Marelli boss outlines strategy to become Top 5 global supplier

Marelli has set an ambitious goal: the 3-year-old Italian-Japanese company wants to one of the world’s five largest automotive suppliers based on revenue. Marelli, which has a combined 170 production facilities and R&D centers worldwide, ranks No. 18 on Automotive News Europe’s list of the top 100 global suppliers, with sales to automakers of $11.8 billion in 2020. Based on that list, the automotive lighting and sensing technologies supplier would need to boost its sales 170 percent to pass No. 5 Aisin’s $31.9 billion in sales. Marelli, which was formed in 2019 after Fiat Chrysler Automobiles sold its parts unit, Magneti Marelli, to Japan's Calsonic Kansei in a $6.5 billion deal, is fully owned by the U.S. private equity giant KKR. Marelli Executive Chairman Dinesh Paliwal outlined how the company will reach its target and explained why it appointed a new CEO to get there in an interview with ANE Associate Published and Editor Luca Ciferri.

When KKR bought Magneti Marelli in 2019 and merged it with Calsonic Kansei, which it purchased in 2017, the plan was to take the new company, Marelli, public or divest it by 2024. How did the pandemic affect this plan?

The pandemic clearly affected the timing, but not the ultimate goal, which will happen when the time is right. It will just take place one to three years later. There is no rush. First, we want to grow Marelli into a top five Tier 1 supplier. We are not there today. We had total revenue of about $14 billion pre-COVID. We shrunk a little bit during COVID, but revenue will grow again with an emphasis on innovation and technology.

Marelli recently named David Slump its new CEO. He joins from Harman International, where you two were colleagues. What do you expect from him?

We needed a CEO with a lot more energy, a lot more passion for technology and innovation. Someone who has run a global organization, comes from a big-picture, large-systems business and has a long-term view. I've known David for 20 years. He is very strong in systems and software. He ran Harman’s automotive systems business. His experience there is perfectly aligned with Marelli's vision and investment plans.

How will Marelli base its next investment decisions?

Since I joined Marelli last year, I wanted to learn more about the technology needs of automakers. Therefore, I have spent quite a bit of time to talking with CEOs at European and American car companies. I’m listening to them to understand what they are thinking about for battery, for charging stations, for electrification, for autonomous. For the next two years, Marelli main focus is to grow into a significant player in electrification. We are already the leader in lighting and sensing. Most people don’t realize yet how much we have invested in our ADAS [advanced driver-assistance systems], lidar, radar and camera technology. I have seen some neat stuff during my test drives at our operations in Reutlingen, Germany, such as cameras and lidars that work in all weather conditions. So, Marelli is going to invest heavily in electronics, software, electrification, lighting and sensing. Interiors will continue to ne a strength of ours as will our internal combustion engine (ICE) management systems. I believe ICEs will continue to be a player until at least 2035.

Magneti Marelli was very reliant on business from Fiat Chrysler, now part of Stellantis, while Calsonic Kansei was reliant on Nissan. Is that still the case at Marelli?

Yes, we still depend heavily on Stellantis and Nissan and enjoy very close technology partnerships. Like everyone, these companies have had their fair share of challenges due to difficult macroeconomic conditions. Although they had a very good profitability last year because they optimized all the inventory. Nevertheless, production went down similar to all other automakers. We know that most of these declines were due to semiconductor issues, which were a nightmare in 2021 and will be very challenging again this year. I'm hoping that by Q3 we will have bit a relief and the volumes at our biggest customers will grow again.

What were Marelli’s 2021 highlights?

It was a record year for order intake, exceeding our plan for the year, which is quite remarkable. Today we have $55 billion worth of orders on our books. When the semiconductor crisis gets solved, when the supply chain disruptions get solved, we are going to fire on all cylinders. We have available capacity, given that our 130 plants worldwide used to run at 80-plus percent capacity and lately are running at about 70 percent.

What is Marelli’s largest business?

Our lighting and sensing business accounts for almost 30 percent of our revenue. Lighting is our flagship business and also the most diversified in terms of customers. Our lighting and sensing products are present in pretty much all premium cars. We are very pleased with our positioning. Between Marelli and Hella, we probably take the bigger portion of the premium lighting business worldwide. I think we will grow that business even more.

What are the other key business areas?

They are vehicle electrification, electronics, interior experience, green technology systems (exhausts) and a cluster of classic businesses including ICE powertrain and ride dynamics, plus the aftermarket business. Finally, there is motorsports. We worked with all the major teams in Formula One, MotoGP, Le Mans series and all the other major world motorsports championships. It is a beautiful field, but it is small and not a proper business. It's more of a marketing exercise, but it gives us edge. It gives us access to new technology.

What does Marelli’s interior experience unit include?

We do the complete interior, except for the seats, which are a commodity. The next-generation car interior will be like sitting in a high-tech office with 5G video conferencing. There will be high-speed streaming and large interactive displays that will also allow passengers to experience movie watching like they were in their living room. And you can do everything with touchscreens and with voice recognition. That's how we will create a new interior experience.

Many automakers had strong financial results last year because their response to the chip shortage was to produce fewer vehicles but with higher content. That resulted in higher transaction prices and better margins. Suppliers, meanwhile, had to deal with lower-than-expected volumes as well as volatile prices for chip and raw materials. How bad was it for Marelli last year?

We were hit hard by the scarcity of semiconductors. We – and when I say we I'm talking Tier 1 suppliers – were buying chips on the spot market. You pay a lot more for them and then you have to do a second validation. It takes time and additional engineering efforts. On top of this commodities such as carbon, steel, aluminum, copper, magnesium shot up. We ended up eating the cost increases. A lot of those cost increases cannot be automatically passed on to automakers. The fairest way to deal with automakers is with indexes. If prices stay at that level, you get this price. If the price comes down, we will pass on the savings to you. If prices go up, you take care of us. Unfortunately, those indexes are loosely defined and not really as disciplined as you would expect. So, we worked hard last year to objectively create indexes that we took back to customers. There was a lot of back and forth, but I think we made good progress. Marelli is one of the very important suppliers to customers such as Nissan, Volkswagen, Daimler, Stellantis and others. They want us to be strong, and I think they are responding now.

Did Marelli make money last year?

We were profitable last year, but significantly less than pre-COVID.

Does that mean you were down from two digits to one digit in operating margin?

Before COVID, Marelli was over 10 percent (EBITDA), last year it was significantly less.

What has or will be done to make the company leaner?

We will continue to streamline our cost structure. We had two headquarters, two COOs. We were operating as two separate companies. We did not take out as much cost as possible with the merger of two companies. While engineering, project management, sales and customer support will be hardly be touched, we will shrink our corporate structure. This will improve our profitability. I believe that to be a profit leader, you need to be a cost leader. Cost is a mindset. It’s not about being cheap. I'm not trying to match the lowest Chinese cost structure. I'm trying to compete with the best of Bosch, Harman, Fujitsu and Denso. We need to be best among them. That is my goal.

The European Union wants to ban sales of internal combustion engine models by 2035. Is this a reasonable timeframe?

There are many well-known consultants who have called for a fast adoption and predict a total decline for combustion engines. I do not believe this is as imminent as some may suggest. Electrification is the future, but there are many open questions. Is the technology ready for mass adoption? Will the infrastructure be ready? Will power grids be able to sustain the extra power demand to charge all the EVs? A lot of things will need to happen. The eventual shift to electrification, however, is going to happen, led by China, followed by Europe. The U.S. will be last because American consumers have a love affair with the gas guzzlers.

Why will China lead?

Because the government is building the infrastructure and it has the power to require people to comply [with the shift] . Europe and U.S. do not behave the same way. In terms of timing, I would say 35 percent to 40 percent of all cars globally will be electric by 2030. That includes China, Europe and America. Then, if everything goes well, that will probably rise to 65 percent to 70 percent by 2035. Therefore, it is many years away. That is the reason why Marelli cannot stop innovating ICE powertrains. There is still a lot of work to do to reduce the pollution coming out of the exhaust. We can truly transform Marelli from what it is known as now into a futuristic technology player. What I am asking my team to do is think different. Thinking differently will lead us toward futuristic technologies.