Continental AG will scale back investments in traditional motor components and allocate more funds for hybrid and electric powertrains as the auto-parts maker prepares for the eventual decline of combustion engines.
Europe’s second-largest component supplier will invest an additional 300 million euros ($326 million) to develop and expand its offering of electric- and hybrid-car technologies by 2021, the Hanover, Germany-based company said Tuesday in a statement. While Continental won’t entirely abandon fine-tuning traditional motors, it sees electric and hybrid vehicles accounting for 40 percent of the car market by 2025.
“We have to expect gradually falling demand for newly developed mechanic and hydraulic engine components,” Jose Avila, head of Continental’s powertrain unit, said in the statement. “This is why we will reduce our expenses into these technologies step by step.”
Global automakers and their components suppliers are investing heavily to develop electric-car technology to comply with tightening emission rules across the globe. Balancing these investments is key to mitigate the financial burden of having to pour money into both electric and combustion engines for years to come as the tipping point at which battery-powered cars overtake gasoline and diesel engines remains difficult to predict.
“Large chunks of today’s powertrain revenue streams are simply obsolete in battery-electric vehicles,” Victoria Greer, an analyst with Morgan Stanley said in a note to clients. “We continue to struggle with the companies’ message that electric vehicles will be a content multiplier.”
Continental stock declined 1 percent to 204.60 euros at 9:22 a.m. in Frankfurt trading, paring its gain this year to 11 percent and valuing the company at 41 billion euros.
In a sign of the disruptive potential of the shift, Continental held talks with U.S. peer Delphi Automotive Plc earlier this year about merging parts of their powertrain divisions, people familiar with the matter have said. Negotiations ended without a deal to combine the operations, which make components including transmissions and fuel and exhaust systems for gasoline and diesel cars, said the people.
Diesel has been particularly hard hit in the aftermath of Volkswagen AG’s cheating scandal, with consumers gradually turning away from the technology in Europe, its main stronghold. Continental said it had limited exposure to the slumping diesel market, which accounts for less than 2 percent of overall sales.
Continental is relatively well positioned to benefit from the shift, as it offers a range of components, sensors and sophisticated electronics systems that future cars need. The German company anticipates bringing in as much as 3,000 euros in revenue per electric vehicle it supplies parts for in 2025, about triple the revenue gained from each combustion-engine car last year, according to an investors’ presentation in January.
Continental said Tuesday order intake and profitability at the powertrain operations are improving. It targets 10 billion euros in revenue at the unit in 2019, compared with about 8 billion euros this year. The division’s profit margin is forecast to be 9 percent of sales this year and rise to around 10 percent in the years to come, excluding hybrid and electric systems.