Auto Suppliers Continental eyes revamp amid auto industry flux

The German tiremaker has evolved into one of the world’s leading providers of auto components and now seeks ways to keep adapting.
Continental has moved beyond tires but is still the place where the rubber meets the road.

It is fitting that a company built on rubber should prove to be infinitely flexible. Continental, a leading tiremaker, has been remarkably resilient in the near century and a half since its founding in 1871 and remains today one of the world’s largest suppliers of auto components. And now the company is contemplating a more supple structure to better adapt to revolutionary changes in the industry, which may include spinning off or merging some its core operations with US competitors.

The potential restructuring was first reported by Bloomberg. Continental CFO Wolfgang Schäfer confirmed to Handelsblatt late Tuesday that the company would probably decide about possible restructuring by the middle of the year. “Perhaps what will come out of it is that we don’t need to do anything,” Mr. Schäfer said in an interview.

In looking at a restructuring, the maker of powertrains and chassis as well as tires, conveyor belts and tracks for off-road vehicles is following a global trend as the automotive industry shifts its focus to electric vehicles and autonomous driving.

One possibility that appeals to investors would be to spin off Continental’s tire business as a separate entity.

Delphi, for instance, another global leader in powertrains, last year split into two, spinning off  future-oriented products like information technology, electrification and autonomous driving into Aptiv and leaving the classic powertrain business in Delphi. Daimler is also considering splitting its divisions into self-standing companies that could be listed individually on the stock exchange.

Reports of a potential split at Continental lifted the stock to a hefty gain in Tuesday trading. The share price spiked to €256.50 before closing at €250.40, a gain of nearly 5 percent over the previous close.

After the market’s close, the company said revenue in 2017 rose 8 percent to some €44 billion ($52 billion), while the profit margin (measured by earnings before interest and taxes) was 10.8 percent, higher than the targeted 10.5 percent. A strong fourth quarter, boosted by sales of winter tires, contributed to the positive results. For 2018, the company expects revenue to reach €47 billion.

The reports of a restructuring came as many of Continental’s top executives, including chief executive Elmar Degenhart, attended the CES consumer electronics show in Las Vegas. The automotive industry is a growing presence at an industry event long devoted to smartphones and other electronic gadgets as e-mobility and autonomous driving rapidly gain traction.

Already last year, insiders say, Continental explored the possibility of merging its powertrain operation with competitors in the business, including Delphi. “Among many possibilities, we didn’t exclude transferring the business,” said one source. Germany’s Schaeffler family holds a 46-percent stake in Continental and would have to approve any restructuring.

One possibility that appeals to investors would be to spin off Continental’s tire business as a separate entity. The experience of Pirelli, the Italian tiremaker acquired by China’s Chemchina in 2015, suggests such a move could unlock value in the operation. After integrating Pirelli’s truck tire business into its own, Chemchina last year conducted a successful IPO for car and motorsport tires.

But officials in Hannover-based Continental firmly reject this idea. The tire business is a cash cow for the firm that smooths out the ups and downs of the innovative products as well as the powertrain and other legacy auto components.

Stefan Menzel covers the automotive industry for Handelsblatt and Robert Landgraf is deputy finance editor. Darrell Delamaide, a Handelsblatt Global editor in Washington, DC, adapted this story into English. To contact the authors: [email protected] and [email protected].