Promises kept: ContiTech breaks ground on Mexican hose plant

FAIRLAWN, Ohio—ContiTech USA Inc. CEO Andreas Gerstenberger is fond of the phrase "we say what we do and we do what we say."

That's certainly the case with ContiTech's plans for its new hydraulic hose manufacturing facility in Mexico. And then some.

From when the business unit of Germany's Continental A.G. first announced the project in 2022 to when it broke ground Jan. 26, a lot has changed.

The scope of the project has expanded, with potential for future production of ContiTech products beyond hydraulic hose.

The need for a larger footprint brought about a change in location from San Luis Potosi to the west-central Mexican state of Aguascalientes.

And the projected investment more than doubled to $90 million from $40 million when ContiTech first announced the project 18 months earlier.

Since that time, the Continental business unveiled its "One ContiTech" approach, where the group became organized under geographic regions in the Americas; Europe and the Middle East; and Asia-Pacific, rather than along product lines.

In practice that means ContiTech leaders are more focused on making sure its entire range of products—industrial and hydraulic hose, conveyor belting, power transmission belts and air springs—are successful within each of these regions.

And the new corporate structure caused ContiTech officials to re-think and change plans for the Mexican facility, according to Gerstenberger.

He and Jim Hill, vice president of marketing and strategy for ContiTech's Industrial Solutions Americas business, spoke exclusively with Rubber News about the project in an interview at ContiTech Americas headquarters in Fairlawn.

For starters, the plot of land needed for the facility more than quadrupled, leading to the location change. The plant itself will be about 915,000 square feet, ContiTech's largest in Mexico, or approximately the size of 12 soccer fields.

Construction is expected to start the second half of this year, with a start of production forecast for the second half of 2025, with 200 jobs generated in the first phase.

"The biggest impact is it cost us more time than anticipated to have (the) groundbreaking," Gerstenberger said. "We originally had a location in mind in San Luis Potosi, but then when the overall scope changed, we had to re-broaden our search view, and that's why it ended up in Aguascalientes, which for us is the best combination of all of the needs we have in the new organization and setup."

Hill added that when the plans originally were developed, it was strictly from the perspective of ContiTech's hose business.

"But with our new organization, we're taking a different approach," he said. "We're trying to bundle all of our products together as we go to the market together. But it also gives us a viewpoint of bundling manufacturing potentially as well. Looking beyond hose to all of the products allowed us the opportunity to go look at other places where we may need more space."

Looking at the Americas region as a whole, Mexico ranks as one of ContiTech's top five markets, along with the U.S., Canada, Brazil and Chile, Gerstenberger said. And geographically, it lays nicely in the center, allowing for shipments to both South and North America. Plus, it complements the production base in Norfolk, Neb., where the firm already produces hydraulic hose, among some other products.

The site also follows with ContiTech's strategy of having production "in the region for the region," along with the new organizational structure of being as self-sufficient as possible in the Americas.

"It balances our manufacturing in the total region, where today still the vast majority of our production is in the U.S., for all the products," he said, noting that it does have a manufacturing footprint in each of its top five markets in the Americas.

As for why specifically in Aguascalientes, Hill said a lot of factors go into site selection. The availability of a plot of land the size ContiTech needed, having the proper infrastructure and the availability of labor all were key variables.

"And Continental has recently opened a plant there for our automotive sector, and their experience has been very favorable," he said. "It gave us a little bit of extra confidence that we can meet all our objectives, tick all the boxes. Their experience says this feels like a good place for us."

Of course, when asking parent company Continental for more than double the original investment, Gerstenberger said you need to have a good story, and a solid plan behind it.

"And that's what the team worked on over the past months after we announced the first hose-focused plant," he said. "With more land, a bigger facility and more machinery, plus inflation, that led to a higher price tag."

Gerstenberger said Philip Nelles, a member of Hanover, Germany-based Continental's Executive Board with responsibility for ContiTech, summed it up nicely at the groundbreaking ceremony.

"Strengthening our industry business in the Americas region is a focus for us," Nelles said. "This investment is our answer to the demand and growth of the hydraulic hose market in the region and underlines our strategic approach to become the innovation leader and full range supplier for hydraulic hoses.

"The new plant will allow us to further expand our hydraulics business with an extended portfolio of hoses for diverse key industries like agriculture, mining, construction, manufacturing and energy,"

In talking to ContiTech customers—the majority of its business goes through distribution—then the hydraulics arena is one of the most interesting areas to be in, according to Gerstenberger. It is strong in the U.S., particularly in the Midwest, and also throughout other countries in the region.

"To make that pitch from the market back to the organization, looking at the Americas, was very highly welcomed by the corporation," he said. "We can confidently say the company is seeing that we have good feedback from our customers, we have a team who can execute this complex project, and we are creating value in a sustainable way, so that investments here in the Americas makes sense."

While ContiTech has been in the hydraulic hose market for over half a century, it's no secret that it's not among the top players in the segment in the Americas. And given that the hydraulic market, Gerstenberger said, is seen as the largest hose and fittings market segment in the Americas, that's a position the company is working hard to change.

"When you look at our five major product groups," Hill said, "we're one of the few that participate in all those groups. We're a leader in conveyor belt, we're a leader in industrial hose, we're a leader in power transmission and we're a leader in air springs. In hydraulics, we're not a leader—today."

In order to get closer to the top of the hydraulic hose market in the region, the next logical step after the investments made in the Norfolk factory was to add another facility in the Americas. The new plant in Mexico will double its capacity in this field, and address the needs of current and new customers in multiple industries, Gerstenberger said.

"As a manufacturer, the answer is very simple," he said. "You need capacity in order to produce the products customers are asking for.

"If we continue on this road, I am sure this will not be the last investment we will talk about in the Americas."

On the market side, Hill said the growth fields ContiTech wants to emphasize include off-highway, energy and commercial vehicles—all markets tied to the hydraulic investment.

"It's focusing on those markets, but it's also focusing on our distribution base. Historically, that's the way we've gone to market here in hydraulics in the Americas," he said. "They're a vital part of our network and our team, and will be a vital part of our success with this new location in Mexico."

When you present your business plan, Gerstenberger said you're talking about markets, how you go to market and your existing customer base.

"We have a very broad existing customer base," he said. "We see more than enough potential even to grow within our existing customer base today in hydraulics.

"It doesn't mean we won't sign a new customer here or there in hydraulics, but I would say a large portion of our current customer base is in hydraulics today as a customer, and we think we can grow with those, and don't have to sign too many new in terms of hydraulics."

Both Fairlawn-based executives said the lack of sufficient capacity in hydraulics has hindered its growth plans up to this point.

"The opportunity for growth has presented itself. We have not been able to service those opportunities as quickly as we'd like to," Hill said.

Between now and when the Aguascalientes plant will start churning out products in the second half of 2025, there is much that will take place in parallel, they said.

On the operations side is the need to construct the facility, get machinery ordered and have the proper layout in place.

"The other thing is you have to sit down with your customers and talk about the potential which this new factory will bring us together here in the Americas," Gerstenberger said. "We will not wait for those discussions until after the opening. We will start earlier than that."

Hill added that when the project was first announced, it was more of an abstract vision for ContiTech's customers. But the groundbreaking brings it closer to the horizon.

"We think more people get excited about it when they see dirt getting turned," he said. "It's going to be a reality. It's not just a power point slide we're showing. This is a reality, it's happening."

Other than to emphasize that hydraulic hose will be the focus of the first phase of production at Aguascalientes, the two officials wouldn't discuss specifics of which ContiTech products may be next in line at the new factory.

"With a new plant, like other things, if you see and others see the progress of your plan, then the confidence in starting the next phase may be earlier than you thought," Gerstenberger said.

"If we are doing a good job—and that's our target in phase one—then it might well be that phase two is starting earlier than what we currently planned. If we deliver what we promise, then we will accelerate."

Building from scratch also brings its advantages.

"With its state-of-the art infrastructure including solar panels, process water reuse technologies, smart factory tools as well as machinery with high automation and optimal energy utilization, our new plant is perfectly prepared for additional expansion activities in the future," he said.

Looking at market projections for 2024, Hill said the business came out of the pandemic strong in 2022, and had a good year in 2023, though there was a bit of slowing in order intakes in Q4.

"We don't see 2024 to be an overly robust year from a demand standpoint," he said. "If you look at a lot of reports and listen to some of the economists, is that 2025 will be a better year than 2024. ... But we don't see it as a bad year by any means."

Gerstenberger said Continental doesn't see a full recession happening this year, which some had predicted for 2024.

"Maybe call it a little bit of a soft landing," he said. "The stock markets right now are not in bad shape. Look at some markets like energy and oil and gas, and those businesses are doing very well. Then you have other businesses which are a little bit softer than they were at the beginning of last year, such as construction.

"I think it's a mixed picture, and it will be different than two years ago, when a lot of products were allocated rather than sold."