CON Continental AG

By William Boston 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 8, 2019).

BERLIN -- One of the world's biggest car-parts makers is preparing for a future without the internal combustion engine -- the machine that has been at the heart of the auto industry for well over a century.

In a major strategy shift, Continental AG said Wednesday that it would cut investment in conventional engine parts because of a faster-than-expected fall in demand as major auto makers accelerate their shift to electric vehicles.

The move by the Hanover, Germany-based maker of tires, lubricants, powertrains and other core components shows how tougher regulation of greenhouse-gas emissions is pushing the industry toward electric models and forcing manufacturers to redraw their supply chains.

Continental said its board had voted to halt the expansion of its hydraulics components business, largely focused on fuel injectors and pumps for gasoline and diesel engines, to shift its focus and future investments to components for electric vehicles.

"The future is electric. We are convinced of this," said Andreas Wolf, head of Continental's powertrain division, which is reorganizing under the name Vitesco Technologies.

The auto industry's multiyear boom after the financial crisis came to a sudden end this year, as trade conflicts and slower economic growth caused new vehicle sales to start declining.

Analysts say 2018 marked not only a cyclical peak in sales of new cars with internal combustion engines, but also likely was the beginning of a decline in their share of the overall market. AlixPartners, an auto industry consulting firm, predicts that the combined share of gasoline and diesel engines in new car sales will fall from 95% in 2018 to 56% by 2030, replaced by battery electric, hybrid and plug-in hybrid vehicles.

The biggest shift is expected in Europe. Driven by tough limits on greenhouse-gas emissions, forcing car makers to go electric, the share of gasoline and diesel engines is expected to fall to 42% by 2030, compared with 59% in the U.S. and 50% in China.

Continental made the announcement as it released earnings for the three months to the end of June, reporting a 41% drop in net profit to EUR485 million ($543 million) and a 1% decline in sales to EUR11.3 billion. It attributed the weakness in the second quarter to a global slowdown in automotive production.

Mr. Wolf said that although the auto industry would continue to use conventional internal combustion engines for many years, it was becoming difficult to justify the high cost of improving components to make gasoline and diesel engines less polluting.

As car makers accelerate development of electric vehicles and demand fewer components for combustion engines, the traditional business of suppliers like Continental promises to offer "only selective growth opportunities" in the future, the company said.

"Investments in research and development and in production capacity for innovations are becoming less profitable," Mr. Wolf said in a statement.

Write to William Boston at william.boston@wsj.com

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August 08, 2019 02:47 ET (06:47 GMT)

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