(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.
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’s shifting business model.
“Continental is a very good example of how German companies are finding it difficult to navigate the transformation,” said Stefan Bratzel, head of the Center of Automotive Management in Bergisch Gladbach, Germany. “This breakup shows one way that the model of a big, one-stop shop doesn’t work anymore.”
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.
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’s strategic shift shows how the supply chain is now starting to adapt.
Chief Executive Officer Nikolai Setzer wasn’t 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.
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.
“The common markets of our three sectors were reducing or diminishing over time — the sectors had different purposes, customers and products, so synergies were limited,” Setzer said in an interview. “As soon as you have different entities within a company, you have to see whether the synergies outweigh the challenges of holding them together.”
Headwinds have increased in Germany after two years of contraction and minimal growth projected this year. For Europe’s 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.
That puts pressure on Chancellor Friedrich Merz’s 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.
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’re threatening to use their control of half the seats on the supervisory board to try to block the move.
What Bloomberg Intelligence Says:
The restructuring will make Continental a pure-play tire business, which could position it for a rerating.
— Gillian Davis, industry analyst (Click here for the full report)
“There are considerable synergies between tires and ContiTech,” Matthias Tote, the unit’s works council chief and a supervisory board member, said in an internal memo sent to workers on Monday. Jörg Schönfelder, another employee representative on the board, said executives are moving ahead “without adequately assessing the potential risks.”
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.
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.
Continental’s breakup will happen in two stages with the listing of Aumovio planned for September. The sale of ContiTech — which employs almost 40,000 people globally and makes an array of rubber and plastics products — is targeted for next year.
“The auto spinoff is the right thing to do, just probably five years too late,” said Harry Martin, an analyst at Bernstein. “It’s not unleashing a lot of growth potential.”
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.
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’s breakup reflects a broader retreat from the model, as complexity and weak synergies increasingly outweigh the benefits of diversification.
For Setzer, Germany’s economic woes are only part of the driving force to split up. The company has seen “tempered growth” in its global markets, specifically in Europe and North America, he said. In China, the automotive unit’s sales have been falling short of the market and that’s likely to continue, according to Aumovio’s top executive.
“In such an environment where you need to adapt fast because visibility is so low, where customers can’t always give you reliable forecasts, that’s where you need small, agile teams,” Setzer said. “The better you can adapt now, the better you will profit in the future.”
–With assistance from William Wilkes and Isolde MacDonogh.
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