FRANKFURT, Germany—Although tires will continue to be a fundamental cornerstone of Continental A.G.'s corporate structure, the company clearly sees its future in electronics—in the form of automotive components and systems from its Continental Teves unit. With the acquisition of the brake and chassis activities of ITT Industries in mid-1998, tires went from Continental's mainstay at two-thirds of sales to the junior partner at less than half of sales.
At the time, then-Continental Chairman Hubertus von Gruenberg spoke glowingly of the synergy potential, but many inside the two companies were skeptical, new Chairman Stephan Kessel said.
``The Teves people considered tire-making a `dirty hands' business, and most Conti people didn't know quite what to make of their new electronic brethren,'' Mr. Kessel said.
``It took someone with vision to see how these two seemingly disparate companies would interact,'' he said during an interview held on the eve of the 1999 Frankfurt motor show in mid-September. ``And that someone was von Gruenberg, who knew both companies intimately.'' Prior to joining Conti in 1991, Mr. von Gruenberg had headed the ITT business Conti acquired last year.
Now that executives and engineers from the two companies have had a year to interact, the number of cooperative projects seems to be expanding exponentially.
``Our sidewall tension sensor (SWT) idea alone has sparked a number of concrete cross-over projects, with hopefully many more to follow,'' Mr. Kessel said.
With the car companies increasingly keen on eliminating the spare tire, the prognosis for original-equipment tire sales is not particularly rewarding—and the jury is still out on which run-flat/pressure-warning system the car makers will embrace, as well as how soon.
Continental has high hopes for its ContiWheelSystem (CWS) tire/wheel package, especially in combination with the SWT concept. However, Mr. Kessel is realistic about the chances for Conti's run-flat system—especially in light of strong competition from Group Michelin with its PAX integrated tire-wheel package.
``In the end,'' Mr. Kessel said, ``there will be only one system chosen. Will it be CWS? Will it be PAX? Or something else altogether? We certainly hope and believe it will be CWS.
``Regardless which system it is, no manufacturer will be given an exclusive. The car industry needs multiple suppliers for tires, so licensing of the technology will be an essential component of the system.''
So while the tire side of the business comes to grips with relatively slow OE growth projections—and the daunting prospect of launching an entirely new tire/wheel system to both the OE and replacement markets—Conti sees a bright future for its Teves activities.
For instance, the electronic content of a car's value is expected to rise to 40 percent in three to five years time from 30 percent currently, Mr. Kessel said.
With extensive activities in brakes and traction control, Conti Teves covers a broad range of vehicle electronics. What's lacking is direct involvement in steering systems, something the company most likely will accomplish through alliances, Mr. Kessel said, although he wouldn't rule out Conti Teves developing its own electronic steering system in-house.
``Fully electronic steering is in various stages of development at the car and supplier companies. If we can't find the appropriate partner, we feel there's still time to do it in-house,'' Mr. Kessel said.
Conti's belief in its sidewall tension sensor technology is based on one fundamental principle, Mr. Kessel said. ``The vehicle industry is obsessed with noise, vibration and harshness. And who understands noise, vibration and harshness better than a tire maker?''
Conti hopes to parlay this premise into concrete development contracts and, eventually, significant chunks of OE business. Conti's pitch to the car makers is to use the SWT technology to measure all the relevant car-road interaction forces—speed, cornering forces, yaw, pitch, traction, braking etc.—and integrate these data into the car's electronic control systems, which coincidentally are made by Conti Teves.
Conti is pitching the SWT/Teves package as offering both cost savings and safety enhancement. Conti engineers feel the feedback from SWT technology—plus that from additional tread-area sensors under development—will allow systems like anti-lock braking or electronic stability controls to react faster and operate at decreased cycle times, thereby enhancing their effectiveness.
Until recently, Conti's SWT pitch still was almost purely theoretical. Only in mid-September, on the eve of the start of the biennial Frankfurt motor show, was Conti able to demonstrate a working prototype of a car using data from SWT sensors to operate its electronic braking and traction control devices.
In terms of global alliances, Continental was an early industry convert. In the mid-1980s it established ties with Japan's Toyo Tire & Rubber Co. and Yokohama Rubber Co. Ltd., and in 1993 agreed to a series of cooperative measures, including joint purchases of raw materials, with Group Michelin.
On another front, Conti is looking into what OE contract dividends its affiliation with Toyo might pay in the aftermath of France's Renault S.A. taking a stake in Japan's Nissan Motor Co. Ltd., Mr. Kessel said.
Parallel to developing chassis and suspension ``feedback'' systems, Continental is taking several key steps to secure the long-term future of its tire manufacturing capabilities.
Among these steps are:
Closing its high-cost, money-losing Newbridge, Scotland, passenger tire plant;
Building a car tire plant in lower-cost Timisoara, Romania—where a portion of the Newbridge production will end up—and expanding production at its Barum plant in the nearby Czech Republic to 1 million units a month;
Creating a joint truck tire venture in Slovakia with local manufacturer Matador;
Evaluating further consolidation of its European manufacturing network (``We still have too many small plants, i.e., making fewer than 6 million units a year; 8 million a year output is ideal.'');
Acquiring majority or full control of long-time affiliates in Mexico and South Africa, and negotiating the same for affiliates in India, Pakistan, Tanzania and Mozambique;
Securing a new technical and off-take production partner in South America—Fate in Argentina—along with building its own ``satellite'' tire plant in Brazil (the latter, though, is on hold until the Brazilian economy revives);
Negotiating joint ventures in emerging economies, like China or Southeast Asia, or in hoped-for resurgent economies, like Russia—where Conti is prepared to work together with Moscow Tire Co.
Continuing development of its ``modular manufacturing process,'' a cost-effective tire production system the company sees as an ace up its sleeve when it comes to moving into emerging markets.
Taken altogether, these deals have added more than $500 million in annual sales already, and created the potential for several hundred million more.