As suppliers try to work against the current difficulties in the market, value is being looked for at every opportunity
This last week has seen news emerge that Johnson Controls (JCI) is investigating the possibility of divesting its electronics business, with the company hiring JP Morgan Chase & Co. to explore the potential sale of the unit. It was reported earlier in the week by Reuters that it was the company’s automotive interiors business unit that was set to be divested, however this was quickly corrected to its electronics business.
The company's electronics division makes driver information displays and devices that link smartphones and other devices to the rest of the vehicle. The unit posted sales of USD1.35 billion in the financial year ending 30 September 2012, representing one-quarter of the company's interiors and electronics division sales. However, this only represents a small part of the company’s USD42 billion in sales last year.
The move is another step in the company's efforts to increase value by offloading parts of its business that are seen as underperforming. The company’s first quarter results saw income in its interiors and electronics business down 50% to USD101m.
Electronics has become an increasingly difficult market for auto suppliers to do business. The stagnant European market (the company says automotive production went up 11% in North America and 3% in Asia, while a decline of 9% was recorded in Europe in Q1 2013), expensive product development and, in particular, cut-throat pricing for electronics are proving a real drag on the sector, with reports suggesting that these factors have reduced the company's operating margin on electronics by 5%. The potential divesture would leave the company with four major businesses: automotive seating, automotive interiors, building controls, and car batteries. Any revenue from the sale would undoubtedly be poured back into these better performing sectors.
Last October the company demerged its car seating business from its interiors and electronics businesses in 2012. "If you look at those businesses, the business models, capital intensity, the manufacturing footprint requirements are very, very different. And we also wanted to bring more focus to each of those segments," said Steve Roell, CEO of the company, at the time.
When revealing its forecast for 2013 in December 2012, JCI had said that its automotive electronics business would focus on improving its geographical presence in China and India, expanding the Specialty Products portfolio, and strengthening its core infotainment business. JCI's unit sales in the electronics division fell by 8% year-on-year in the first quarter of fiscal year (FY) 2012/13 compared with FY 2011/12, according to a report by the Milwaukee Journal Sentinel.
In general, JCI has been restructuring aspects of the company since the third and fourth quarter of 2012 to mitigate the effect of softening demand in the European automotive market. Those efforts are likely to show results in the second half of this year. JCI is betting big on its growth from Asia, particularly in China. In Q1 2012, the company saw a 21% y/y rise in sales in China to USD1.4bn. Sales in this region primarily relate to its seating business and generated through non-consolidated joint-ventures. Currently, JCI operates 29 joint-ventures in China running 56 manufacturing plants; the company expects to open another 10 facilities over the next 18 months.
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