ITT Industries Inc. may sell the brake and electrical businesses of its automotive division. The operations account for nearly $4 billion in sales.
The US conglomerate finally grew tired of the price wars. At a time when automakers are demanding antilock brake systems costing $100 per vehicle - down from $600 six years ago - suppliers have to slash costs simply to stay in the game.
ITT Automotive is one of the world's three leading manufacturers of antilock brakes. It is profitable, but not profitable enough.
ITT's non-automotive manufacturing operations enjoy profit margins of 8 percent, compared with the automotive division's 6 percent.
That is a dilemma confronting other industrial conglomerates, too. Over the past two years, AlliedSignal Inc. sold its brake and airbag divisions. Rockwell International spun off its automotive business, and United Technologies shook up management to improve UT Automotive's earnings.
'The automotive business does not offer high profits,' said Robert Oswald, chairman of Robert Bosch GmbH. 'For a conglomerate looking to maximize returns, it would be natural to question what it is doing in the automotive sector.'
The problem is particularly acute in the market for antilock brakes. Bosch, ITT Automotive and LucasVarity LLC - the world's three leading ABS manufacturers - are locked in a chronic price war that shows no signs of abating.
Today, automakers pay $140 to $150 to equip a sedan with antilock brakes. Industry sources say automakers are getting bids for future antilock systems costing $100 to $125. Antilock brakes have become a commodity, and automakers do not pay premiums for commodities.
'Prices have been driven down very aggressively,' Oswald said. 'Designs and performance are fairly standard, so aggressive pricing will continue.'
In Europe, the company has introduced successful cutting-edge technologies such as its vehicle stability management system. BMW will introduce ITT's yaw-control system on its 3-series models, while Daimler-Benz plans to use it on the ML430 sport-utility.
With new technology and a healthy market share in Europe and North America, ITT's brake division will not be sold cheap.
The company has hired Lazard Freres & Co. LLC and Goldman, Sachs & Co. to evaluate its prospects. It is not clear how long it will take for ITT Industries to decide the fate of its automotive division.
According to an estimate by Lehman Bros., the divisions to be sold could garner bids of $2 billion to $2.5 billion.
Although ITT has not identified possible bidders, there already are reports of interest. Companies such as TRW Inc., Tenneco Inc., LucasVarity and Siemens Automotive might make bids. At the moment, LucasVarity is flush with cash after selling its Perkins diesel unit to Caterpillar.
Meanwhile, Siemens supplies ITT with electronics used in its antilock brake systems. And a bid might make sense for Tenneco, which launched a joint venture with ITT to design suspensions and brakes.
Bosch recently spent $1.5 billion to acquire AlliedSignal's brake division. A union of ITT and Bosch - the world's two biggest antilock brake makers - might set off antitrust alarms in Europe and Washington.