Johnson Controls Inc. will invest in another 10 auto seating plants in China as part of a long-term business strategy that continues to expect growth in China and slow expansion in the North American market to offset an expected slowdown in Europe.
JCI also will expand its footprint for interiors and electronics in the southern U.S. and Mexico, although the company did not provide any specifics on those plans.
Speaking during a meeting with investors Dec. 19, JCI CEO Steve Roell said he and the company remain “bullish” on China.
“We think it will continue to prosper, though not as fast as it has been,” he said.
The Glendale, Wis.-based company does $5 billion in business in China now with 56 plants between its wholly owned operations and joint ventures. Roell said it believes it supplies 45 percent of the seats in China.
Although the Chinese auto industry has slowed significantly, he said it still has the largest growth potential globally and JCI has plans to build another 10 facilities during the next five years. He did not discuss any details for those new sites.
That means that essentially JCI will be launching a new seating plant every 18 months in China, said Beda Bolzenius, president of the seating business unit.
“Ninety-nine percent of what we do in China stays in China or in Southeast Asia,” Roell said. “We did not go to China for labor arbitrage, we went to participate in the local market.”
Analysts with Baird Equity Research said in a written report on JCI's outlook that it sees Johnson Controls “outpacing the market due to meaningful China exposure.”
JCI also has invested in additional capacity to produce individual components for seating, including more capability for metal parts. Roell said that reflects changes in the auto industry: Automakers sometimes are opting to award contracts for individual parts, rather than the complete seat.
“They're directing the trim, the foam, the metal,” he said.
The company also developed a leadership team that could work with automakers to sell and source those individual parts in addition to complete programs.
“Now we can compete with foam, with cut-and-sew, with metals,” Roell said.
That ability to produce both complete seats and individual components will also expand into China, Bolzenius said. JCI has only 2-3 percent of the seating-parts business in China now, compared with its commanding presence in delivering complete seats. A new focus on components as well as complete seats should bring that parts business up to 20 percent market share.
In 2012, JCI developed a separate business unit for its electronics and auto interiors group — separating it from seating — to reflect the different dynamics of those two groups. Bill Jackson is president of electronics and interiors while Bolzenius, formerly president of the Automotive Experience unit, retains the seating group.
The change comes because interiors and electronics are more capital-intensive than seating, and interiors are more likely to see an overhaul during a midcycle upgrade to an existing vehicle line than is seating, Roell said.
JCI has an automotive backlog of $3.7 billion in business for 2013-15, which is about even with its previous backlog for the 2012 to 2014 time period. For 2013, it expects its seating business to gain 2 percent over 2012, reflecting growth in North America and China.
Europe stands as a “major headwind” in JCI's forecast, however.
“We could talk about Europe all day, but I think all of you know about Europe,” he said. “We look at Europe and believe it's going to take some time. In our case, when we look at the duration [of the downturn] we decided there was nothing we could point at that would see it come back in 2013 or 2014.”
Roell said the company expects European production could decrease by up to double-digit percentages in 2013. That will not only impact JCI's production, it will probably bring unexpected disruptions throughout the supply base as small suppliers shut down, leading to parts issues for others.
“Our thorn is Europe,” Jackson said.
European automakers are already discussing plans to shut down production, including General Motors Co.'s announcement earlier in December to halt production at its Bochum, Germany, Opel plant.
JCI will have to adjust its just-in-time operations in Europe to reflect those changes, Bolzenius said, but will be careful where it makes its overall cuts.
“We need to be smart and selective about how [we cut] to avoid significant disruptions,” he said. “We will be a lot more careful on how to cut into operations and how to cut into our critical resources. We will not go for launch teams, for engineering capacities. We will protect these critical resources better than we did during the downturn in 2008 and 2009.”
The interiors and electronics group made money everywhere but Europe in 2012, Jackson noted. Its biggest problem areas for production are also there. At one facility, he said, the plant was seeing an 18 percent scrap rate on one instrument panel program. It has since brought that rate down to about 6 percent, but it is still working with its customer to develop other improvements if possible.
Johnson Controls also is in the process of restructuring where needed in North America to improve capacity.
It is closing two plants, including the previously announced shuttering of one of its two Louisville, Ky., injection molding plants.