Auto Supplier Continental to Overhaul Business -- Update
22 Oktober 2019 - 10:28PM
Dow Jones News
By William Boston
BERLIN -- Continental AG, one of the world's biggest auto
suppliers, said it would reorganize its business and book a EUR2.5
billion ($2.8 billion) write-down, in the latest evidence of how
softening global car demand and the mass shift to electric vehicles
are reshaping the car-manufacturing economy.
In a sign that it expects the industry's current travails to
continue, Continental said it had shelved plans for a partial
initial public offering of stock in its powertrain division -- home
to most of its legacy, pre-electric technology -- choosing instead
to spin off the unit to existing shareholders.
The business, Vitesco Technologies, which makes parts for
fuel-powered vehicles, will become a potential vehicle for
acquisitions or a merger in anticipation of a coming shakeout among
global automotive-parts suppliers.
The decision indicates that a pure play centered on conventional
car technology is no longer enticing enough to outside investors in
a world where demand for traditional cars is cratering while
governments and manufacturers -- if not buyers -- are pivoting to
electric mobility.
So does the multibillion-euro write-down, which affects mainly
assets acquired in the past decade and will hit the company's
third-quarter results, reflecting the company's gloomy assessment
of the car market's medium-term prospects.
After a meeting of the executive board and the decision to scrap
Vitesco's IPO, Continental said sales for the three months to the
end of September totaled EUR11 billion, down 3% from a year
earlier. The company added that it expects to post a loss before
adjustments for the full year.
Despite the grim news, Continental shares rose 4.1%, as
investors cheered the decision to separate the powertrain business,
a move that could accelerate consolidation in the supply industry,
which is struggling in the current slump.
Demand for cars has dropped simultaneously in China, the U.S.
and Europe. Analysts predict that global auto sales could decline
4% to 6% this year, the second year of falling sales in a row. Last
year, global new-car sales were down about 0.5%, the first decline
since 2009.
"We do not anticipate that global production of passenger cars
and light commercial vehicles will experience any material
improvement in the next five years," Continental Chief Finance
Officer Wolfgang Schäfer told reporters on Tuesday, explaining why
the company adjusted its outlook and valuations of businesses.
Most of the charges against third-quarter earnings are the
result of goodwill that the company has carried from acquisitions
dating to 2008, Mr. Schäfer said. Goodwill is accrued through the
cost of the acquisition minus the fair market value of the assets
acquired.
The biggest share, about EUR1.54 billion, affects the company's
business with auto interiors, which includes electronics and
onboard navigation and entertainment systems. It totaled EUR724
million in the chassis and safety-components business, and EUR244
million in powertrain.
While the change won't occur immediately, analysts expect auto
suppliers to be hit particularly hard as the industry shifts to
producing electric cars and vehicles that are powered more by
software than mechanical engineering.
In August, Continental said it would start phasing out
production of components for internal-combustion engines because of
a faster-than-expected fall in demand.
The news about the third-quarter write-downs also highlights the
dilemma that suppliers find themselves in: As the business
providing parts, services and technology for internal-combustion
engines fades, electric-car sales are still too small to compensate
for lost revenue.
"The business with electric vehicles is difficult, and it's
going to remain so until we have more volume," Mr. Schäfer
said.
Write to William Boston at william.boston@wsj.com
(END) Dow Jones Newswires
October 22, 2019 16:13 ET (20:13 GMT)
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