Building Walls No Solution, ZF CEO Says

FRIEDRICHSHAFEN, Germany – Without ever referring to Donald Trump by name, ZF CEO Stefan Sommer this week is calling out the U.S. president for advocating protectionist trade policies and for proposing relaxed environmental regulations.

Journalists from around the world gathered here at the company’s new headquarters for ZF’s annual press conference and financial report for 2016. In the first full year after ZF acquired TRW in May 2015, sales rose 21% to €35.1 billion ($37.7 billion), and net profits after taxes were €924 million ($992 million), down from €1 billion ($1.07 billion) in 2015.

When asked if the U.K.’s application to exit the European Union will force ZF to relocate any production facilities, Sommer says “protectionist tendencies” on the part of governments can result in trade barriers that lead to job relocations.

“This means that protectionism destroys value and cost structures that are established… and this weakens us in the global competition we have with Asia, for example,” he says. “We have major disadvantages due to this protectionist tendency.”

A vocal critic of international trade deals that he says will cost American jobs, Trump has withdrawn the U.S. from the Trans-Pacific Partnership with Asia, and he also opposes the Transatlantic Trade and Investment Partnership (TTIP) with Europe.

“The idea with TTIP was that in saturated economies of North America and Europe, we try to pull down these barriers, that our economic and technological power enables us to be competitive in comparison to Asia,” Sommer says.

“If Europe is weakened in its performance and if obstacles are built, then in the long run we will lose added-value, lose jobs. They will be lost to Asia.”

With regard to the U.K., Sommer says ZF will “respond to the political framework that will happen with Brexit,” but that the company does not have a massive presence in Great Britain.

However, in North America, ZF has 43 locations, including 29 in the U.S., 11 in Mexico and three in Canada. Trump has advocated tariffs on imports, arguing that products should be manufactured in the U.S. instead, and has pushed for a wall to stop the influx of illegal aliens from Mexico.

“Looking at the U.S., our supply volume from Mexico to the U.S. or from Europe to the U.S., then that would have a major impact if things are decided in the short run,” Sommer says. “All these people who are trying to build walls, they will be the losers in the end.”

Germany’s “very negative experience” with its own wall, which divided the country politically, should remind people that a wall is no solution, he says. It was torn down in 1989.

“Since then, Germany has developed quite well. Currently, I cannot understand why anyone in the world wherever he is tries to raise up walls,” Sommer tells journalists. “With this German example, everyone should have learned it’s not beneficial.”

Despite Trump’s threats of punitive tariffs on imports, especially from Mexico, Sommer says ZF will continue its growth strategy in North America, where the company employs 32,000 people – two thirds of them in Mexico and the rest in the U.S. A few months ago, ZF facilities in the U.S. had about 800 job openings, including 500 in Michigan. Many jobs have gone unfilled.

The locations of its plants, whether in North America, Asia, South America or Europe, is dictated by automaker customers, who generally want suppliers near their vehicle assembly facilities, Sommer says.

He says Trump is misguided in arguing international trade agreements cost American jobs. “If you look into the development of all economies in the world, free trade, taking away barriers, enlarging markets – (they) have good positive developments that are beneficial for everyone in those markets.

“The bigger free trade area would in the end also be beneficial for the U.S. and for all other countries. It’s not just an opinion. This is what you can see as a matter of fact from all economic developments in the world.”

Eight-speed hybrid transmission, integrating electric motor in place of torque converter, assembled in Saarbrücken.

In response to another question about the future of ZF’s massive transmission plant in Saarbrücken, Germany, Sommer says it remains an important location for production of the 8HP 8-speed automatic, which began in 2009. By 2015, Saarbrücken and a similar U.S. plant in Gray Court, SC, combined to manufacture more than 2.6 million units.

Two years ago, Saarbrücken also began producing a hybrid version of this transmission with an integrated electric motor (used in BMW and Audi vehicles), but most of the plant volume is dedicated to less-complex, purely mechanical automatics. Electrical components for the hybrid transmissions are assembled elsewhere and shipped to Saarbrücken.

“At Saarbrücken, we will still have to find some solutions for them to be fit for the future,” Sommer says. “We want to have a large degree of compatibility between traditional mild hybrids and plug-in hybrids. That is the core task for Saarbrücken.”

On the other hand, he says the market for non-hybrid mechanical transmissions might remain healthy if Trump continues dismantling environmental regulations.

“As we’ve seen in the U.S., they are just taking a step back when it comes to environmental requirements, so I think conventional non-electric technology’s going to survive longer in the U.S. but Europe is very different,” Sommer says, referring to a growing number of municipalities attempting to limit internal-combustion engines in city centers.

Owned by two foundations, ZF finished 2016 with €2 billion ($2.1 billion) in free cashflow, which will result in profit-sharing checks of €1,133 ($1,216) for each employee in Germany, plus €15 ($16) for each year of service.

Sommer forecasts ZF closing out 2017 with €36 billion ($38.7 billion) in revenues, EBITDA margin exceeding 10% and free cashflow of more than €1 billion.

He sees modest growth in Europe. “What we can see currently in terms of risks coming from Brexit and insecure political developments is not materializing yet in our business environment,” he says. “Actually, we’re expecting this will not have an impact in 2017. Of course, we are very worried about the protectionist tendencies in the economic areas.”

Elsewhere, Sommer foresees Asia Pacific continuing to be a strong market for ZF, led by China’s growth, and continued stress in South America due to a long-term economic crisis there.

In North America, despite political uncertainty, Sommer says he sees a silver lining: Demand has been brisk for construction machinery, which will be necessary to carry out Trump’s aggressive plans to upgrade roads and bridges nationwide. ZF supplies components for earth movers and other industrial equipment expected to be affected.

[email protected]