both companies, however, have differing styles of management. TRW is more hierarchically organized. At ZF, small business units also have broad business freedom. For that reason, we need to do a lot of communication and use persuasive effort. We are proceeding by the principle, “The best of both worlds.” Nobody gets anything imposed on them. After all, both companies were successful in their own way.
Have you managed to cut costs already?
Yes, we’re making good progress. The new procurement organization, for example, will bring us in €1 billion over the next three years.
Car sales in China are growing more slowly than before. VW is ailing. What about ZF?
We are not dissatisfied, but are keeping a close eye on the situation. We expect growth in the passenger car market in China of 3 to 5 percent. What could present problems for us is the shifting demand to small and compact cars, since we are strongly represented in the premium segment. A strong shift to small cars produced locally by Chinese carmakers would hit us pretty hard.
Because state-subsidized Chinese producers rely more strongly on their countrymen?
Yes. That’s why we are working to develop more contact with Chinese carmakers, but that’s a long, hard process. We already have supplier relations with Chinese producers. We currently are waiting for a decision on the production of a nine-speed automatic transmission.
How do you plan to improve the competitiveness of German production sites?
There are negotiations with worker representatives at various production sites. And already, there partly are solutions, for example, in Ahrweiler, Eitorf and Schweinfurt. We have been producing simple shock absorbers until now, but now we are converting to valves for active shock absorbers. The new E-Mobility-Division is going to Schweinfurt, which will make the location viable for the future. We will produce the simple shock absorbers more cheaply abroad.
And at headquarters in Friedrichshafen?
Here, as well, talks are in progress with the works council. We must prepare for a variety of scenarios such as for a diesel crisis or a sharp drop in exports to China. That would have strong repercussions on German production sites, since we build the transmissions for German premium and luxury vehicles exported China there.
This interview originally appeared in German business weekly WirthschaftsWoche. To contact the author: email@example.com.