Big-league player

We examine how German tyre maker Continental has transformed itself into a top automotive systems maker.

At the beginning of this year the German manufacturing group Continental almost doubled in size with the acquisition of a large division belonging to Siemens, Europe's biggest engineering firm. Now, just as Continental is working through the practicalities of this friendly merger, it is facing a takeover bid from a comparatively small German bearings maker, Schaeffler.

Continental has been here before. In the early 1990s it fought off a takeover approach from premium tyre maker Pirelli. In those days - and right up until this year - Continental was best known for its tyres. But the design and production of automotive electronic systems has also been an important part of the business and, with the acquisition of the former Siemens division, Continental has consolidated itself as a key automotive electronics maker.

Whether or not Continental fends off or caves in to a merger with Schaeffler is uncertain at time of writing. But what clearly makes Continental an attractive catch is its success in massively growing the group in recent years. The process began ten years ago with the buy-up of auto brake systems specialist Teves from its German parent ITT. Two years later came the acquisition of German car giant Daimler's electronics business. Then, in 2006, Continental bought the auto electronics activities of US group Motorola.

With Germany-based Siemens last year undergoing its own restructuring to focus on three activities - industrial, energy and healthcare - the opportunity arose for Continental to snap up Siemens' unwanted 'VDO' automotive services division. The acquisition has now taken Continental from a €16bn- turnover group, prior to the merger, to an expected €26bn-plus business this year.

Continental insists that the acquisition of VDO is not itself leading to major job losses. While around 2,000 jobs are expected to be shed worldwide in 2009, most of these are not the result of the merger but of Continental's drive for greater efficiencies across the group and from restructuring its production and logistics operations globally, the company says.

The restructuring stems, not surprisingly, from a need to shift production from high-cost to low-cost countries - which means from Western to Eastern Europe and to Asia and India.

Continental this year has been developing a global production 'footprint' that will determine the details of the plant restructuring. According to Henner Cnyrim, who oversees production and logistics globally for Continental's automotive business (which includes the merged VDO unit), the changes are about both following the customer and simplifying the production structure across 90 factories worldwide.

"The priority is to be very close to the customer [geographically] and to optimise the supply chain," Cnyrim says. "This means being close to customers' factories. At the same time, we want to reduce the complexity within plants.

"We're now a new organisation comprising three different areas - we bought Motorola, and now have Siemens, and we have to bring everything together. This is the driver for developing our new global footprint. We want to reduce the complexity and bring all these businesses together."

Following the merger with VDO, the automotive arm had a total of 18 'business units' reflecting the different activities and customers served by the division. Both the Continental and Siemens automotive systems plants were structured along similar lines to operate a number of such business units within a single factory. This means, says Cnyrim, that a single plant can be made up of a number of sub-plants, or "plants within a plant".

Taking it global

The new strategy aims to 'optimise' this customer-focused production and logistics structure - which means streamlining it to an optimum size. For Cynrim, this means a maximum of five business units per plant. Such a factory would employ around 1,500 people.

Continental has yet to fully work out what this means in terms of plant restructuring globally. The plant 'footprint' plan is a five-year programme. But Cnyrim insists that there will not be large-scale closures of plants.

"There's not very much duplication with Siemens VDO," he says. "We have overlapping businesses only in auto body and security [systems]. Conti was centred more on the brake [systems] business - Siemens was not in this business - and in transmissions. [Before the merger] we also served different customers to Siemens. There's not very much overlap between the two. "

Cnyrim says the new merged auto electronics business is growing, so this will take up the slack from where there is some duplication between the Continental and VDO activities.

Customer focus

But, ultimately, the key driver for change is Continental's automotive customers, who are locating plants in Eastern Europe, Asia and India in order to cut production costs and to be close to these growing markets.

"That means we'll build new factories in Eastern Europe and in Asia, which means the percentage of manufacturing will be more in low-cost countries compared to high-cost ones," Cynrim explains. "When you look into the plants, there are some products that can be easily moved because they are not so complex and can be produced in low-cost countries. We are evaluating this at the moment."

But Continental does have concrete plans to open new plants in key emerging markets. It already has auto systems operations in China, India, Malaysia, the Philippines, Thailand, Mexico, Brazil and South Korea. This summer it opened a new plant in India and one in China. It is also planning further plants in Thailand and Costa Rica.

In Eastern Europe, Continental has auto systems plants in Romania, Hungary, Slovakia and the Czech Republic. New plants are planned for Eastern Europe but, says Cnyrim, he has still to decide which are the best locations. "We are looking at the availability of educated people and the manufacturing costs. These costs are rising in the Czech Republic and Hungary, and so we're looking for opportunities in Bulgaria and Ukraine. "

Like its production facilities, Continental's auto business is structuring its logistics operations into regional 'clusters' around the globe. Cnyrim says: "[The former] Motorola business had a different structure. It had electronic systems plants in Mexico and China and shipped these systems to North America.

"We'll relocate those products to plants where we are closer to the customer - producing in the area, for the area. We want to improve the supply chains not only for our OEM [original equipment manufacturing] customers but also for incoming materials. [As with production] the first priority is to be very close to the customer and to optimise the supply chain."

Continental's new production and logistics footprint for its much-enlarged automotive systems business is, in effect, killing two birds with one stone: meshing together what were once three separate entities - Continental, Motorola and VDO - and following the trend of forming global clusters to be located in the low-cost areas favoured by auto manufacturers.

In addition, the automotive arm is also developing its manufacturing technology systems, which have a structure of 'decentralised centralisation'. Cnyrim explains: "Globally we have a manufacturing technology process and we are using this to develop our manufacturing systems. [This structure means that] we have people in Germany who are coordinating the processes implemented around the world - implemented by specialists in Asia, Europe, North America, and so on. This means we can do manufacturing development work in one place in the world and develop these technologies everywhere else."

In effect the technology network overlaps and links with the production and logistics networks globally. Cnyrim is proud of this decentralised-centralisation process, as he is of the plans for a new production footprint. Whether this restructuring will be further influenced by the global economic slowdown and the knock-on effects on auto makers remains to be seen.

For Continental's automotive arm, however, the long-term future is firmly rooted in growth. This will be partly generated by green technologies. Continental is investing more than €100m in developing systems for 'hybrid' vehicles, which are powered by both conventional and electric engines, says corporate spokesman Hannes Boekhoff.

The company recently bought a stake in Japanese battery maker Enax to jointly develop lithium-ion battery technology for hybrid vehicles. Continental already produces a lithium-ion battery of its own, which will be used in the Mercedes S-400 Blue HYBRID car.

Boekhoff stresses that the Continental group as a whole is also committed to the tyre business as well as to the ContiTech arm, which offers rubber and plastics technology for non-tyre markets.

"Tyres are an elementary part of the braking system," Boekhoff points out. "And so we are looking at developing intelligent tyres, which means having sensors in the tyres [to promote] stability control and road contact."
The Continental group has raised its profile this year through sponsorship of the Euro 2008 football tournament, which was one highlight in what has been a rollercoaster year of change for the company. But it could be facing yet another merger - one not entirely of its own choosing - before the year is out, with the possibility of yet another round of restructuring plans to grapple with.

Continental has already committed itself to sponsoring the football World Cup in South Africa in 2010. Just what structure the company will have then is anyone's guess.

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