If the autonomous driving business can be independently listed, its valuation will reach 7 billion euros.
Text | Qian Boyan
On March 9, local time, auto parts giant Continental officially announced its 2021 fiscal year annual report.
After two consecutive years of losses, the world's second-largest component manufacturer, once the second largest after the Bosch Group, finally managed to make a tough buck.
Continental's full-year revenue rose 6 percent last year to €33.8 billion, while full-year EBIT was positive for the first time in three years, from negative €4.28 billion last year to €1.8 billion.
A car business that is difficult to make a profit
This may be good news for a long drought, but it is also bad news that "covers up all ugliness in vain".
On the one hand, Continental has indeed stepped out of the loss zone after being hit by multiple negative factors such as the chip crisis, supply chain instability, soaring raw material prices and the new crown epidemic. The powertrain business, which has plagued the Group for a long time, has also successfully and independently listed under the name Vitesco AG.
On the other hand, however, behind this satisfactory financial report at first glance is still the unprofitable automobile business.
Continental's organizational structure has been adjusted several times and now consists of three business segments: the Automotive Subgroup, the Tire Subgroup and the Conteuc Subgroup. Compared with the Conteuc sub-group, which has a small revenue share and does not have much presence, the two subgroups of automobiles and tires have always been the two thighs of Continental Group.
Unfortunately, the under-tech-sounding Tire Subgroup contributed €2.2 billion in EBIT to the group last year, while the Automotive subgroup lost €370 million. The inability of auto subgroups to be profitable remains the most urgent problem for Continental to solve.
However, a loss of 370 million euros is likely to be just a "return to the light" of the auto subgroup.
At its annual report on March 9, Katja Dürrfeld, Continental's chief financial officer, said the group would need to spend at least $2.3 billion more in fiscal 2022 to cope with rising procurement and logistics costs – a figure that did not take into account the adverse effects of the Russian-Ukrainian conflict.
In fact, continental, as a European enterprise, has been greatly affected by the Russian-Ukrainian conflict.
According to a previous report by think tank Jun, some factories of Continental Group, which have been interrupted by supply chains, also announced the suspension of work this week as major automotive wiring harness production plants such as Leoni, Kobschut Krmberg & Schubert have all set up manufacturing bases in Ukraine. In addition, Continental has a production site of 1,300 people in Kaluga, Russia, close to the Kaluga plants of the Volkswagen Group and the Stellantis Group, and has also announced the suspension of work.
Considering that these Eastern European businesses are closely related to auto subgroups, it is clear that auto subgroups are only likely to hand over a worse report card in 2022.
On the one hand, there are auto sub-groups that continue to lose money, and on the other hand, there is the new four waves of automobile modernization that need to burn a lot of money. What is Continental's solution?
One possible, and already implemented, answer is: split the continents.
Break up Continental?
Specifically, it is to spin off and list the autonomous driving business under the Automotive Subgroup (i.e., Autonomous Mobility), which is the Autonomous Driving and Mobility Business Group.
In fact, the idea of splitting the autonomous driving business into a market is no longer news, as early as February 8 this year, messages about the plan have been circulated in the German headquarters.
According to the plan, Continental is considering spinning off the autonomous driving business from the automotive subgroup and establishing an independent subsidiary on January 1, 2023, as a prerequisite for further independent listing. The plan was strongly supported by Wolfgang Reitzle, chairman of the group's supervisory board, and Continental's share price rose by more than 6% on the same day.
It is worth mentioning that the autonomous driving business itself is a business group that will only be independent in 2021.
According to the successful experience of other companies in the past, the independent spin-off and listing of some star businesses can indeed greatly increase the valuation of enterprises, and there is an opportunity to obtain more funds to support those huge upfront investments.
A best-case scenario is Aptiv, which spun off from U.S. parts giant Delphi in 2017, and has transformed itself into a technology-based company with revenues far less than Continental's current valuation of nearly three times that of Continental. Another example is Intel, which plans to list its self-driving subsidiary Mobileye independently in the middle of this year, and it is now widely expected that the valuation of Mobileye that will fly alone will reach $50 billion, equivalent to a quarter of the market value of Intel' "river decline".
If Continental's autonomous driving business can be independently listed, its valuation will reach about 7 billion euros. Considering that the current valuation of Continental is only 16 billion euros, which is equivalent to 40% of Continental's market capitalization, while the self-driving business, together with assisted driving, contributes only 14% to the Group's revenue. After all, the popularity of technology companies and "stupid big black and thick" parts and components industry companies in the capital market is not the same, and the current price-earnings ratio of Continental Group is only 5 times.
Even without considering the positive financial impact of independent listings, giving autonomous driving-related businesses greater decision-making power has long been a popular practice for traditional car companies and parts manufacturers. Whether it is Cariad, the newly established software subsidiary of the Volkswagen Group, or Mobileye, which has not yet been independently listed at Intel, it has indeed succeeded in making some achievements in the field of automotive digitalization with the "small U-turn of the boat" and the new corporate image.
However, this does not mean that Continental can replicate these success stories.
Resistance to splitting
The first resistance came from within the group.
"So what's left of the Continental Group?" It's a question that needs to be answered.
Since Continental spun off its powertrain business under the name Vitesco AG, what was once the world's second-largest component manufacturer has slipped to sixth in the world. Continental, which has shrunk a circle, has not only been robbed of many orders by ZF ZF, which has gradually expanded and has economies of scale, but also the market value of Continental after the loss of the autonomous driving business will obviously shrink further, which also means that Continental may not be able to face the "local tycoon" acquisition of technology companies - which is also the key to the spin-off of the autonomous driving business can not get the majority support in the supervisory board.
With the bursting of the bubble of autonomous driving in Europe and the United States, many technology companies, including Google, Amazon, Nvidia, Qualcomm, etc., are no longer hyping up independent car manufacturing, and realize that pure Internet thinking cannot kill the four parties in the more asset-heavy automotive industry, but more securely choose to cooperate with more experienced parts manufacturers in the automotive field.
On the other hand, with the increasing complexity of the digitization of automotive functions, the feasibility of traditional parts manufacturers hoping to go it alone from technology companies is gradually decreasing.
The next stage of cooperation between each of the parts manufacturers and technology companies that each needs often means an acquisition. And technology companies with huge amounts of cash are obviously not the ones that are being acquired.
A classic case is that Qualcomm, which wants to eat a bite of the cake of the automobile market, has reached a deep cooperation with the Swedish self-driving company Veoneer, and finally directly ate the partner with a high report price of $4.6 billion. Magna, a component giant that also wants to buy Veoneer on the "third way," has to go home in a sad way, simply because Magna can only come up with $3.6 billion in cash.
This also means that once Continental's autonomous driving business is independently listed, whether it is a single-flying autonomous driving business or the only car software business left in the group, it may become the prey of technology companies, and Continental, which has too low market value, does not have enough financial resources to resist. At that time, continental's worst outcome will be to return to a company that "sells tires".
In addition to the fear of further shrinkage of the group, another factor that hinders the spin-off and listing of continental's autonomous driving business is that the mainland does not seem to be able to tell a good story about autonomous driving to the capital market.
On January 25 of this year, Bosch Group, a veteran rival of Continental, announced a strategic cooperation with Cariad, a software subsidiary of the Volkswagen Group, to jointly develop autonomous driving and advanced assisted driving. Mercedes-Benz and BMW also announced early on that they had reached long-term cooperation agreements with NVIDIA and Mobileye respectively. Obviously, at least in Germany, the autonomous driving business has been "left behind".
While continental does have long-term ties with lidar startup Aeye and U.S. self-driving chip company Recogni, the size of the two companies is still not comparable to that of giants.
As for the large order that Continental has repeatedly promoted in recent years, that is, ICAS, the in-vehicle application server known as the electronic and electrical architecture of the intelligent and connected vehicles of the future, it is obvious that the relevance to autonomous driving is extremely limited.
In addition, continental's internal organizational structure if it wants to split the autonomous driving business to develop autonomous driving technology.
At present, in addition to the autonomous driving and mobility business groups, Continental's automotive subgroup also includes the safety and dynamic control business group, the Internet of Vehicles and Architecture business group, the user experience business group and the smart travel business group, with a total of five businesses.
Considering that Continental itself is also developing its own in-vehicle operating system, which is highly relevant to advanced assisted driving, the single-flying autonomous driving business is bound to take away some of the business of the Safety & Motion business group. At that time, the auto sub-group that is already leaderless is bound to be even more chaotic.
Perhaps it is precisely because of these negative factors that Nikolai Setzer, CEO of Continental, said at the annual report meeting on the 8th: "It will be better for all sub-groups to develop under Continental."
However, this is still not answered, the lack of funds and partners of Continental, in the field of autonomous driving where the future lies?