Adient CEO: 'The real trick is staying close with our customers'

The seating giant Adient, among the 20 largest automotive suppliers, has been strongly affected by the semiconductor shortage, partly because it is tied to automakers' just-in-time production strategies. But Doug Del Grosso, CEO since 2018, is confident that the shortage is starting to ease, and Adient has taken its own steps to lessen the blow. Del Grosso recently spoke with Automotive News Europe News Editor Peter Sigal about how his company is navigating a challenging time in the industry, and future opportunities to expand seating content.

Adient's results in the first quarter, where you had a small loss, were maybe a little disappointing. What is your business outlook for the rest of the year?

There is no question the first two quarters of the year have been challenging. We are operating under some pretty significant headwinds. First and foremost is COVID, including recent shutdowns in China. Then we have the shortage of semiconductors, and this was further compounded by the war in Ukraine. Then there are indirect impacts associated with these global events, such as rising costs. It's impacting every region. But we are seeing some encouraging signs. I can't be too specific on the outlook for the rest of year [ahead of first-half results], but if you look at our prior earnings call, this is really the first year [since the separation from Johnson Controls in 2016] that we have not provided very specific guidance.

Are you optimistic, pessimistic or neutral for the rest of the year?

I'm always optimistic. What has impacted us most has been the disruption around semiconductors, but we anticipate that it will continue to improve throughout this year and into 2023. It has a significant impact on us because most of our operations are “just in time.” So, when our customers shut down, we automatically have to shut down. Our ability to manage labor is disproportionately difficult because we can't build inventories. If that situation improves things will gradually improve in our business. We have been able to negotiate deals with our customers on [rising] materials prices. Ocean shipping has also been a huge issue, to the tune of about $60 million incremental costs on a year-over-year basis. We're solving these things over time, and we're gradually getting there.

What are you seeing that gives you confidence that the chip shortage is easing?

We are seeing our customers' schedules stabilize. That's due to a combination of factors: More capacity is coming online; there is less disruption due to COVID at semiconductor factories; and our customers are getting more intelligent in the way that they are applying semiconductors to their vehicles.

Can you pass through 100 percent of raw material price increases to customers? Which materials have affected your business?

The price of steel has gone up dramatically, but essentially, our agreements with our customers allow us to pass through the vast majority of increases. The problem we ran into is that historically steel prices modulated by plus or minus 5 percent. The structure we had in place had a lag factor to it, but it allowed us to recoup [increases] over a reasonable amount of time. When you saw the inflationary spike that occurred, our agreements didn't comprehend that environment. We discussed with our customers that the lag adjustment that we had in place -- in some cases 12 months -- wasn't going to work in this environment. We can't absorb inflationary risks like that. It's beyond the scope of our agreements. We simply went to our customers with our data and had a discussion, and have had a pretty reasonable outcome.

Would you say your relationship to your customers is better or worse than it's been, with recent pressures on supply and costs?

The short answer is, I think our relationships with our customers are better than they have been, but that's not to suggest that they are perfect. Our motto at Adient is to focus on everything that's within our control and really push to be collaborative. I think we elevated our credibility as a supplier during COVID. We never really created a disruption for our customers. We demonstrated that we were a reliable supplier, and that is going to make all these other conversations go a lot better when we have to talk about material [price] recovery and semiconductor disruptions.

How are you handling production stoppages that might be out of your control, from a labor standpoint?

Over Easter, we had a customer that on relatively short notice notified us that their plant was going to be down for a full month. We recognized that in the labor environment we are operating in right now, that likely those employees would look for alternative work. So, we ended up compensating 80 percent of their salary to retain them, with no production revenue. That is the level of measures that we are taking to provide stability to our customers when they have this level of disruption. The real trick is staying close with our customers, particularly as a just-in-time supplier, because when they start up, we have to immediately start. We operate with essentially zero inventory in the pipeline. And that's been a real challenge for us, but so far we have been managing it.

Have some of the recent events you mentioned caused you to rethink your view of globalization?

We have gone into our supply chain and looked at everything that is made offshore and imported into another region. We have had to reexamine every one of those business cases because the input costs from before are obsolete. We have taken some “self-help” measures, such as looking at how we can change our [shipping] pack density. On the question of do we re-shore, it's always a function of return on capital. You are duplicating capacity that already exists in an attempt to offset input costs. The automotive industry has been notorious in duplicating capacities to look for material savings. That's not a very attractive financial model to pursue. I think we will continue to operate with a global supply base, but we may change some of that in the near term based on the risk profile. A big component for us is if you re-shore, there is a fair amount of validation cost that goes into that equation because we are essentially a safety product. We are looking at whether we should validate an alternative site to have it on the shelf if we get into a Ukraine situation where we have to move quickly.

What has been the effect of the conflict in Ukraine? Adient has a factory in Togliatti that serves the Lada plant.

That is the extent of our operations in Russia. We are essentially a Tier 2 supplier there. That plant has been essentially shut down, but it's relatively minor to us financially. We are operating under a nondisclosure agreement, so I can't really say what we are going to do there in the long term.

In seating, are you seeing more demand from customers for sustainable materials, and are they willing to pay more for it?

Initially, what people thought about seating systems with regard to EVs, autonomous vehicles or sustainability is that they are kind of agnostic and there is not much you can do in those areas. We think there is a lot you can do. Historically, surface material has been the selection of the automaker as part of their overall styling process and our part has been more on the manufacturability side. We are now doing more upfront work, collaborating with “vegan leather” producers and others to have a product to show to customers that includes everything that we think falls under the umbrella of sustainability. If we are smart about it, I don't think cost is really going to be the issue, because we are showing some alternative construction that is actually lower cost, such as flexible structures that can replace the amount of polyurethane foam you need in a seat.

How else has the push for sustainability affected Adient?

One of the things that is important to us as a company is ESG, or sustainability, more broadly. When I look at 2021, our sustainability report was light years ahead of anything else we had communicated. I would expect that we will have that kind of quantum leap in our 2022 report. I think we always intended to lead in that area, but this kind of self-reflection and making it part of your business plan has been a pretty cool development, too.

When you refer to sustainability, is that tied to materials specifically?

We are very conscientious that we never want to be perceived as “greenwashing” our messaging. Everything we have put in place, we have spent a fair amount of time talking about and researching. You know, a year ago, I didn't really appreciate that there was a deforestation issue [with leather seating], and didn't really understand the role [environmental groups thought we] played in that. And then we sat down with them and explained how the process works. So, when we uncover something, even if we have to correct what we previously stated, we are willing to do that. We want to be really transparent and sincere in our approach.

Lightweighting is a key topic for EVs, because it can help increase range. Is that something Adient is specifically working on?

It's high on customers' priority lists, but it's not the only thing related to electrification, autonomous vehicles and other broader trends. In an autonomous world, but also in an EV world, people will probably spend more time in the seat. There is an intense focus on making it really comfortable, so you Are seeing recline features becoming light weight. We are also looking at all the materials utilized in the seat -- trim, cushioning, aesthetic coverings, polypropylene, plastics. If we are using low-strength steel, can we change to high-strength steel that's going to have less weight? The other EV consideration is that as automakers move into dedicated architectures to increase range, they are increasing battery density, and that changes the packaging size for a seat system that we traditionally occupied. So, we just have less space, and we have to package things smaller [in a way] that also provides lightweight to our customers.

How are you adapting seating to autonomous vehicles? And how do you see that trend developing, with many automakers backing off optimistic predictions for full self-driving vehicles?

There is a lot of work that needs to be done here, thinking about “out-of-position” occupants versus the traditional seating system that you built to structure the seat around a passenger and position the airbags to shield them in case of collision. That introduces a whole new level of configuration that that we have to account for. So to say, “It's just a seat and it's fairly agnostic,” is really underestimating what we are talking about. What I'm hearing from people I respect is that Level 4 or Level 5 is out there a bit. We were spending a lot of time doing full-autonomous vehicle development, and we have backed off a little. Do I think we ultimately get there? Yes, I do, but I think it's a ways off.

How is seat content growing, from a value standpoint, given the various trends we are seeing?

We are seeing content per vehicle go up. When Tesla came out, they had relatively simple seating systems, but they were first to market. People are not buying a Tesla because they like the seating system. But now virtually every automaker is trying to compete, and one way they are trying to differentiate is through seating. We are seeing that evolve quickest in China, which is a microcosm of what you can expect for the rest of the world when it comes to EVs. You have these very creative companies such as Nio and Xpeng -- whom we are doing seating systems with -- and they are driving a lot of comfort and content. We look at that as what we expect the rest of the world to do, and that is why we are convinced that our content will go up.

What is your forecast for your business in China?

We are anticipating by 2027 that will be about 10 million EVs annually in China, from about half that amount right now. We have about 22 percent of the market there and we think by 2027 it could be upward of 30 percent. We are off to an early, fast start with a lot of the new brands that are there. You always need to be cautious because not everyone is going to be successful. But so far we have a pretty good track record, and they are really exciting to do business with because they do things so fast. As a result, they get to market quick and they really lean heavily on us as a supplier because we know every seat system in the world.