Asset Hive-off Continental, mulling a split-up, could ease Schaeffler's modernization

A break-up of tiremaker and auto industry supplier Continental could free up cash to speed Schaeffler, a key shareholder, into the era of e-mobility.
Future vision: Continental's assets could be worth more if split up.

With nearly 90,000 employees and €14 billion ($17.16 billion) in revenue, German auto and industrial parts supplier Schaeffler appears to be in good shape. Behind the numbers, however, the picture is anything but perfect: Schaeffler is struggling to get fit for the digital age. “We have to be faster,” said Klaus Rosenfeld, Schaeffler's boss. “That also means that we have to do some things earlier than we’d planned.”

If this restructuring succeeds, the company will rely less on revenue from machine parts and more on money made selling applications and solutions for electric and hybrid cars. Compared to the competition, however, Schaeffler has plenty of catching up to do. To close the gap, it will need to double down on investment — but there’s still the question of where that money would come from.

Car-parts supplier Continental could be the answer. Maria-Elisabeth Schaeffler and her son Georg hold a 46 percent share worth €22.5 billion in Continental. (A few years ago, Schaeffler briefly held 75 percent of the company.) Those assets could be worth even more if Continental’s board decides to break up the business and put certain segments, such as its lucrative tire division, up for sale. In similar instances, investors have valued these units higher individually than combined. If that’s true in Continental’s case, the Schaeffler family would make a considerable profit.

Observers predict that Schaefflers, one of Germany's richest families, would channel that extra money into the company's operations. “The larger the family’s fortune, the more financial leeway the company has,” said Jürgen Pieper, an analyst with Metzler Bank. A source close to Continental said that while the Schaefflers did not initiate the deliberations over the company’s fate, they have been “kept informed at all times.”

We have to be faster. That also means that we have to do some things earlier than we’d planned. Klaus Rosenfeld, CEO of Schaeffler

Linde supervisory board chairman Wolfgang Reitzle, who is old friends with Ms. Schaeffler, is also chairman of Continental’s supervisory board. Sources close to the family said Mr. Reitzle is playing a key role in Continental's reorganization plans, which are deemed vital to its future success.

If, as expected, electric cars ultimately break through into the mainstream, the auto industry will require new software and power electronics, not the bearings and clutches that Schaeffler produces. Its replacement parts business could suffer as well, since electric vehicles use fewer moving components. Mr. Rosenfeld has admitted as much, saying that “part of what we offer today” will no longer be needed for e-cars.

With that in mind, Schaeffler's boss has increased spending for research and development by 25 percent since 2015. Yet investment in new technologies isn’t his only objective. Mr. Rosenfeld is also under pressure to cut costs, including through the possibility of further job cuts in the supplier’s industrial division, according to sources at the company.

It’s not the first time that Mr. Rosenfeld has gotten his employer out of trouble. In 2008, Schaeffler faced a crisis after it launched a takeover of Continental, pushing the former to the brink of bankruptcy. Its CFO at the time, Mr. Rosenfeld managed to negotiate a deal with creditors to keep Schaeffler afloat.

Schaeffler's parts may be high quality but not the stuff of e-mobility.

For now, Mr. Rosenfeld enjoys support within the company. Shareholders, the family, and employee representatives on the supervisory board all stand behind him, said Jürgen Wechsler, regional director of labor union IG Metall in Bavaria and Schaeffler’s deputy supervisory board chairman.

Clearly, Mr. Rosenfeld will need this support as he has his work cut out for him. Compared to its rivals, Schaeffler has few cutting-edge technologies in its portfolio. The company developed its own electromechanical roll stabilizer, a system that helps vehicles navigate curves more safely, but many of its competitors have similar products. Moreover, most of the components for Schaeffler’s stabilizer are made by Continental.

The Hannover-based company is well ahead of Schaeffler when it comes to forward-looking projects. For instance, Continental created a power train for Renault’s Zoe electric car that draws on wireless charging technologies. Continental’s automotive division derives 60 percent of its €26.5 billion in annual revenues from electronics and software, and its CEO, Elmar Degenhart, aims to boost that to 70 percent by 2020.

By then, things at Continental could be very different. Though reorganization plans are still at an early stage, the company’s executive and supervisory boards hope to make concrete decisions within the next six months.

A version of this article originally appeared in WirtschaftsWoche, a sister publication of Handelsblatt. Stefan Hajek is an editor, Matthias Kamp is a correspondent based in Düsseldorf, and Annina Reimann covers the insurance and investment markets for WirtschaftsWoche. Amanda Price adapted this article into English for Handelsblatt Global Edition. To contact the authors: [email protected], [email protected], [email protected]