Why the automotive seating king wants out

Johnson Controls Inc., the world's biggest producer of automotive seats, is looking for a way out of that business. Huh? What? Why?

With annual sales of $22 billion, JCI's seating and interior trim units have achieved economies of scale that rivals can't match. But the auto industry goes through boom-and-bust cycles that can wreak havoc on a company's cash flow. And the seat business needs serious capital investment to maintain growth.

Moreover, automakers have quietly transformed the way they buy seats — driving down costs and leaving seat makers with modest profit margins.

The auto industry always has been cyclical, of course, but conventional wisdom has it that top dogs make good money. An exit by the world's biggest automotive seat maker may force the industry to rethink that assumption.

Last week, JCI CEO Alex Molinaroli said he would explore "strategic options" for the company's $17.5 billion seat operation and also its $4.5 billion interiors unit, which was repackaged last year as a joint venture. In plain English, they're for sale. The Glendale, Wis.-based JCI operates its Automotive Experience unit from Plymouth, Mich.

In an interview with Automotive News, Molinaroli cited those boom-and-bust cycles and the need for capital investment. Automotive News is a sister publication of Plastics News.

Molinaroli prefers to invest in nonautomotive ventures. The seat unit "competes well in the businesses it is in," Molinaroli said. "To continue to be a leader, they need a source of capital."

Although he didn't say so, Molinaroli could have cited a third reason for bailing out: The profit margin on a seat is nothing to brag about.

In recent years, the seating business has been transformed. Automakers now prefer to make bulk purchases of individual parts. Different suppliers deliver the cushion foam, recliners, seat tracks or frames, while yet another supplier handles final assembly.

Automakers thus enjoy lower prices, but it also ensures that seat makers won't have much money left over to invest in new products.

"Seats are capital-intensive," said an industry insider, who asked not to be identified because he does business with seat makers. "If you start laser welding, or switch from a simple, cheap steel to dual-phase steel, you've got to constantly reinvent your manufacturing processes."

Tight margins

A decade ago, automakers bought 70 percent of their seats by ordering the complete product from one supplier. The other 30 percent would be assembled from components purchased from a variety of vendors.

Now, those percentages have reversed, said Byron Foster, group vice president of global operations for JCI's seating business.

Automakers began to use standardized components — such as the same type of foam, seat track or frame — in all their vehicles. And in some cases, different automakers will agree to use the same part.

For example, Mercedes-Benz and BMW use a common seat frame developed by Johnson Controls.

That approach has reduced the cost of seats, and Johnson Controls can produce individual parts in bulk if that's what customers want, Foster said. In fact, the company is a top global supplier of foam, metal parts and cut-and-sew products — not just complete seats.

"We have the expertise" to design complete seats, Foster said. "But we also saw the trend to component sourcing, and we can do that as well."

But problems arise when it comes time to redesign key metal parts such as seat frames. As automakers save money by ordering individual components, suppliers' R&D budgets get squeezed. And that's why Molinaroli said the corporate equivalent of no mas.

Any buyers?

A bidding war could break out for the JCI units, but there are not a lot of suppliers with sufficient deep pockets to acquire a $22 billion global business.

Lear, Faurecia, Toyota Boshoku and Magna International ranked second through fifth last year as global producers of complete seats, according to data supplied by Magna.

With revenues of $36 billion last year, Magna has the deepest pockets, but it's not clear whether it will submit a bid.

Barclays speculated that Magna might make an offer. The Canadian firm wants to expand in China, where Johnson Controls already has a big presence.

Magna spokesman Scott Worden declined to comment.

Another possible bidder may well be Yanfeng Automotive Trim Systems Co., the Shanghai company that formed a 70-30 joint venture with Johnson Controls last year to produce door panels, instrument panels and consoles.

The company inherited that global expertise from its former partner, Visteon Corp., which sold its 50 percent stake in Yanfeng to its Chinese partner in 2013.

Molinaroli did not name likely bidders, and Yanfeng could not immediately be reached for comment.

In any event, it's going to take awhile for Johnson Controls to find a buyer, given the sheer size and complexity of the organization.

"I don't think it's even possible it can happen this year," Molinaroli told Automotive News. "It's so intertwined with the company. It's not something that can happen overnight."