Freudenberg unit looks to adapt as automotive industry changes

Adapt or die is nature's way.

Freudenberg Sealing Technologies knows this, and it's getting ahead of the curve.

The automotive industry is entering one of its most exciting — and turbulent — decades with electric and autonomous vehicles pushing automakers and their suppliers to change rapidly.

If these technologies come to fruition, FST will need to adapt. CEO Claus Moehlenkamp said the firm could lose up to 70 percent of its automotive sales, or about $1.02 billion, if it doesn't embrace these new opportunities. Most of its seals are found in the traditional powertrain. And while that won't be going anywhere in the immediate future, when Moehlenkamp looks at projections for the next 15-20 years, it's clear the company needs to act.

"Many opportunities we can develop from within given our technology foundation," Moehlenkamp said. "For instance, if you think about a thermal management cooling system, we have many component opportunities to participate in that within our existing competencies. But that would never come close to compensate for the potential downfall, so we need to step out of the box and do some significant M&A in order to get new technologies and products on board."

FST — a unit within the Freudenberg Group, the second-largest non-tire rubber manufacturer in the world — generated about $2.66 billion in overall sales for 2017, about 55 percent of that coming from its automotive activities using both rubber and plastics in automotive seals.

Moehlenkamp said Freudenberg already has a deep knowledge base at the component level, with e-mobility bringing a sizable amount of component business that's very similar to what it does today.

The area Freudenberg needs to grow in is the battery. Moehlenkamp said that area is completely different compared to its current business, with the most important element being the integration process of these battery packs or systems into the entire electric propulsion system.

"We have to learn a lot," Moehlenkamp said. "We have to partner with our customers."

The process already has begun, as FST has made two strategic acquisitions that significantly strengthen its capabilities within fuel cells and lithium-ion batteries. The first was a deal for Munich-based fuel cell system manufacturer Elcore, and the other for a significant interest in Midland, Mich.-based Xalt Energy, a developer and manufacturer of lithium-ion battery cells, power electronics and battery management systems.

"We definitely lack electronic, electrical engineering and mechanical competence," Moehlenkamp said. "With the acquisitions, we bring a certain base level of those competencies and now we have to go from there and evolve to become stronger and stronger. We intend to add more resources to this, we have to hire electro-chemical engineers for the battery cell making, but we have to also hire software and electronics engineers for the integration of fuel cell and battery technology."

Moehlenkamp said the two deals, along with Freudenberg's existing expertise at the fuel cell component level, have been brought together to create the firm's Battery and Fuel Cell Division. The unit has been tasked with pursuing E-mobility and fuel cell opportunities in the commercial truck and bus, marine and energy industries, among others.

These deals give Freudenberg the ability to produce all major components of a fuel cell stack in-house, Moehlenkamp said.

"We want to be in control of the quality," he said. "We've enjoyed our traditional business for decades. We see the battery and fuel cell technology as an addition, or an expansion, for the time being. Over time, with our expertise we're building right now in fuel cell technology and battery modules, we will be much better positioned when it comes to thermal management and the cooling of those items. I think it will have a positive side effect."

Moehlenkamp is confident that about 70 percent of FST's business is in danger should it not take steps to chase these new opportunities. How soon the transition occurs, however, is another question. And like most answers within a global environment, it depends on the region.

"The speed is very different in Asia, China and Europe than it is in the U.S.," Moehlenkamp said. "But eventually, say over 15 to 20 years, that business is going to change significantly. The important issue is to capture this opportunity of electric mobility and position the company in a strategic sense with a new product portfolio and new technologies."

Which means its existing business still is going to be quite relevant for some time, so FST must balance the task of investing to make sure it continues to support it while at the same time keeping an eye to the future.

Mobility is not the only area where electrification is taking place, either. Moehlenkamp said this trend lends itself to multiple opportunities beyond automotive as battery packs can operate within a mobile application, buses, trucks, ferry, cruise ships and other areas. The executive described the trend as a "wide-open" opportunity, both in terms of the battery pack and the fuel cell.

"We have to deal with two agendas," Moehlenkamp said. "We have to continue to innovate and manage the traditional business very well, and at the same time we have to prepare for the future and deal with completely new technologies at different speeds in different regions. It's a tremendous strategic question to deal with."

He added, though, that FST is in a strong position to take on these challenges.

"It requires a long-term orientation and a financially sound position," Moehlenkamp said. "We know we cannot miss out on these new opportunities. It's developing and evolving as we speak. We need to position ourselves within the next two to three years with a value proposition and a clear market portfolio."