(Bloomberg) — Continental AG intends to become the latest German manufacturing stalwart to dismantle itself, highlighting the pressure to become more agile to weather structural issues at home and respond to mounting competition abroad. <\/p>\n
Tracing its roots to producing rubber hoof buffers for horses in the late 19th century, the Hanover-based company plans to split into three: the core tire business, rubber components and auto parts. The moves, which Continental will pitch to investors on Tuesday, would unwind decades of diversification and reflect Germany\u2019s shifting business model. <\/p>\n
\u201cContinental is a very good example of how German companies are finding it difficult to navigate the transformation,\u201d said Stefan Bratzel, head of the Center of Automotive Management in Bergisch Gladbach, Germany. \u201cThis breakup shows one way that the model of a big, one-stop shop doesn\u2019t work anymore.\u201d <\/p>\n
Once favoring sprawling structures, German businesses are getting smaller and more nimble in response to rapidly changing technology and geopolitical volatility. Industrial giant Siemens AG and steelmaker Thyssenkrupp AG already moved to split up years ago.\u00a0 <\/p>\n
Automakers have shifted as well as the industry reacts to Chinese rivals and the transition to electric vehicles. After Daimler split its cars and truck businesses and Volkswagen AG partially spun off the Porsche sports-car brand as well as its commercial vehicle unit, Continental\u2019s strategic shift shows how the supply chain is now starting to adapt. <\/p>\n
Chief Executive Officer Nikolai Setzer wasn\u2019t always so enthusiastic about a breakup. Two years ago, he told investors that the global automotive and industrial group would stick to its three-pillar structure, because it provided better insulation from unforeseen downturns.\u00a0 <\/p>\n
That changed last August, when Continental announced plans to spin off its auto-parts unit and lowered earnings forecasts due to weak car demand in Europe. At that point, its non-tire rubber unit ContiTech was becoming more of an industrial player and drifting away from the automotive business, according to the 54-year-old executive. A second carveout would leave Continental with a tires-only portfolio, which nets the biggest profits. <\/p>\n
\u201cThe common markets of our three sectors were reducing or diminishing over time \u2014 the sectors had different purposes, customers and products, so synergies were limited,\u201d Setzer said in an interview. \u201cAs soon as you have different entities within a company, you have to see whether the synergies outweigh the challenges of holding them together.\u201d <\/p>\n
Headwinds have increased in Germany after two years of contraction and minimal growth projected this year. For Europe\u2019s largest economy, the changed corporate strategy is not without risk. Smaller companies could be more easily swallowed by rivals or relocate to escape smothering bureaucracy and high labor costs.\u00a0 <\/p>\n
That puts pressure on Chancellor Friedrich Merz\u2019s administration to move fast on reforms that can revive prospects for domestic companies, even though hundreds of billions of euros in planned debt-financed government spending has brightened the mood. <\/p>\n
While the carveout of parts business Aumovio is a done deal, union leaders are concerned that separating rubber unit ContiTech from the tire business would add costs and put jobs at risk. They\u2019re threatening to use their control of half the seats on the supervisory board to try to block the move.\u00a0 <\/p>\n
What Bloomberg Intelligence Says: <\/p>\n
The restructuring will make Continental a pure-play tire business, which could position it for a rerating.\u00a0 <\/p>\n
\u2014 Gillian Davis, industry analyst (Click here for the full report) <\/p>\n
\u201cThere are considerable synergies between tires and ContiTech,\u201d Matthias Tote, the unit\u2019s works council chief and a supervisory board member, said in an internal memo sent to workers on Monday. J\u00f6rg Sch\u00f6nfelder, another employee representative on the board, said executives are moving ahead \u201cwithout adequately assessing the potential risks.\u201d <\/p>\n
The company has already announced plans to close five ContiTech sites completely and two partially, which will cut hundreds of jobs. Despite the resistance, Chairman Wolfgang Reitzle can break the deadlock, though the tensions could spark legal challenges and delay the process. <\/p>\n
The motivation for management is clear. With the stock effectively flat-lining over the past five years, Continental is worth about a third less than rival Michelin, which has recently moved in the opposite direction and expanded its non-tire business.\u00a0 <\/p>\n
Continental\u2019s breakup will happen in two stages with the listing of Aumovio planned for September. The sale of ContiTech \u2014 which employs almost 40,000 people globally and makes an array of rubber and plastics products \u2014 is targeted for next year.\u00a0 <\/p>\n
\u201cThe auto spinoff is the right thing to do, just probably five years too late,\u201d said Harry Martin, an analyst at Bernstein. \u201cIt\u2019s not unleashing a lot of growth potential.\u201d <\/p>\n
To be sure, some German conglomerates remain intact. Robert Bosch GmbH, a major automotive supplier and industrial tech firm, is shielded from breakup pressure by its foundation ownership. Merck KGaA, which is active in pharmaceuticals and specialty chemicals, and consumer goods maker Henkel remain largely untouched. <\/p>\n
Conglomerates once promised stability and efficient capital allocation across sectors, but sprawling portfolios have fallen out of favor as investors push for focus and higher returns. Continental\u2019s breakup reflects a broader retreat from the model, as complexity and weak synergies increasingly outweigh the benefits of diversification. <\/p>\n
For Setzer, Germany\u2019s economic woes are only part of the driving force to split up. The company has seen \u201ctempered growth\u201d in its global markets, specifically in Europe and North America, he said. In China, the automotive unit\u2019s sales have been falling short of the market and that\u2019s likely to continue, according to Aumovio\u2019s top executive.\u00a0 <\/p>\n
\u201cIn such an environment where you need to adapt fast because visibility is so low, where customers can\u2019t always give you reliable forecasts, that\u2019s where you need small, agile teams,\u201d Setzer said. \u201cThe better you can adapt now, the better you will profit in the future.\u201d <\/p>\n
–With assistance from William Wilkes and Isolde MacDonogh. <\/p>\n