Manfred Wennemer: Continental CEO predicts big things for telematics

By Arjen Bongard and Douglas A. Bolduc, Automotive News

Last year, Continental spent $1 billion (about €730 million) on a Motorola division that specialises in telematics. Now, Continental CEO Manfred Wennemer has high hopes that the life-saving, infotainment-enhancing technology will become a hit.

During a recent interview, Wennemer spoke about the prospects for telematics, his company's interest in rival Siemens VDO Automotive and how Continental is coping with volatile raw materials prices.

He met with Automotive News Europe Editor Arjen Bongard and Reporter Douglas A. Bolduc at Continental's headquarters in Hanover, Germany, last month.

It is more than a year since you acquired Motorola's automotive business. How is the integration going?

It is going very well. We have announced the restructuring of three plants. Now we have to work on the cultural integration. Motorola was more focused on consumer goods, Continental is an automotive company. There are differences in the development process, the production and in the way we do business. But all in all, we are very pleased.

Continental got into the electronic stability control business at the right time. In five or 10 years will you be saying the same thing about your decision to become a leader in telematics because of your acquisition of the Motorola unit?

We are convinced that with telematics we have a similar opportunity at hand as we had with ESC. You know about the EU's aim to halve the number of people dying on the road by 2010 [to 25,000].

Considering that many cars already have active and passive safety systems, the question is: Where can the further reduction come from? We are convinced that it will come largely from telematics and eCall.

It will come from cars talking to each other, from cars sending information about what is happening around them and making sure that this information is sent to other cars heading in the same direction. A second major growth area is to allow customers to use their own portable devices in their cars.

But this is still going very slowly.

There are not many cars around in which you can use your own devices, but we are convinced that this is going to change in the future. People will no longer accept that they have to buy the CD player for €1600 and the navigation system for €2000 or whatever the price tag may be. They have everything in their own hands and they want to use it in the car.

Automakers are traditionally very cautious about that, right?

Right. But the OEM has to think about the business model. They will make the switches and interfaces available so consumers can connect their products. And the best thing is that you can update software to work with devices that do not even exist when you buy a new car. There is a good chance that tomorrow there will be no more recalls because of software flaws.

A lot has been written about your interest in Siemens VDO Automotive. Please update us on what is going on?

The message is: We are interested. It makes a lot of sense for everybody involved. We hope we will get a chance to prove that this is the right concept.

Do you need to have a majority stake to make a deal worthwhile?

We are very flexible. We see that Siemens might want to have a share in the value creation, and we could even imagine being a minority shareholder as long as we have the industrial leadership.

Last year you took a big hit because of the rising cost of raw materials, particularly natural rubber. How do things look for 2007?

We paid an additional €317 million for raw materials in 2006, and that mainly in the two tyre divisions. For 2007, we have bought all the natural rubber that we need until June or July and there was no increase compared with last year. That is the good news. The bad news is that we are still at the extremely high level that we experienced in 2006.

Have you succeeded at passing along raw materials costs?

We always have said, one-third for our suppliers, one-third for our customers and one-third for us.

Do automakers accept that?

It is very difficult to convince our customers that they have to share the pain and that they have to take one-third. In certain cases we have had some limited success, in other cases the success has been even more limited.

Is it more difficult for Continental to ask for help with raw materials costs because it has been so successful?

Yes, that happens from time to time. On the other hand, our customers know that this industry needs strong suppliers who can invest €600 million to €700 millions in R&D a year. They cannot work with suppliers if they are not certain that they will continue to receive deliveries tomorrow. These cases are increasingly more frequent, so OEMs make sure that they find long-term, strong partners.

Will Continental benefit financially from the push by governments to reduce emissions?

Are there more sales in the short term? No. But is it easier to negotiate with our partners on products we have been pushing for several years? Yes. For example, we make belts and here we compete against chains. A chain is about 20 percent less efficient than a belt. When you translate that into fuel-efficiency, you would save 1 percent to 2 percent with a belt compared with a chain. We expect more intense discussions about such products in our portfolio and that our customers will test those products and perhaps can convince themselves that this is a possible optimization.

Is it true that you have received such a huge increase in interest for your hybrid solutions that you have had to turn down some requests?

That is correct. We cannot handle all the additional requests and we could not complete all the potential projects in the time frame demanded.

During and after the Geneva auto show we had a lot of requests to pull forward projects. We will try to do that whenever possible, but there is a limit. We cannot somehow create engineers within hours.

We clearly want to live up to our commitments and we want to remain a reliable partner. Therefore, we will not promise our customers that we will have a project completed at a certain time, and then when it finally comes time for the start of production, we have to tell them that it unfortunately didn't work out.

That is not Continental's style.

Hypothetically speaking, how many more people would you need to hire to take on all the recent requests?

At least twice as many as now. I just looked at the projects that we have been asked to do and it is 50 percent to 60 percent more than we are currently doing. But remember, the carmakers are not just coming to Continental, they are asking everyone that offers similar products.

Is there an overall shortage of engineers specialised in these technologies?

Yes. We definitely do not have all the engineers we would like to employ, but I don't think that this is a problem in the medium term. You just cannot get people on board within weeks, get them to be very effective and then launch a product within a year. That is impossible. At the moment it is one of our major problems, but we don't think that it is stopping the development of hybrids.

You are adding people to your hybrid team, right?

Yes. We have been adding people for two years. We have increased the number of people working directly on hybrids, and we also have increased the staff working on the electronics for those hybrids.

We really have created a powerhouse. You will see our new products on the road next year.

One of the customers is Volkswagen. Can you name any others?

Volkswagen has allowed us to mention its name. When it comes to the others, we are not supposed to.

Will you make any announcements about your hybrid projects in September at the IAA in Frankfurt?

We would like to, but in fact I really don't know. We cannot ask our customers every second day if we are supposed to say something or not. They have a strategy and they will announce it whenever they think the time is right.

What percentage of new-car sales will hybrids represent in the next five years?

When you look at the different estimates, hybrids will be somewhere between 1.5 million to 3 million cars worldwide. Assuming that 60 million to 70 million cars are built a year, you can see that it is a very small percentage.

When will your hybrid cooperation with ZF Friedrichshafen start paying off financially?

The first vehicles we expect with Continental and ZF technology will come in 2009. This will not be a huge number of cars, at least not according to today's plans.

When do we expect to see a major impact on our sales and hopefully profitability? We think in 2010 and 2011. We do not anticipate a major number of hybrid cars before that date. Plus, hybrid solutions will often come as an option, so it will depend on how green the consumer is.

How green is the consumer?

It always comes and goes in waves. VW had its three-litre car, but it was not a commercial success. When the gas price was $3 (about €2.20) a gallon in the US there was a clear drop in SUV sales. When the price dipped to $2.20, SUV sales started to climb again. I don't think the consumer is making his car choice based just on environmental friendliness. There will always be some who do, but not the majority.

Right now 40 percent of your business comes from Continental Automotive Systems, 40 percent from tires and 20 percent from ContiTech. Are you satisfied with this mix or will it change?

We know that the automotive industry is cyclical, therefore our objective is to have 40 percent of our sales outside the automotive industry. Tires play a major role because we sell the majority of our tyres to retailers and fleet owners and not directly to the automotive industry. In the past, we have seen that if new-car sales are down, people have to buy one or two more sets of tires for their older cars. We get a complementary effect from our tire business.

As much as the diversification helps, doesn't it also leave you more vulnerable to the volatile raw materials prices?

You are right. If you are just in electronics, you don't have to worry about natural rubber prices. On the other hand, I am not sure what is going to happen to the prices of copper, gold and all the other materials needed for electronics. Natural rubber was one of the leaders in price increases during the last few years but perhaps you can look at it this way, the worst is behind us. I hope.

You are not getting much of your sales from Asia. What are you doing to change that?

You are right. Our business in Asia and with Asian customers is too small. Therefore we have started specific action plans in all divisions to overcome this. In Yokohama, Japan, we have a large, new r&d center for CAS [Continental Automotive Systems]. There are now 300 engineers there, and we are increasing that number to 500. On the tire side, we have the Yokohama joint venture where we are very well represented with Japanese OEMs. In China, our position as a brake and electronics manufacturer is very good. Our customers are not only the European and American transplants but also the local Chinese manufacturers. In Korea and India we have not been so successful. We have opened offices this year for CAS, but we don't have any production there yet. I hope that this year we can announce the first major joint venture in India.

Does having engineers in developing countries help open your eyes to creative new ideas when it comes to developing parts for low-cost cars?

When we go into those countries, we have several objectives: The first is low cost. The second is exactly what you described, a new creativity to look at things from a different angle. And the third is to make sure that we have enough engineers, also in 5 to 10 years, when a shortage is expected in high-cost countries.

Are suppliers under even more pressure now to create products that reduce emissions because of the increasing debate on this subject?

There is no doubt that we as an industry have to react to the latest development. On the other hand, it is wrong to think the industry discovered this subject just some weeks ago. Perhaps the industry has not done a good job showing the progress we have made. We at Continental have been working in this field for many years. Rolling resistance is one of the six major criteria we consider when we develop tyres. This is not something we have done just since 2007. When you look at the car tires we produced in 1975 and compare them to those we make today, you will see that we have improved rolling resistance by more than 37 percent.

Can you give an example of how those improved tires have helped?

Using Continental's tyres on all wheels on a truck saves between €500 and €1400 on fuel, depending on which competitor tyres the comparison is based on, or three to seven metric tons of CO₂ a year per truck.

Have you reached a pinnacle when it comes to reducing CO₂ by improving rolling resistance? To reduce further will you need to use new materials?

We made an improvement of 8 percent in rolling resistance from the last generation of tyres to the current one. We expect that the next generation, due in 2009-2010, will have, in total, a 13 percent improvement in rolling resistance compared with the current product. We plan to get 10 percent from what we call innovation, which means new materials, new construction and new production processes. These are not revolutions, these are evolutions, because we think we have a pretty good understanding of rolling resistance and know what we have to do. So 10 percent comes out of innovation and another 3 percent by shifting the emphasis.

We always have to deal with six sometimes conflicting criteria that we want to optimise. If you go in one direction you normally lose somewhere else. For example, if we give up some mileage then we are able to get additional improvements in rolling resistance. Our plan is to change our emphasis to get another 3 percent, so that would give us the 13 percent on rolling resistance on the tyres that will be out in 2009-2010.

Will you compromise on mileage to improve rolling resistance?

We have not decided yet. There is always a compromise on mileage and the other one is on braking. It is impossible for a company like ours to make a compromise on safety; therefore your assumption is not a bad one.

What does the 13 percent improvement mean in terms of fuel efficiency?

If you keep everything else constant and just go for rolling resistance, then you would improve fuel efficiency by 0.5 percent to a maximum of 2.5 percent, depending on several factors such as driving habits, for example.

What other Continental products can help reduce fuel consumption and how much of a benefit is possible?

We are providing a wide range of products that can help to reduce CO₂. For example, if you remove the spare tyre and put in a kit, use aluminum instead of cast iron in the brakes, reduce the size of EBS [electronic braking system] or improve the electronics for engine and transmission control, we can contribute somewhere between 4 percent and 5 percent with our non-hybrid technologies.

In addition we are constantly improving the rolling resistance of our tyres. The ultra low-resistant ContiEcoContact 3 tyre can up a car's fuel efficiency by around 2.5 percent -- again depending on several factors. The development has been even more important for commercial vehicle tyres. With its latest tyre generation, Continental has been able to reduce the rolling resistance coefficient a further 8 percent. If you go for a full hybrid, depending on the circumstances, you can save another 15 percent to 35 percent.

When can this happen?

Most of these products are available today, but to achieve the full effect we need another four or five years.

Continental has a really aggressive growth strategy. How do you describe the quality of the companies that are on the market?

We think there are quite a few quality assets on the market. There are also distressed assets available that we have to analyse very, very carefully to see if they fit our strategy and what the risks are.

You didn't get Goodyear Engineered Products as you intended. What are the reasons?

It would have fit in well to our ContiTech division. So we offered a very good price -- in fact we went to the very top limit, keeping the goals of our business plans in mind. But others offered much more and we dropped out of the race. We stick to our word: We will not pay any price -- only reasonable ones.

How are supplier and automaker relations right now?

For Continental, our relationship to the OEMs is good. Our customers are in a tough fight for market share. It is very difficult for them to pass on price increases to their consumers. They need suppliers that offer new technology, good quality and good cost-efficiency. We have accepted those rules and we have accepted that, in general, our costs have to come down somewhere between 3 percent and 5 percent a year. That is what we constantly try to achieve.

From Automotive News Europe (A Crain publication)