With powertrain spun off, Continental prepares for digital transition

FRANKFURT, Germany—Just two years ago, Continental looked like a very different company than it is today. Elmar Degenhart was CEO, a position he had held since 2009; and the company ranked fourth among the world's largest 100 suppliers. Automotive sales in 2019 were $35.3 billion.

Since then, the 150-year-old Continental has undergone fundamental changes. Degenhart unexpectedly stepped down at the end of October 2020 "for immediately essential preventive health care" in favor of Nikolai Setzer, 50, a company veteran who was head of the tire division.

In mid-September of this year, Continental formally completed the spinoff of its powertrain division as a separately listed company, Vitesco. That will remove 40,000 employees as well as $8.1 billion in revenue from the balance sheets, or 18 percent of the company's total revenues, according to 2020 fiscal year figures.

Taking out powertrain, Continental's revenues last year were roughly evenly split between Automotive Technologies and Rubber Technologies, at about $17.4 billion, or 40 percent, each. But tires have been vastly more profitable.

According to preliminary third-quarter figures, sales for Rubber Technologies were $5.1 billion, with a margin of 11.3 percent (adjusted earnings before interest and taxes, or EBIT), compared with a 2020 third-quarter margin of 15 percent. Sales for Automotive Technologies were $4.03 billion, with a loss of 2.3 percent, compared with a 2020 margin of 1.9 percent. Final results will be released Nov. 10.

Setzer is counting on that changing in the future.

Free of the legacy powertrain operation, he is playing a long game by focusing on technologies with strong future growth potential: high-performance computing, software, software integration, driver assistance and autonomous driving.

"Hardware is a key competence, but software is going to make the difference more and more," Setzer said last week at an event in Frankfurt to showcase Continental's innovations and future products.

Setzer and incoming CTO Gilles Mabire said that 90 percent of future automotive innovations would be software-based.

"Software is becoming a value driver," Setzer said. "The perceptible part of this software market is what sets brands apart for carmakers. But a larger share of this market—an estimated 60 percent, roughly—consists of software that is not distinctive."

Suppliers such as Continental "are in a very good position, especially in this area," he added, noting that the value of software in a vehicle will rise to about $2,780 in the next decade from about $927 now.

Continental is also moving full speed into networking and architecture, which runs on high-performance computers that control domains such as autonomous driving.

The Volkswagen ID3 full-electric hatchback is the first vehicle to use Continental's high-performance server, with software, Setzer noted, adding that by the end of this year 20 models would have the server, representing a volume of 5 million units.

Among Continental's forthcoming products it showed in Frankfurt:

• Drive planning software, which maps out self-driving maneuvers, especially for complicated situations such as merging onto a crowded highway, eight to 10 seconds ahead for Level 3 autonomous driving and up. Launch for this technology is set for 2024.
• Long-range lidar that will scan the road 300 meters ahead, with a start of production in 2024. Current short-range lidar has a range of about 50 meters. This will be important for self-driving vehicles, because it will help identify large structures or objects in the distance.
• A low-speed self-driving system for perpendicular parking that uses inexpensive ultrasonic sensors to select a space and center the vehicle. Series production will start in 2023.
• Actuated sound, in which interior surfaces and structural components are "excited" to different frequencies, replacing traditional speakers and reducing weight. Production is set for 2023.
• A purely electronic braking pedal, which adds flexibility for full-electric "skateboard" chassis construction, and is a stepping stone to so-called "dry braking" that eliminates the need for a hydraulic system. At the same time, Continental is testing hydraulic front drum brakes as a solution to avoid particulates from brake dust, which it says it expects the EU to regulate in coming years.

Under Setzer, Continental is reorganizing its business structure for the second time since 2019 in an effort to match the pace of technological advances, and at the same time realigning its workforce for the technological transition.

Starting in January, the Automotive Technologies group sector will be known as Automotive, with business areas consisting of Safety and Motion, Autonomous Mobility, Smart Mobility, User Experience and Architecture and Networking.

A 2019 plan to cut 20,000 jobs and close some factories over the next decade is still operative, Setzer said on the sidelines of the event in Frankfurt.

"The transition from analog to digital is like the transition from internal combustion to electrification," he said.

Asked if he was satisfied with the pace of change, he said, "You can never move fast enough."

Continental ranks No. 6 on the Automotive News Europe list of top 100 global suppliers, with 2020 sales to auto makers of $29.7 billion.