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Shaping change: ZF sees more supplier mega mergers as autonomous driving race heats up

FRIEDRICHSHAFEN, Germany – The fast changing auto industry has ushered in a series of mega deals in the form of mergers, equity investments and outright takeovers over recent months, as major players both inside and outside of it vie for supremacy in the race toward connected, autonomous, shared and electrified mobility. In fact automakers have coined the terms “CASE” or “ACES” using the first letters of these four trends as pillars of their future strategies.

Dr. Stefan Sommer, CEO of ZF Friedrichshafen AG, expects such mega mergers and smaller partnerships to continue as the mobility market expands and the autonomous driving race reaches a climax.

Sommer made the comments at the German supplier’s annual press conference here on March 30 held at its new corporate headquarters – the ZF Forum, which opened in November 2016.


Filling the white spots

“We still have companies to collaborate and expect more mega mergers as the market continues to grow,” Sommer told CBU/CAR in a Q&A session after the press conference. “We can bring the strength of two companies together and for smaller partnerships we can bring the creativity and speed of smaller companies to add up to your portfolio.”

ZF is not a stranger to mega mergers, having acquired TRW two years ago in what is to this day still the biggest acquisition deal in the supplier industry. The integration of TRW, according to Sommer, is “making good progress” and “on the home stretch,” and “customers have benefited from the unique product portfolio and combined engineering expertise” as a result.

In fact, ZF Group sales in 2016, which rose 20.6 percent to €35.2 billion, included for the first time the Active & Passive Safety Technology Division that encompasses TRW’s business. Thanks to better operating performance and synergies, ZF was able to improve its EBIT adjusted for extraordinary items from €1.6 billion to €2.2 billion, and EBITDA rose from €2.9 billion to €3.8 billion. It was also able to reduce its debt load from the TRW acquisition by €1.6 billion while increasing spending on R&D to €2 billion.

“This strength gives us a solid foundation to help shape the challenging transformation in the automotive industry through digitalization, electromobility and autonomous driving,” said Sommer. “ZF is grasping the opportunity of fundamental change in the automotive industry to transform into a leading technology company in e-mobility and autonomous driving. The car of the future will still rely on mechanical components. Our strength is our combination of hardware and software. So we produce intelligent mechanical systems.”

That effort continued with the announcement on March 30 of the acquisition of a 45 percent stake in Munich-based radar technology provider Astyx Communication & Sensors GmbH. That move follow’s ZF’s acquisition of 40 percent share each in LIDAR technology company Ibeo and IoT/software provider doubSlash last year, in what Sommer calls “filling the white spots” as it strengthens its “See, Think and Act” capabilities.

“Astyx radar technology ideally complements our other radar solutions currently utilized for driver assistance functions such as distance control,” said Sommer. “Our ‘See-Think-Act’ principle means we’re committed to giving the cars of the future new sense and heightened intelligence. This brings us a crucial step closer to the vision of accident-free driving.”


China to drive growth

One market crucial to that vision is of course China, which will play a key role for ZF’s 2025 Strategy, according to Sommer.

“China is the most aggressive market in electrification and we share the views of our customers and will prepare for high production volumes (of EVs),” said Sommer. “We are seeing that penetration is mostly due to regulations and decisions of the authorities so we are analyzing those carefully.”

Sommer believes that development will continue to be strong in China as the start to the year, which many be expected to be moderate, was actually very strong, despite the reduction of government incentives that drove the market last year.

“We recognize that policies in China at the end is to make the economy strong and drive electromobility, we are of course open and in a lot of talks with Chinese OEMs to support their transition from combustion engine towards electrification,” said Sommer. “We are open and ready to work with them to make us strong.”

ZF’s Asia Pacific business last year of about €7.65 billion accounted for roughly 22 percent of its global revenues. It is opening the Phase II of its Shanghai Engineering Center later this month and will present the latest clean and safe transportation technologies at the upcoming Shanghai Auto Show.

“China is becoming more competitive and we are taking it more seriously,” said Sommer.

In fact, China is so important that it has become one of the five strategic mandates for ZF in 2017, according to Mamatha Chamarthi, chief digital officer of ZF.

“Three of them are autonomous driving, efficiency and integrated safety. The fourth is digitalization and the fifth is China,” Chamarthi told CBU/CAR. “We are not just looking at China as a market but also many other strategic partnerships for our company in China.”

Chamarthi, who was appointed CDO of ZF last year to lead the company’s digitalization efforts to establish a digital agenda and transformation for the entire company and ensure access to scalable resources worldwide, believes that ZF’s future will also be in China as it plans to set up an innovation hub there too.

“What has happened with Baidu, Tencent and Alibaba, it is just mind blowing. China is just too aggressive,” said Chamarthi. ZF, which Chamarthi says is a “100-year-old startup,” needs to tap into global innovation and will set up global innovation hubs everywhere starting with Silicon Valley and eventually to Shanghai, Israel and other countries as innovation pops up.

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