HANOVER, Germany—Looking strictly at the numbers, it would be easy to see how ContiTech A.G. might seem overshadowed within the Continental A.G. organization.
The rubber goods operation is one of five Continental divisions, but it accounted for just roughly 11 percent of Conti's overall 2012 sales of $42.1 billion. Even within the tire and rubber group, ContiTech made up only 28 percent of the $17 billion in sales last year.
Viewed another way, however, and ContiTech is a giant in its field. The business posted 2012 sales of $4.77 billion, enabling Continental to be ranked as the world's No. 1 manufacturer of non-tire rubber products.
But Heinz-Gerhard Wente, head of the ContiTech Division and a member of Continental's Executive Board, doesn't care much for the term "non-tire." It reminds him of earlier days of Conti—his tenure with the firm dates back to being a trainee in 1969 and a full-time staffer since graduating from college in 1978—a time when "non-tire" was used in a negative way.
During those days, Continental was strictly a tire and rubber company, and the non-tire rubber operation clearly was looked upon as the lesser of the two, Wente said during an interview at his Hanover office. When the non-tire group started to concentrate on high-quality, high-technology goods, though, it began to develop its own identity. That was reflected in new names for the operation, first as Continental Technical Products and later ContiTech.
And when Continental executives determined the company never would rise to more than the fourth-largest tire company in the world, the firm changed directions to focus on other automotive-related technologies. Such acquisitions as the Teves braking unit in the late 1990s and the Siemens VDO Automotive Corp. business in 2007 have transformed Conti into one of the world's largest automotive suppliers, but one deriving just 40 percent of revenues from tire and rubber goods.
"We are not in competition with each other," Wente said about the various Conti divisions. The firm's decentralized approach, with each unit having profit and loss responsibility, does, however, allow for benchmarking for the divisions to learn from each other.
"We have five divisions, and ContiTech is one of them, and ContiTech is a contributor to the success of Continental. This is what we know, so we will not feel lost," he said.
Besides, Wente has other things on his mind, such as finding ways to grow in what many view as mature markets, while some of the newer automotive businesses at Conti have flashy new technologies—such as automated driving—that offer ample opportunities to boost future sales.
And while he said there isn't competition within Conti, he acknowledges that "what I personally do not want is at the end of the day the others are growing and we are not growing. Then our 11-percent share today in Continental will go to below 10 percent."
Building outside Europe
ContiTech's sales in 2012 climbed a solid if not spectacular 3.6 percent, and its adjusted earnings before interest and taxes of $570.9 million put its profit margin at 12.1 percent, a number Wente said was fairly typical for the business.
Even with its lofty position among the world's non-tire rubber business, ContiTech remains a largely European-centric organization. The division posted two-thirds of its sales on the continent in 2012, with its home market of Germany accounting for 34 percent of overall revenues.
Conversely, just 16 percent came from Asia, 10 percent from the NAFTA region and 8 percent from other countries. That is a breakdown Wente definitely wants to change, but he said it's not just as simple as targeting a region and watching sales rise.
ContiTech is made up of eight business units that range widely from automotive hose and belting to air springs, automotive interiors, conveyor belting, vibration control goods, elastomer coatings and compounding technology. About half its sales come from automotive and the rest from a variety of industries.
"The markets are totally different, so whatever we would like to do, we have to concentrate on the respective markets," he said.
For example, in looking to boost its business in the U.S., ContiTech will target such sectors as cement, construction and other areas where goods need to be transported as potential candidates for its conveyor belting lines. "We are convinced that high-performance conveyor belts and energy-optimized conveyor belts are the future products," Wente said. "This could bring us some advantages in the American and Asian markets."
Conversely, the firm's Benecke-Kalicko Group offers artificial leather products—many made from thermoplastic polyolefins—to improve the comfort level inside automobiles. Its business model requires a totally different approach.
ContiTech took a big step forward last year in its North American and global hose business with the purchase of Parker Hannifin Corp.'s Mobile Climate Systems Division. It brought total sales in the $140 million range but, more importantly, added to the Conti unit's portfolio.
"We are now a significant player in air conditioning lines and assemblies for cars," the ContiTech chief said. "We would like to extend this to trucks on our own internal performance, but we are there in America in this business and we would like to develop it."
Another difficulty in moving to other regions of the world is that technology doesn't always transfer, according to Wente. That means that power transmission belting produced in Germany meets European specifications but similar products in North America may carry different requirements.
"So it's impossible for us to produce in Germany the European program and the American program," he said. "When it comes to strategy, one day we will have to have a plant in the Americas to be able to supply the market and produce more local-related products. Whenever there is a chance to get to the American market either via acquisition or be in the position to invest in a plant, then we will do it."
In reality, there is no Asian market, Wente said. There is a Chinese market along with other markets in South Korea, India and a variety of other nations in the continent. And each of these regions calls for a tailored strategy.
ContiTech made its first investment in China in 1996 and 17 years later has 10 plants and employs 2,350 there.
"You can say this is not aggressive enough, but this is our way to do business, to do this evolutionary process," he said. "We think we can grow with our plants there, so we can do quite good internally because we have the necessary capacity and we see that the market is growing. We also expect change in market behavior so we have even better chances to grow."
One behavior Wente sees evolving over time is in the trucking industry. He said about 99 percent of trucks in China still run on steel springs rather than the air springs that are so prominent in Europe and North America. ContiTech has an air springs operation in China serving the rail industry, but that capacity will come in handy as the trucking market changes over time.
ContiTech is involved in discussions with customers in China to help nudge Chinese trucking firms to switch to air springs for safety and economic reasons, but Wente knows patience is necessary.
"We are not that arrogant that we can influence the market in this direction directly in this manner from one day to another," he said. "But in any case, we will do our work to support this because we think that it's not just a good business solution for us to have air springs, but also a good solution for the market."
The firm also has had successes in India with a conveyor belt plant near Calcutta. The division just added a new production line at the site and capability to work on steel cord to extend the scope of its technology there. "When it comes to conveyor belts for mining, building and cement, this is a market which will have a certain growth for the future, and we are prepared to be there."
In areas such as Vietnam, Thailand and Indonesia, Wente said ContiTech is exploring and analyzing the regions to consider plans for future investment.
Different approaches to growth
ContiTech will continue to look to grow both internally and through acquisitions.
When looking to buy a business, he said the Conti division looks at such criteria as whether the prospective firm would strengthen ContiTech through product technology, new processes, wider geography or broadening of its customer base. There are times Wente said ContiTech could have developed a technology on its own, but it made more sense to make a purchase. Recent examples include an English firm that produced vertical conveyor belts, and a brake parts business it bought from the Freudenberg Group.
What ContiTech never will be is a business that will add sales just to see its revenues grow. Wente said the firm won't buy market share by undercutting on price, but it will stick to its approach of winning customers by touting high-quality products that sport the best technology and can lower a customer's "total cost of ownership."
"We know that with our vision what we like to do is supply first-class quality, environmentally sustainable solutions to our customers," he said. "This is something that we are doing here in Europe where we have been successful, and this is what we are doing in the Americas and Asia, and this is also what we will do in so-called new markets."
ContiTech will back up this plan by investing in research and development in regions it wants to grow significantly, Wente said. So the business recently opened an R&D center for vibration control in Asia and has invested in testing centers in the U.S. as well.
"We don't want to be the biggest, but we want to be one of the best," he said. "When I talk about growth, I always talk about profitable growth. With all of our acquisitions and all of our investments, we need to add value to the company, and this means you have to get a certain payback."