How Webasto will tackle tight labor market, rising inflation

Webasto's 2021 global sales increased 12 percent to 3.7 billion euros but it reported a full-year operating loss of 146 million euros, more than double its loss from 2020. It's first time the 121-year-old German roof and technology supplier has reported back-to-back operating losses in at least the 21st century if not longer. The negative result was largely because of quality issues Webasto had with the roof system it is producing in the United States for the Ford Bronco. Webasto Chairman Holger Engelmann said that issue is solved, but now the challenge is finding and retaining people in the tight U.S. labor market. He discussed this and more with Automotive News Europe Managing Editor Douglas A. Bolduc.

Webasto attributed its operating loss and negative profit margin in its 2021 to “one single, extremely challenging, technologically innovative major project of highly strategic importance for the Americas region.” That is the Ford Bronco roof project, right?

Yes.

What is the current status of the project?

We successfully started operations at a second roof plant, which is in New Hudson, Michigan. So, we are producing the required volumes. In addition, we have the ability to expand capacity. Nevertheless, it's still a challenging project, basically because it is very difficult to fill job vacancies in the U.S. due to the very tight labor market. Retaining people is also very difficult because there is intense competition for high-skilled positions. But we have improved our operation and with regard to the quality and the production volumes the project is going well.

Why is it so difficult to staff your U.S. factories?

Unemployment in the U.S. is very low. There are more jobs than there are people to fill them. The economy is booming, and with little immigration, there is a real a lack of a workforce in many parts of the U.S. It's not just in the Detroit area. It's also in the other regions of the country. This is limiting growth in the U.S. and also driving inflation there more so than in Europe, where inflation is mostly driven by higher energy costs.

The troubles in the U.S. and cost of your long-term investments caused Webasto to have a -3.9 percent margin, which was worse than 2020's -2.1 percent margin. Will you get back into positive territory in 2022?

Our target is to return to profitability this year.

What are your chances of doing so with three financial quarters now completed?

We are heading in the right direction, but there is still a ways to go. A lot depends on whether the projected light vehicle production volumes are met during the final months of 2022. This includes whether the  automakers' volume plans come to fruition and how negotiations go with customers on  increased costs we face due to higher inflation. What is clear is that during times of great uncertainty and global conflicts, forecasting is difficult.

How much of a financial hit do you expect rising costs for energy to have on your results this year?

We don't have an exact figure, but the overall impact of rising energy costs will be at least in the double-digit millions. That is not just from increased expenses we face for our own energy consumption, it also includes higher costs at our subsuppliers, especially in Europe, that are facing these increases. The effect will be less severe in the Americas, and we don't expect a significant impact from energy costs in China.

What is your overall market outlook for 2022 and for the major global markets?

We expect growth in the major markets to results in a 5 to 6 percent increase in global light vehicle production compared with 2021, but that is nowhere near the level we had prior to the pandemic of 95 million cars.

Webasto increased its revenue in 2021 by 12 percent. Will you have a similar performance this year?

Yes, we expect the increase to be around double digits or perhaps a little lower. It really depends on the last months of the year.

What impact has Webasto felt from the chip crisis and what is the long-term outlook?

The situation remains tight because for some chips we are still only getting a specific allocation. Overall, the situation is slightly better now than in 2021, but we don't expect it to ease significantly until the end of next year.

Why?

Because there are still shortages of some semiconductors that are purely used in the automotive industry.

What has Webasto done to reduce the impact of this crisis?

In the past, we mostly purchased our electronic components without really knowing what chips or elements were on the circuit boards we integrated into our products. Now we have full transparency on this. Therefore, we can better anticipate potential shortages and talk with our subsuppliers earlier or with the semiconductor producers directly.

Any other changes when it comes to chip?

Yes. We are ordering higher volumes and we are making our orders earlier than we have in the past. We no longer just do short-term buys. This gives our suppliers a longer range forecast. In addition, when we add new electronic components into our product portfolio we try to make sure it has chips that we can easier substitute with alternatives. And if we have to choose a chip that might be more difficult to get, at least we know this in advance and can calculate the risks and determine how to protect ourself.

How much extra are you ordering when it comes to chips?

It is about 10 percent more. But there is a related development I am concerned about. The semiconductor demand per car will definitely increase over the next few years, therefore, and I wondering whether we have enough capacity in the chip industry to support this growth in demand. Unless the industry invests in increasing overall semiconductor output, we won't be able to get back to annual light vehicle production of 90 to 100 million cars a year.

You mentioned that you are giving suppliers a longer outlook? How much has it increased?

In the past we forecast three months ahead, now we give a perspective of six months to a year.

Have there been any other positive lessons taken from the shortages caused over the last two years by the pandemic and chip crisis?

A reliable supply chain was considered a given in the past. That is no longer the case. Therefore, we spend more time evaluating the potential risks we face sourcing every component.

How does Webasto feel about automakers such as BMW developing direct relationships with chipmaker and is this something you also plan to do?

OEMs and suppliers are all pursuing different strategies to solve this long-standing problem for themselves. We have also started to contact chip producers directly.

Do you see any underlying issues when it comes to having a less volatile flow of chips?

The problem is that the current supply chain structure for semiconductors is extremely complicated and not very transparent. For example, maybe there are some chip stocks located somewhere where they are not being utilized. If there was some transparency on this then those chips could be put to use, resulting in higher vehicle production. Unfortunately, there is no visibility like this for chips, which I think would help us get the most out of the limited capacity that is there. Sadly, I don't see how to solve this issue amongst ourselves due to antitrust regulations that we all have to follow.

How will Webasto capitalize on the move to EVs?

Our decision to go into this area, which we call electromobility solutions, came at the right time. We are seeing strong orders for our products, which helped us double sales in this area last year. Despite major current challenges, we continue to systematically expand this area, which is now the second strong pillar of our business after roof systems. Above all, the business for our batteries and electric heaters is really taking off. In the first quarter of this year, incoming orders for our e-mobility business exceeded orders for our roof systems and our heating and cooling systems divisions.

What have been the key wins?

In addition to two large-volume projects for Hyundai-Kia passenger cars for 68.7-kilowatt-hour and 50.9 kWh battery packs, which we will build at our plant in Dangjin, South Korea, we received our first battery order from a German automaker at the beginning of the year. We will add a new plant in Slovakia to help us meet this order. The business has huge potential. By 2025 at the latest, we plan to reach the sales of 1 billion euros. But that is dependent on us having the financial capacity and the human resources to keep expanding that business.

How will Webasto capitalize on the move to autonomous cars?

A key product for us is our roof sensor module, which integrates lidar, cameras and radar sensors in the roof that help enable autonomous driving. We demonstrated the technology at the 2019 IAA in Frankfurt and now we have received our first orders for the system. The advantages of this solution are that being positioned on the roof provides a wider overview of the area around the car and if there is an accident it is less likely the sensors will get damaged than if they were in the bumper.

How has the war in Ukraine impacted Webasto?

We lost Russia as a market for our fuel-operated heaters, and some customers temporarily reduced production at the beginning of the fighting because their supply chains had been affected. We also have some suppliers in the Ukraine that were able to continue delivering to a limited extend. Moreover, we found other solutions to cover our needs. Overall, the consequences of the war have been manageable for us so far.

What alternative solutions did you find?

We still get parts from Ukraine now. We built up stocks and we have added backup suppliers outside of the country in the event that our suppliers there cannot produce because of the war.

Are you concerned about de-globalization?

I believe in the free market. The more this gets hindered by tariffs, duties and taxes the more expensive everything gets. Nevertheless, this has become a reality given the current geopolitical situation. As a result, things are getting more and more regional. Therefore, we have to make our regional businesses as independent and cost efficient as possible. Overall, Webasto is quite independent because we produce in the market for the market, and we mainly purchase in the market for the market. There are, however, still some components that are shipped long distances. Therefore, we have to decide whether it makes more financial sense to continue doing that or to find an alternative supplier in that region. We also have to look at this from an ecological sustainability perspective, asking ourselves whether transporting goods over very long distances makes sense. This could lead to a totally different value-added structure in the future.

How has Webasto offset the risks and vulnerabilities from raw materials?

One way is that we try to avoid using rare earth materials in our products. When it is impossible to avoid using a raw material with a widely fluctuating price we try to make sure index-based pricing is used to help protect margins and reduce re-negotiating deals when prices are volatile. This will need to be applied to more materials in the future.

How are negotiation going with automakers?

It's always a challenge to discuss prices with our customers, but there is a certain level of understanding that there is a necessity to somehow support us as we try to manage the rising inflation. We are progressively finding good solutions despite challenging times for both parties.

How does COVID-19 continue to affect the business?

I would say it's not an everyday topic of discussion anymore because it has become part of our normal working environment. But even so, I believe that we all are suffering from a form of long COVID because the entire economic system was thrown off balance by the pandemic and things have not returned to normal. For example, the Czech government decided non-Czech citizens had to leave the country during COVID. As a result, we lost a lot of employees because they had to return home, where they found new jobs. We had to start with an entirely different crew at our plant, which was like opening a new business. In addition, we are still trying to find a balance between work from home and coming into the office, which is having some impact on the overall performance of the company especially in regards of creative or problem-solving processes.