CONTINENTAL AG is betting $1.9 billion that automakers will want to buy 'smart' tires.
The world's fourth-largest tire maker is buying ITT Automotive's brake-and-chassis division so that it can integrate a vehicle's corners - that is, the tires, wheels, brakes and suspension -into a single system.
One key system could be electronic tires with built-in sensors. Continental is developing a magnetized tire that can measure vertical and lateral pressures.
The tire could help determine whether the vehicle is about to skid or spin out. A data-gathering tire could improve the effectiveness of antilock brakes, traction control and yaw-control systems.
Moreover, the sensors would be a key component for a run-flat tire that Continental is developing.
'It's a way to enhance the value of the tire,' said Bernd Frangenburg, the president of Continental General Tire and a board member of Continental AG.
'If we are successful, we will have a true innovation,' he said. 'You might compare it to (the invention of) radial tires 30 years ago.'
Conti had to outbid Visteon Automotive Systems and Tenneco Automotive for ITT. It paid a premium for the company, but it got what it wanted: more non-tire business and chassis expertise.
The ITT acquisition will allow Continental to achieve its goal of expanding beyond tires. Yaw control could be one of ITT's hottest products, in the wake of Daimler-Benz' infamous elk test.
The German automaker decided to equip its A-class car with a yaw-control system after the car flipped during a lane-change maneuver. Other automakers like Volkswagen AG are likely to follow suit.
'All of a sudden, there is a huge market,' Frangenburg said. 'All these cars need to be equipped.'
With 10,775 employees and annual sales of $2.1 billion, ITT's brake-and-chassis division will double Continental's sales of non-tire components. Tires account for 70 percent of Continental's total sales now. After the ITT purchase, Continental's sales will be split evenly between tires and non-tire components.
'It puts Continental right where they want to be,' said Tim Aney, an analyst for Bayerische Hypotheken und Wechsel Bank AG of Munich, Germany.
Aney estimates that Continental paid a 60 percent premium, compared to the price of other German suppliers.
He warned that a payoff on electronic tires may be at least four years away.
Moreover, Continental will have to invest heavily in R&D, and may have to carry out a costly restructuring of ITT.
The integration of ITT's corporate culture with Continental may be aided by the fact that both companies are German. The core of ITT's operations is the former company Alfred Teves GmbH, based in Frankfurt.