Change Is Good, Necessary, Conti Chief Says

Special Coverage

Convergence

DETROIT – Sounding at times like a presidential candidate stumping for office, the chairman of Continental AG’s executive board focused on change in his keynote speech this week to the Convergence Transportation Electronics Conference here.

Change is the only constant facing the auto industry today, Karl-Thomas Neumann says, referring to evolving business relationships, stricter environmental and safety requirements, steep economic challenges, advancing technology and emerging markets as examples.

But these challenges represent opportunities for suppliers and auto makers, alike. Neumann says the need to reduce fuel consumption and achieve zero emissions is a positive development for Continental, an expert in electronics.

“In this area, we have the strongest growth, and we are very optimistic about the future,” Neumann says. Beyond electronics, Continental is a major tire supplier, and its low-rolling resistance tires can improve fuel economy by up to 5%, he says.

Neumann urges the industry to stay focused on great products and improving operations, rather than being consumed by anxiety about the economy.

“We think change is good and change is necessary,” he says. “Yes, this crisis is bad. But it’s also an opportunity, because this crisis will impose change. We are confident we will come out stronger.”

One of the greatest opportunities is in emerging automotive markets such as India, which will launch the ground-breaking $2,500 Tata Nano in the coming months.

Karl-Thomas Neumann, chairman of Continental’s executive board

Neumann says he and other auto executives attended a special reception in India with Tata Motors Ltd. Chairman Ratan Tata to preview the vehicle, and that most executives sneered at it as exceedingly cheap, uncomfortable and unsafe.

But Neumann says most executives fail to grasp what the Nano represents in a country that desperately needs basic transportation for millions of people who cannot afford expensive or even moderately priced cars.

“I also don’t like the car,” Neumann says as he flashes an image on the screen behind him of an Indian father driving a small motor scooter, with five children on board, dressed in their school uniforms.

“But I don’t drive my family on a motorcycle to school every morning,” he says. “The Nano is much safer than a motorcycle.”

Because of this contradiction, Neumann says auto executives in the established markets of Western Europe, North America and Japan must rethink what constitutes a great car in a world that allows for regional preferences and varying price points.

“It shows how difficult it is for all of us to be successful in this (Indian) market,” he says. “We think a car should have a certain standard of safety, a certain standard of testing, a certain standard of quality. But people just need to drive their families safely to school and work in an environment that is entirely different from what we face every day.”

Within Continental, which became the world’s fourth-largest auto supplier after its 2007 acquisition of Siemens VDO Automotive, Neumann is witnessing change daily as the two large companies continue to mesh their corporate cultures. It has not been easy.

“I’m convinced great companies have strong cultures,” he tells Ward’s after his speech. “Siemens VDO was a great company, and so is Continental.”

When the integration of the two companies began, Neumann says the goal was not to impose Continental’s culture across the Siemens VDO operations.

“Because, in some aspects, they are better than we are,” he says. “We wanted to mingle that and get the best of both worlds.”

He compares the integration to the jarring sensation when two trains couple together; eventually the united machine is moving smoothly in the same direction.

Overall, Neumann describes the integration as “going well,” while admitting there are “operational issues, specifically in the area of powertrain.”

Asked about potential consolidation of manufacturing facilities, Neumann tells Ward’s, “We have more than 200 facilities in automotive. It’s too many.” He declines to discuss specific facilities or regions for consolidation.

Still, Neumann says Continental ultimately may need more capacity, particularly in low-cost regions of the world. He says a smaller percentage of Siemens VDO’s manufacturing facilities are in low-cost countries, compared with Continental.

As he told Ward’s a year ago during the Frankfurt auto show, one of the greatest assets of the new Continental is an abundance of engineers (13,500 in Europe, 2,500 in North America and 2,000 in Asia). Neumann wants to leverage the expertise of them all.

“We will not consolidate totally our engineering sites,” he says. “To move our engineers, we will lose too many of them.”

On the consolidation front, Neumann says the number of auto suppliers globally has plummeted from 35,000 in the 1980s to about 4,500 today, and that number will continue to decline by 200 companies annually for the foreseeable future.

Although certain OEM purchasing chiefs in Detroit express a preference for smaller suppliers focused on a few core competencies, Neumann says parts makers must be big and diverse to meet the needs of auto makers ramping up global-vehicle architectures.

“First, you cannot work for only one OEM,” he says. “Second, if you work for any of these big OEMs, they go everywhere. You have to have your factories globally, because (OEMs) expect you to be already there when they make plans to build a factory in Russia or somewhere.”

These global strategies require massive investments in technology as well. “We can’t afford to develop a direct-injection technology for one OEM,” he says. “We can’t even afford in some areas to develop technology ourselves. I’m convinced only the larger suppliers are capable of dealing with this.”

As consolidation talks continue among auto makers, especially with regard to Chrysler LLC and General Motors Corp., Neumann says he is not concerned about the implications for Continental.

“We are a very large supplier to both those companies, and we have very good relationships with both of them,” he says. “Now, if they would come together, possibly some of our programs would be canceled, but other programs would come up.”

A merger between the two – or between Chrysler and another OEM – should boost volumes for Continental. “In the longer run, I’m absolutely convinced it’s good for us,” he says.

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