Schaeffler and Continental to form Europe's next giant automotive parts supplier

Germany's corporate landscape is seeing a double case of David vs Goliath like story unfolding within a short time frame of less than a year. Late last year Porsche AG completed its takeover bid of Volkswagen AG. Volkswagen is Europe's largest automaker and is also the third largest automaker in the world, behind second place GM and first place Toyota. VW Group which includes brands like Audi, Skoda, Bentley, Bugatti and Lamborghini sells more than 4.7 million vehicles annually while Porsche is a small independent sports car maker who sells less than 100,000 cars annually.


Schaeffler Group is a family owned company that is little known outside the mechnical parts supply chain industry. Truth is Schaeffler Group, which owns INA, LuK and FAG brands is among the world's largest bearings manufacturer (Swedish bearing company SKF holds the top title), and transmission parts maker, whose products move millions of mechanical machinery around the world, including the TGV, the fastest wheeled train in the world.

As far as the auto industry is concerned, Schaeffler Group have suddenly become a very often mentioned name when it acquired a controlling 49.9% stake in Continental AG. The Continental brand is well known among consumers for its tires but in actual fact the company produces a lot more than just tires. Continental is among the world's largest suppliers in automotive electronics, especially in the field of electronically controlled brake modules (brake-by-wire), climate control systems and vehicle telematics.

Continental is estimated to be more than 3 times the size of Schaeffler Group. German autoparts journal Automobil-Produktion ranks Continental as the 11th largest autoparts supplier in by the end of 2007 (excluding subsidiary Siemens VDO) while Schaeffler's autoparts business is 28th largest (excluding aerospace, locomotive and other industrial applications) in the world. It is interesting to know that Schaeffler's largest automobile customer is VW, which as mentioned earlier was subjected to a takeover by a far smaller company.

With the acquisition of Continental, Schaeffler Group is now Europe's second largest automotive parts supplier, behind Bosch GmbH, and possibly third largest in the world behind second place Toyota-affiliated Denso. The current third and fourth largest automotive suppliers are Delphi and Magna but these companies are not expected to hold their position very much longer given their heavy reliance on GM, Ford and Chrysler. Delphi is a spin-off from GM.

Schaeffler is primarily a mechanical parts manufacturer and is facing strong competition from cheaper Chinese brands. The expanding use of electronics in modern cars is opening up huge business potential and the current trend in automotive technology is that mechanical parts are being slowly replaced by electronics, especially in the area of throttle and brake control and in the future, camshaft and valve controls. Schaeffler needs to move up the value chain and the fastest way to do so is via acquisition of Continental, which is strong in electronics and hybrid vehicle components.

Continental made headlines when it supplied lithium ion batteries to the world's first lithium ion battery powered hybrid car - the Mercedes S400 BlueHybrid. It is also a supplier to the highly publicized Chevy Volt - whose Lithium Ion cells were made by A123 Systems (a start-up of MIT graduates) but were packaged in a casing developed by Continental which made the cells suitable for automotive applications. Continental also supplies the battery management electronics and cooling systems, two extremely critical areas for Li-ion applications in hybrid cars as these cells have a very narrow 3 degree Celcius operating range.


Continental supplies the world's first production lithium-ion hybrid car battery, for the Mercedes-Benz S400 BlueHybrid



The lithium-ion battery pack for Chevy Volt. Battery cells were made by A123 Systems while the overall packaging and battery management electronics and cooling is by Continental.

Like the VW-Porsche takeover, Schaeffler's bid for Continental is not without controversies. Schaeffler managed to snap up Continental's stocks as a result of Continental's earlier purchase of Siemen's VDO unit. The two-year long integration and heavy debts that Continental was left with made Conti vulnerable. Conti's then CEO Manfred Wennemer have earlier questioned Schaeffler's timing of their hostile bid. He has since left Conti and would later be replaced by Hubertus von Gruenberg. But the drama does not end there. Schaeffler Group would later demand for von Gruenberg's resignation as chairman, charging him of sabotaging integration efforts of the two companies. Schaeffler threatened to replace all 10 investor representatives on the board, if von Gruenberg didn’t step down and demanded four seats in Conti's supervisory board. Hubertus von Gruenberg have since stepped down but remains in the company's supervisory board. Following this, Conti's CFO Alan Hippe will be leaving the company for a steel maker group in Europe.


Maria-Elisabeth Schaeffler and her son Georg F. W. Schaeffler, co-owners of Schaeffler Group.

Dr. Jürgen M. Geißinger, President and CEO of Schaeffler KG and Chairman of the managing board Schaeffler Group

The recent credit crunch and rapid collapse of the car market have complicated matters further for Schaeffler and Continental. The company is now saddled with a combined debt of 11 billion Euros and some of the German business media is reporting that Shaeffler is considering to sell parts of Conti's stocks to finance the deal. Both Schaeffler and Continental are negotiating with their respective state governments of Bavaria and Lower Saxony to grant a 11.8 billion Euros aid package.

Schaeffler's corporate website.