FRANKFURT, Germany—Elmar Degenhart, CEO of Continental A.G. since August 2009, embarked on his biggest project yet in 2018. That's when the global supplier announced it will split itself into three units, including a separate listing for its powertrain division, to adapt to industry trends such as electrification, autonomous driving and connectivity.
Continental recently unveiled a 10-year restructuring plan in an effort to cut costs by nearly $550 million annually, in part by closing plants and cutting thousands of jobs. Degenhart spoke with Peter Sigal, Automotive News Europe correspondent, at the Frankfurt auto show about the challenges. Here are edited excerpts.
Automotive News Europe is a sister publication to Rubber & Plastics News.
Q: Continental may spin off its powertrain division as an alternative to a planned initial public offering. What are the pros and cons of each scenario?
A: For an IPO, you need to convince investors that the price you want to establish in the market is reasonable and attractive. As the capital market environment gets more difficult, it's harder to do an IPO at a reasonable price for us and for our investors. Now, unfortunately, the current economic situation doesn't look very favorable. This will most likely continue into 2020.
Consequently, we decided that it's a good idea to evaluate a Plan B. For a spinoff, we still need the support of Continental's shareholders, but if this is granted, then we can decide to do the split of the Continental stock and give each of our shareholders stock in Vitesco Technologies, our powertrain business.
Why make Vitesco a separate company?
In 2018, we had sales of $8.44 billion in powertrain that were predominantly dedicated to combustion technology. We are preparing our business for the transition to electrification. To meet ever-stricter emissions regulations, we expect that many vehicle manufacturers are going to move their share of full-electric drivetrains to above 40 percent over the next decade.
Fortunately, we already have a strong presence in electronics, sensors and software for combustion engines. Our goal now is to translate these competencies to better suit the future electrified powertrain market. To manage this transformation, our powertrain division needs a high degree of independence to make its own decisions, to be agile, flexible and to be able to move very fast.
The other group sectors of Continental will be Rubber Technologies and Automotive Technologies. How will Automotive Technologies develop its business?
We are using our established and successful businesses today to finance new opportunities, especially those that are focused on software. This is a huge market that will explode in the next 10 or 15 years, when the overall value of automotive software will go from $300 billion to potentially $2.7 trillion. Today, about 19,000 of our 49,000 engineers have a software background. We will get to a point where more than half of our engineers will be software experts.
In the U.S., there is a divergence on emissions levels between what the government and what auto makers think they should be. How does Continental plan for the future when this happens?
It's challenging because we need clarity and transparency for at least the next 10 years. Unfortunately, we have different regulations in North America, in Europe and in parts of Asia. As the regional divergences get wider, it becomes more difficult to provide technologies that fulfill the expectations of our customers. The best for us would be a global standard. It would also be best for the environment.
There's also the prospect of more tariffs. Can Continental pass along the costs to customers? Are you talking to regulators to make your position clear?
We are speaking to European politicians, and we have an office in Washington, D.C. The purpose is to provide background information so that politicians and governments can make reasonable decisions.
If you raise tariffs on short notice, that's poison for the industry because we are not able to react in a timely manner. It only generates an additional financial burden.
We are in favor of eliminating all tariffs completely. This is a clean, simple solution. Nobody should be at a disadvantage. With the imposition of tariffs, our products are getting more expensive, the vehicle is getting more expensive, and the losers are the consumers.
In the last year, some automotive executives have backed away from their most optimistic predictions about self-driving cars. How do you see that market developing?
The typical development for a trend like assisted driving and autonomous vehicles is that people are very skeptical at the beginning, then they get interested, then they get over-interested, causing hype, then people try to make more aggressive statements than others about the timeline, and then all of a sudden, it's cooling down, and finally you can have a realistic discussion.
So we are in the cooling-down phase?
That's exactly right, and this is a good development. In the next 10 years, the bulk of the business will be from driver assistance. Because of the safety benefits, advanced driver-assistance systems will have higher and higher rates of installation in the vehicle.