Marelli CEO expects e-powertrains to provide long-term boost

Marelli was created in 2019 after Fiat Chrysler Automobiles sold its parts unit, Magneti Marelli, to Japan's Calsonic Kansei in a $6.5 billion deal. The supplier was in the midst of melding different cultures and industrial footprints when the pandemic hit, forcing it to switch to "survival mode." CEO Beda Bolzenius says the company is back on track and poised to keep growing, even as it invests heavily in electric powertrains and software. Bolzenius discuss this and more with Automotive News Europe Associate Published & Editor Luca Ciferri and Correspondent Andrea Mala

Last February you said it would take longer than expected to complete the integration of Calsonic Kansei and Magneti Marelli. What is the current status?
The basic rationale for the merger is the same: create one broad-based supplier with a more diversified customer portfolio and a more balanced regional exposure. We were able to leverage this new position, first by expanding the business beyond Fiat Chrysler and Nissan. We also have leveraged our technology position. Progress has been very good especially on the so-called "hard" integration activities -- such as accounting, service agreements, restructuring of legal entities, that were about 80 percent completed within the first year.

Could you give an example?
Our e-powertrain business is seeing significant synergies in the area of the e-axle because we can combine our knowledge of electrical motors – coming from the former Magneti Marelli team -- and inverters from Calsonic. In addition, we are working on a new partnership for gearboxes that would immediately give us a strong position in that sector. Integrating the two companies and finding new synergies is still one of our highest priorities.

How did the pandemic affect the integration?
COVID-19 changed the company's priorities. Last March and April we went into survival mode to try to protect our people as much as we could. All of our plants were closed at some point last year because of the pandemic. Out of 174 plants, 170 were closed for at least two months. During the height of the crisis we had more than 90 plants closed at the same time. This caused project work connected to a number of launches to be frozen. We looked at how to preserve cash. And while I wouldn't call the cash situation severe, it was demanding a lot of attention, specifically in May and June. That was when we started to look closely at areas such as past-due payments, supplier payment terms and reducing inventory. Unfortunately, the integration work was stopped because of the crisis.

How was the speed of the cultural integration affected?
The soft side of integration, the creation of common spirit, was also slowed due to the lack of cross-functional and cross-business activities and because we were often prevented from meeting each other. Before the crisis, I spent at least one week a month in Italy. That gave me the opportunity not only to participate in all the management meetings, but I also had the chance to meet people face to face and get their feedback. There is no video conference in the world that can replace that. We need to recognize we have gone slightly backward on that part of the merger because everybody was forced to into survival mode.

Did you restart the integration activities?
We are starting to ramp it up again, although the way we are running the business is not back to normal. There are still restrictions caused by COVID-19. We are still very careful with regard to cash-related issues. I really hope things will be back to normal in the second half of 2021.

Marelli received emergency loans from Japanese banks. Was it a political decision to go to Japanese banks or did you also ask others for help?
The entire industry was in need of support from all sources. The financial tools have included temporary layoff support from governments as well as short-term credit offers. When it comes to the latter, we have been more cautious because they add debt to the balance sheet. Japanese banks have been at the center of the financing of the entire company since long before the crisis because the merger is a very Japanese-centric deal. Financially, the deal with Marelli was not so much a merger as it was an acquisition, and even that step was financed by Japanese banks. [Majority owner] KKR has been a very supportive partner. Fresh money came from their side as well.

How is the company performing?
Marelli's operational performance is now back to a positive level. We are also running the business cash positive right now. We are safely able to fulfilling covenants and conditions on our debt. The levels at which we are operating now are already good enough to keep us going.

What is Marelli's long-term profitability target?
If we look at the transformation that we have in front of us, the targets we will achieve in the next two years will allow our different business units to perform at or above the industry average. We know where we need to be if we want the Ebitda [earnings before interest, tax, depreciation and amortization] from the ongoing business to finance our growth plans. Like everybody else, we will have to spend money on new technologies. For example, our push into e-powertrains will have a cumulated cash-negative impact. It will also cost us money to build up our software activities.

Automakers have told us that COVID-19 safety measures are reducing the speed of their assembly lines, causing a 10 percent decline in capacity utilization. Is Marelli experiencing the same impact?
I would say we are closer to a 20 percent decline. Also, I think the level you mentioned for automakers might be a target. The supply chain is still extremely unpredictable. There is an industrywide shortage of semiconductors. There are still disruptions due to COVID-19. At one point we had between 600 and 800 people who could not come to work, forcing us to hire other people. In regions such as Mexico we have lose one shift per week just to perform cleaning and sanitizing.

You said Marelli froze or postponed a lot of activities. Which areas suffered most?
A lot of what we did was aligned with our customers. On one hand there are the normal launch activities where you already have the business and an SOP [start of production] assigned. You have to deliver samples, and so on. Those activities slowed down significantly. On the other hand there are RFQs [request for quotations]. You have the full agenda for the year. You know when the sourcing decisions need to roll in if you look at the launches customers are planning for the next two to three years. I would say that on average there were delays of three to six months for launches across all our customers. We were able to reduce our outsourced engineering activities. Within the legal boundaries, all of that work was stopped immediately. We have, like everybody, contractors on board who cover 20 percent of our workload, specifically on the engineering side and manufacturing planning side. That was the first level that went to zero.

Which technologies were hit hardest?
Activities around autonomous driving have slowed down significantly because a large number of predevelopment activities, prototypes and pilot projects have been canceled.
One example comes from our automotive lighting business, which was creating a solution we call the "smart corner." Our aim was to integrate camera, radar and lidar technology within vehicle headlamps and taillamps, using a fusion software to optimize the way those different types of sensors work. We had some programs underway to get something on the road and start collecting data but activities were stopped. In general there has been a broader reset on autonomous.

What technologies remain in demand?
Demand for connectivity solutions, for example, cockpit controllers, remains strong as does demand related to next-generation electronics architectures. Overall, activities around electrification have significantly increased. There is a new push in that direction, starting with China but quickly followed across the rest of the world. Throughout the pandemic, Nissan has been laying out a road map toward integration. First came a two-in-one solution that integrated the inverter with the electric motor. Then came a three-in-one solution, resulting in an e-axle that combines the electric motor, power electronics and transmission. What is relevant to us -- and we have seen this with different customers -- is that at the beginning of the crisis the e-axle was supposed to be done in-house [by the automakers]. Now that is being outsourced.

What is Marelli's business outlook for 2021?
That's very difficult to predict. Even before the pandemic there was a lot of volatility because of Brexit, tariffs, political instability and oil prices going up and down like hell. Now everything will depend on how the pandemic unfolds. We were pleasantly surprised by the stability of consumer demand from October to December. The desire for individual mobility has increased. The willingness of consumers to buy cars is higher than before. This is true all over the world. But if dealerships have to be shut down again the output at the vehicle plants will drop again.

What share of Marelli's revenue comes from software and what is the outlook?
While I can't provide a specific number, I can tell you how much revenue we generate from what we consider to be "software-defined" systems. These are products in which the software is crucial for functionality and the performance. For our interior electronics business the number is shy of $2 billion in revenues. This includes new programs such as cockpit modules and cockpit control. For our automotive lighting unit revenue is north of the $3 billion threshold. Right now 20 to 30 percent of the products from this area are already software defined. We are building up our e-powertrain business, which accounts for a couple of hundred million dollars of revenue today but is growing very quickly. The inverter is software defined, meaning that perhaps 50 percent of the revenue that we generate in the e-powertrain business is software defined.

A lot of software is embedded in semiconductors. How reliant is Marelli's on these providers and will this change?
This is a very strategic discussion that we have internally. It goes from standardizing our components based on strategic relationships we want to build up to sourcing from dual or multiple suppliers to meet our requirements. Dual sourcing was a big topic after the disaster in Fukushima made it difficult to get semiconductors, which are in short supply again because of the pandemic. In reality, it's not easy to start buying processors from a different player within a matter of months. A lot of planning goes into your semiconductor strategy. The processing power within cars will increase tremendously. I remember, when we were first looking at embedded software, there was always a precise specification coming from the automaker aimed at minimizing the purchase cost. Nowadays, it is often the case that the specs we get are not very well defined at the outset. In those cases, automakers want suppliers to offer flexibility, which means having a little bit more processing power in the chips in case it's needed later. On the other side, some of the largest chip suppliers in this world throw processing power out as their calling card. I don't have an easy answer. This is one of the things that we need to follow through on.

How long will the current semiconductor shortage last and what is Marelli doing to offset any potential damage it could cause?
We currently keep organizing a lot of premium freight and last-minute deliveries. I have scheduled numerous crisis calls because every day another customer is talking about this. The industry recognizes this as a real bottleneck that I would say will not be back to normal until the end of Q1.

What will Marelli's role be in electrification?
In addition to electric motors and inverters, we have a very unique position in thermal management, where we are booking good business. Battery plates and the entire cooling systems for the power distribution unit are our core competencies. We put our HVAC [heating ventilation and air conditioning] business into a joint venture with Highly International. The core components of thermal management are highly commoditized and we needed some support to become more competitive in China. At the same time, we see thermal management as being really strategic. We are also booking good business for heat pumps -- the thermal systems for future electric vehicles. These are areas where we want to grow and where we are better than Bosch and Continental and the other suppliers. Through the inverter business, we are looking more closely at direct inverting -- wireless solutions for the battery management. For that you need a better understanding of how the cells work. But we won’t try to enter the battery manufacturing business because it's a specialized field that is not part of Marelli’s DNA.

Are you eying any acquisitions?
We need to decide whether our software capabilities are good enough. Can we catch up quickly enough organically or do we want to solve the problem with an acquisition? There is certainly the area around electrification, where I believe we need to be. I don't want to throw out names right now, but we need to look at gearboxes in the e-axle area. In that area we are certainly looking at acquisitions.

Is there any specific geographic area Marelli needs to strengthen?
I believe we have a good chance to grow reasonably in China. I think China is for us a focal point and the joint venture activities that we announced have been part of the strategy. If you look at our customers, Dongfeng or Nissan, they are very successful in China so there's a good reason for us to spend money there to defend and increase our presence there.

Is Marelli still investing in future combustion engine technologies, and how long will it keep doing that?
I tell my people that we need to be where the customer is spending money and where the customer is making money. If I look at Volkswagen Group and other big automakers, we both know where they will spend their money. That being said, when it comes to combustion engine technology, we will do everything we can to maintain our technology level. We have good products in the high-pressure technology area. These solutions can significantly increase the efficiency of small-displacement, high-volume gasoline engines. We still have projects as well as new launches coming up. It's valuable enough to continue this part of our business for a while.