Special Coverage

Frankfurt Auto Show

FRANKFURT – Employees at Siemens VDO Automotive may be concerned about their jobs as Continental AG prepares to acquire the company later this year, but Siemens engineers, in particular, have little to worry about, Continental’s automotive chief tells Ward’s.

Karl-Thomas Neumann, executive board member responsible for Continental’s Automotive Systems division, says his company has about 7,000 engineers globally and looks forward to integrating Siemens VDO’s additional 12,000.

“So we end up with 19,000 engineers, and I think we need that,” Neumann says after a press conference here at the Frankfurt auto show. “We are hiring engineers all over the place, so I am very happy that we have the (additional) engineers.”

Still, Neumann makes no assurances to employees concerned about their future, including those at Continental. As the two companies are consolidated, he says Continental jobs could be eliminated as well.

“The Conti employees are also concerned because they are under the same pressures,” he says.

But the lack of significant overlap between each company’s product portfolio suggests massive dismantling may not be necessary because they complement each other.

“It is an extension and a completion of the portfolio of our company,” Neumann says of the addition of Siemens VDO’s extensive electronics expertise.

On the administrative side, Neumann admits “it’s a little bit more difficult” to keep the Siemens VDO management intact. “But we know there will be restructuring,” he says.

And Neumann says his company is learning more about restructuring activities that have been ongoing at Siemens VDO.

For instance, Siemens has been downsizing a plant in London, ON, Canada, that produces climate control and engine cooling motors. Some 140 manufacturing jobs have been eliminated as the business is being transferred to Asia, Mexico and Europe. Some 300 engineers remain at the London location.

Also this year, Siemens has transferred instrument cluster manufacturing from the electronics plant it recently acquired in Huntsville, AL, to Guadalajara, Mexico.

“But in the end, I think we will be able to create a growth story, and I think the Siemens and Continental employees start to understand that,” he says. “Nevertheless, every individual is concerned. I think if you’re an engineer, you shouldn’t be concerned. And in most places, you should not be concerned.”

The new company will be among the world’s largest automotive suppliers, with annual sales of €24.9 billion ($34.1 billion) and some 140,000 employees worldwide.

Neumann says he is particularly excited to gain access to Siemens VDO’s automotive technical center in Regensburg, Germany, where engineers are engaged in advanced research and development projects. Siemens VDO spent some €913 million ($1.3 billion) on R&D in the last fiscal year, or 9.5% of sales.

“Siemens holds a lot of fascination,” he says. “I’ve seen great product, great technology, great people, great engineers. We really want to build something from that. We don’t want to destroy it.”

Consolidating will allow the leaner (but much larger) organization to cope more effectively with component pricing pressures, particularly in the constrained North American market.

“I’m absolutely sure that should happen because we will clean up the portfolio,” Neumann says. “We will have synergies in administration, in many other processes. So I’m absolutely sure it will improve our cost position.”

He says Continental Automotive currently is profitable in North America. Another major European supplier, ZF Friedrichshafen AG, says at the Frankfurt show it has been losing money on its automotive operations in North America the past three years.

“We won’t say exactly where, but it’s a fact we are profitable (in North America),” Neumann says. “We have taken some serious measures, some reductions in North America and a week of closing certain factories.”

Continental will reap massive benefits, he says, with new U.S. legislation that mandates anti-skid electronic stability control on all new vehicles by 2012. “This is a big bonanza for us,” he says.

Continental Chairman Manfred Wennemer says he expects the deal to purchase Siemens VDO for €11.4 billion ($15.6 billion) to close by the end of the year. Antitrust authorities in Europe still have not conferred their blessing

Continental has secured an €11 billion ($15.2 billion) fixed loan and a revolving credit line of €2.5 billion ($3.4 billion), “which ensures us sufficient latitude to maneuver,” Wennemer says.

Although some suppliers have struggled under the weight of too much debt to pursue acquisitions, Neumann says this will not be a problem for Continental.

“We are not over-leveraged,” he says. “Our debt is still in a good relationship to our capital.”

Continental says it expects the acquisition to contribute positively to earnings as soon as 2008, before restructuring and integration costs are factored in.

That cash flow will allow Continental to pay off its debts within “a few years,” Neumann says.

On the product front, Neumann is keeping an open mind in relation to the electric “wedge” brake concept that Siemens VDO has been shopping to global auto makers. In May, Neumann told Ward’s the industry needs electric brakes but that he did not think the wedge brake was the answer.

However, Neumann says here that Continental engineers have been pursuing an electric brake that is derived from conventional technology (in which Continental is heavily entrenched), while Siemens VDO remains committed to the wedge.

“So we have set up an independent team to look at this because, if I ask my engineers, they tell me exactly what they think. And if I ask the Siemens engineers, they also know exactly what the right solution is,” he says. “We’ll have an independent team analyze the pros and cons of the technology and come to a conclusion.”

Neumann says he does not want to “kill” the wedge brake program.

“I want to really understand it and have the best engineers look at it – unbiased engineers – to really give me a very clear picture,” he says.

Whatever technology path Continental chooses, Neumann says he wants all the involved engineers to be convinced it is the correct route. “We want to do electric braking,” he says.