PARIS – Visteon Corp.’s spin-off of its European steering and half-shaft business provides a look at the forces behind the wave of private-equity investment that is reshaping the automotive supply chain.

On May 1, private investors – organized in The Netherlands as Special Situations Venture Partners II L.P. – bought four Visteon Tedrive Holding B.V. plants – three in Europe and one in Brazil.

These include Tedrive Germany GmbH in Dueren, Germany; Tedrive Steering GmbH in Wuelfrath, Germany; Tedrive Poland Sp.zo.o. in Praszka, Poland; and Tedrive Brazil Ltda. in Sao Paulo.

“We have an investment partner familiar with the auto industry and an interest in long-term investment; a partner who knows that creating value takes time. Our timeframe is five to seven or eight years to develop this company.”

SSVP got a business that did $600 million in sales in 2006, with an operating profit of $35 million, for just $90 million in cash and $40 million in liabilities related to pensions.

While it appears to be an exceptionally good deal for Tedrive, there is a downside: a 3-year sales slump.

“This is a non-core operation for us, predominantly high-cost country located, with 2,400 employees, 1,600 of those in Germany,” Visteon’s CEO Michael Johnston told analysts at the time of the sale in May.

The operation faces “substantially declining revenue and profitability as you look out in 2008, 2009, 2010,” he said. “We had not been awarded a couple of follow-on programs, so it was going to substantially decline.”

Competitors such as ZF Friedrichshafen AG, TRW Automotive GmbH and GKN plc have replaced Visteon on some upcoming car programs.

“Our customers did not award Visteon with new business ever since Visteon declared chassis as non-core,” says Tom Schultz, financial director of Tedrive Holding. “If you become a non-core entity under a U.S.-based supplier, you know that the investment money is going to go to core product lines.”

Research and development suffered at Visteon’s chassis technical centers. As a result, Tedrive says its hydraulic power-steering gear is refined, but it is behind competitors in developing electric power steering.

“The market trend is certainly towards electric steering,” says Thomas Schmidt, manager of the steering gear operation in Wulfrath, Germany. “We have also a stake in that. We have developed an e-system that is almost ready to go.”

Competitors such as TRW and JTEKT Corp. already are selling steering systems in which electric motors assist drivers by applying torque to steering columns or pinion gears.

While traditional hydraulic systems constantly drain a little energy from the engine from the belt that powers the steering pump, electric motors draw energy only when required, and they are lighter in weight.

Tedrive has two immediate responses to its situation. For the short term, it will target vehicles that are too heavy to use electric steering and also less-developed markets.

“We have high-end hydraulic steering and high-volume production,” says Schmidt, “and we have some opportunities in the hydraulic market. With the growing car production in east Europe, where the electronic steering is not as advanced, we see opportunities.”

In addition, Tedrive is marketing hydraulic portions of electric-hydraulic hybrid systems that use an electric motor to power the hydraulic pump, a system that heavier cars can use to reduce the energy drain of traditional hydraulic power steering.

For the mid-term, Tedrive wants to beef up its R&D. It is looking at engineering partnerships, as well as some key people.

“We’ve got to invest in people in the R&D side,” says Schultz. “We are in discussions now with people to join the company. We are in a phase where we are changing from a big to a midsize company that is supposed to be flexible and fast. We are examining carefully what we need to fill the gaps that we have.”

Tedrive is not empty of ideas. In 2006, it won an innovation award from the German steel industry for developing a steel tube housing for hydraulic steering systems that cost and weigh less than typical aluminum housings, handle higher pressures and reduce complexity.

The product – now on the road in the Ford Mondeo and S-Max and in some Volvo Cars and Land Rover vehicles – was developed with engineering partner Schmitter Chassis GmbH.

Another quality Tedrive has carried over from Visteon is production efficiency. The Wulfrath factory saw record production of 1.5 million steering gears in 2006 and a record week of 43,000 steering gears since Tedrive took control.

“The steering business is the most stable right now,” says Schultz. “It is a solid running entity, with single digit parts-per-million rates. Half-shafts in Poland is very stable too.”

New ownership has made a difference that already is being felt.

“We at Tedrive experience right now a different attitude from the customer side,” Schultz says. “The customers recognize (our) commitment to invest in process and product innovation. In Europe and South America, customers are approaching us, our people on the sales side and the engineering side.

“After two years of being held back from the customer, we are asking for opportunities; we are penetrating now with our limited resources; and it is paying back with requests for quotes,” he adds. “It is a long way from that to get a purchase order, but customers are enthusiastic. We created a new competitor on the supply side.”

In steering gears, Tedrive faces strong competition from ZF, TRW and J-Tekt, “but we are ready to take that on,” he says. “In half shafts, the competition is (Japan’s) GKN and NTN Corp., and here we see definitely that the customer is looking for a second or third alternative to the major players.”

Tedrive’s longer-term strategy is to enlarge its geographic footprint through additional acquisitions or partnerships in Asia and East Europe and to develop a solid business. While SSVP hasn’t said so, the general plan of private-equity investors is to rebuild a business and then float it on the stock market at a substantial profit.

“It is important that the market knows that there is a new company out there,” says Schultz.