JCI Countering OEM Trend to Vertical Integration With Strategic Acquisitions

BURSCHEID, Germany – Competition among independent interior suppliers is growing fierce as Honda Motor Co. Ltd., Toyota Motor Corp., Volkswagen AG and Hyundai-Kia Group bring their in-house suppliers with them around the world.

The automotive division of Johnson Controls Inc. is battling back with a strategic decision to become more vertically integrated, itself, says Detlef Juerss, vice president-product development here, after his presentation on active headrests.

Having know-how in all areas of seating, electronics and interiors comes with the experience of making the parts, he says, and it improves JCI’s ability to negotiate. The company had $16.6 billion in revenue last year, of which about $14 billion was in seating and the rest divided between interiors and electronics.

Vertical integration, says Juerss, is a megatrend that is a reversal of the epoch when Visteon Corp., Delphi Corp., Faurecia SA and Magneti-Marelli SpA were completely or partly spun off from their OEMs to become independent suppliers.

This month, JCI completed the purchase of Michel Thierry SA of France, so it can weave its own cloth. The supplier also signed a purchase agreement to take over C. Rob. Hammerstein, which will add high-end seat technology if antitrust authorities agree.

JCI earlier in the year acquired Benoac Fertigteile GmbH, a supplier of slush skins for instrument panels, and Seton Group, which wraps leather around steering wheels and shift knobs.

“We don’t always have to make everything, but the minimum would be 20%,” Juerss says. “We have to have the knowhow to leverage and negotiate. We can’t be No.1 in everything by definition, but we need to have the experience to discuss with suppliers.”

Detlef Juerss, JCI vice president-product development

For example, although Volkswagen has an internal seat maker, JCI supplies seats to the VW Phaeton, for which it makes nearly all of the 800 parts, “down to little rings for the adjuster,” he says. “We don’t make bolts.”

Some 60% of JCI’s interior revenue is purchased goods, mostly raw materials such as steel and resins. Auto makers typically have a 70%-75% average of purchased goods, but Volkswagen, Toyota, Honda and Hyundai-Kia have their own captive seat makers.

Vertical integration is important to these OEMs for the same reason as for JCI, says Juerss: They want to be competent in negotiations when they buy seats from independent suppliers. At Volkswagen, Management Board Chairman MartinWinterkorn and Supervisory Board Chairman Ferdinand Piech “will talk to you about a single little piece.”

The change is that auto makers with captive seat makers used to buy from independents when they moved to new markets, but they are starting to have their own supplier move with them.

And while Juerss currently does not see any Chinese interior suppliers ready to become global, “we are watching closely, asking whether Geely Automobile Co. Ltd. and Chery Automobile Co. Ltd. will bring their partners with them as they expand overseas.”

To grow itself, JCI is focusing on China, where it already has 50-50 joint venture with revenues of $3 billion-4 billion annually.

The potential acquisition of C. Rob. Hammerstein would add several wholly owned factories in China that could supply high-end seating to local production of cars such as the BMW 7-Series and Mercedes-Benz E-Class. JCI in Europe supplies the Mercedes S-Class.

Antitrust issues are involved because C. Rob. Hammerstein brings customers as well as high-end mechanical technology.

“They have technology especially for the power-drive mechanism and fine-seat adjusters,” says Juerss, “and we will see premium seat structures in lower segments as more vehicles are made on a small footprint with high-end interiors.”

For instance, where the typical JCI seat track can click into position every 0.4 ins. (10 mm), the S-Class track is infinitely adjustable.

There still are some technology holes in the JCI interior portfolio that could lead to future acquisitions, Juerss says, such as specialty mechanisms and electric-drive motors. However, the supplier first must integrate the companies it already is acquiring.