Webasto predicts 2021 rebound will be held back by chip crisis

Webasto's 2020 global sales dipped 11 percent to 3.3 billion euros and it reported a full-year operating loss for the first time since 2006. The negative results, which the supplier primarily attributed to the pandemic, kept Webasto from meeting its target of boosting sales to 5 billion euros by 2020. Webasto Chairman Holger Engelmann is confident the company will rebound in 2021 and reach its sales goal “in the midterm,” but his top priority at the moment is overcoming challenges such as the chip shortage and rising prices of raw materials. He discussed this and more with Automotive News Europe Managing Editor Douglas A. Bolduc

Webasto missed its goal of having global sales of 5 million euros by 2020, finishing with 3.3 billion euros, its worst result since. How much of that was due to the pandemic and how much of that was due to being over ambitious?
It's true that in 2020 our sales declined significantly. Between 60 and 70 percent of the drop was caused by a slump in demand caused by the pandemic. The rest was because we set ourselves a very ambitious target that we didn't fulfill during challenging times.

What is the new timeline for reaching 5 billion euros?

I'm a bit more cautious about providing a specific year because the current business environment is so volatile, not just when it comes to automotive demand but also because the semiconductor shortage and rising raw materials prices. Another factor is that we are in a build-up phase as the industry moves toward electromobility. What I can say is that reaching annual sales of 5 billion euro remains our target, which we would like to reach in the midterm.

Last year your earnings before interest and taxes fell into negative territory, resulting in an operating loss of 69 million euros, compared with an operating profit of 107 million euros in 2019. What happened?

It was a combination of several factors. First of all, as we discussed, our overall sales declined because of the pandemic. That was a major reason. Second, we didn't stop funding our new business areas [which includes battery systems and charging solutions], we actually increased the investments there. Since we do not do any capitalization in our balance sheet, those costs have a direct impact on our financial results [in the same year we made the investment]. Third, we had some restructuring expenses at our locations. These factors led to a negative result.

This also appears to be primarily attributable to the massive downturn in demand for roofs, which accounted for 85 percent of your 2020 sales. What is the ideal percentage for roofs? Maybe 60 percent?

The roof business is core to us and we still intent to grow it. That means we will have to grow our other businesses even faster to achieve more of a balance. Ideally, in the future half of our sales would come from the roof business and the rest from our other businesses. The challenge is that our roof business has been growing rapidly for years because of the high demand from our customers to add new facilities all over the world.

While 2020 was very challenging, 2021 has gotten off to a good start. Your sales increased 31 percent to 936 million in the first quarter and you had an operating profit of 30 million euros, compared with an operating loss of 40 million euros during Q1 2020. What have been the biggest factors for the turnaround?

We benefited from the work we did in 2020 on our cost base, and we have had a tremendous increase in sales in the first quarter compared with the same period last year. But -- as we saw in the second quarter -- it unfortunately was no real turnaround.

What did you do to improve your cost base?

In 2020, we examined every part of the business to find areas where we could optimize, which resulted in 350 million euros in savings. Some of this was because of so-called short-time work, in which the German government temporarily covered a large portion of our employees' wages in 2020. This had a one-time effect because we have returned to full-time work. Last year we also spent significantly less on travel expenses, kept external consulting services to a minimum and we focused on leveraging synergies for instance on the R&D side, resulting in a better cost position.

You expect sales to increase and to have positive earnings in 2021. Would 4 billion in sales be possible and perhaps a return to a profit margin in the 7 percent range like in 2017?

If you would have asked me in March, I probably would not have given you an answer, but I would have smiled. As of now, I'm looking a little bit more serious because what happened after the first quarter was not that promising. While we still expect it to be a positive year, we must overcome a lot of obstacles that have the potential to turn what seemed destine to be a great year into a mediocre year.

What impact is the chip shortage having on Webasto?

We are being affected in several ways. Some customers had to temporarily close their plants when they couldn't get enough chips, which had a negative impact on our sales, especially of sunroofs. Additionally, this ongoing volatility has made it very difficult for our customers to forecast the quantities of products they need from suppliers. As a result, there can be up to a 20 percent difference in the volume they originally asked for and the number of units they really purchase within one month. The short notice periods cause capacity and cost challenges for us. Third, we also have to fight extremely hard to get our own chips because all our products – from roofs to heaters to charging stations – have semiconductors. A special task force is working very hard to make sure we get enough chips. In some cases, however, we have had to use brokers, which increases the cost by more than double what we would usually pay.

How long do you expect this to be a problem?

We believe it will continue into 2022.  

What is your industry outlook for vehicle production for Europe, the United States and China?

Overall, the demand from end customers is there. The limiting factor is what we can produce despite the chip shortage. Right now, if you order a car it can take six to nine months to get it. That being said, we expect the European market to be stable while China and North America will be strong. The bottom line is that the industry has an overall issue with capacity restrictions due to supply bottlenecks.

What about Webasto's prospects in each of those three markets?

Our business in China will be quite strong. In Europe we expect a significant increase but not at the magnitude we saw at the beginning of the year. Our outlook for North America is pretty good, but very much dependent on whether some of our customers can get back online after having to stop production because of the chip shortage.

Will Webasto grow faster than the overall market in each of those key regions?

That is always our goal. In fact, in 2020 we dropped less than the overall market. Therefore, I believe that we grow faster than those markets in the future. What is driving this is our entry into offering new technologies. We invested heavily and this has opened brand new fields for Webasto. Meanwhile, our roof business will grow more in line with or slightly above those markets largely because of the benefits we are getting from the shift to panorama roofs, which is boosting our revenue.

Do you believe Europe should increase its number of chip factories?

Yes, I support that because I believe each region of the world should have some level of capability to produce something as essential as chips to avoid risks caused by single sources. Europe doesn't need to get 100 percent of its chips from plants here, but it should have the ability to meet half of the region's demand.

Your annual report says Webasto has “multiple large-volume roof orders” can you provide some details?

We received an order from BMW for the 4-Series convertible, which is a strong selling car in that niche. The last-generation car's folding hardtop, which we also produced, was replaced by an innovative softtop that has special honeycomb-design construction that provides excellent acoustics. The other big order is for the Mercedes-Benz S-Class. Although it is not a high-volume car, there is a very high fitment rate for our panorama roof system, which has a lot of new features such as the ability to open or close with a simple hand gesture.

What do you mean when you say Webasto plans to benefit from an equipment rate growing toward 20 percent?

That is related to the Indian market and our new plant there. Currently the overall fitment rate for roof systems in India is in the low single-digit percentage range. It will rise to 10 to 12 percent in the midterm and toward 20 percent in the SUV segment, which to us is the minimum level to justify adding production in a country or region. For example, in China it is 62 percent (see chart, below).

Webasto will spend 30 million euros to add a plant in Pune. When will production start? Which customers will you serve from that location? Will it take any business from your European sites?

Production will start before the end of this year. We will serve European, Korean and Japanese customers with roof systems for the growing Indian market, so this factory won't take any business away from our other locations. The rising demand in India and decisions of automakers to invest in India make it feasible for us to put a facility there.

Webasto plans to open an R&D center in India in 2022. Where will that be and what will be expected from it?

It will also be in Pune. With additional development expertise on-site, we want to serve the local market. This allows us to create or update applications and to make adjustments to the roof systems we offer there. It will also serve as our best-cost R&D location for the Southeast Asia region.

What is the status of your convertible top business for SUVs such as the Jeep Wrangler? Is that area expanding? If so, what's new and what's the outlook?

It's great for us to supply the convertible roof for the Wrangler because we didn't have this contract in the past. It's true that the Wrangler is in a niche, but it's a very stable market. When it comes to the overall convertible roofs for SUVs, we are also producing the roof for the Volkswagen T-Roc. We hope that this will lead to additional orders from other customers. What we currently see is that there is a lot of interest in China. Let's see if we can finally get our first order there.

Convertibles have failed so far to appeal to car buyers in China. What is changing?
A large number of new companies in China are producing electric vehicles. As a result, a lot of these cars are very similar. One way to differentiate from a local rival is with a convertible top. We have hoped for a longtime that the convertible business would pick up in China.

How soon could this happen and how would it affect your overall outlook for convertibles?
It is unclear when this will happen in a couple years or whether it is still five to seven years away. Right now, our customers are primarily concerned with making the shift to e-mobility and autonomous driving. In addition, the success of SUVs has caused convertibles, sedans and wagons to decline. But if the desire for more individualization of the vehicle gets stronger, we could benefit from this with convertibles as well. In the meantime, we still see a loyal customer base for convertibles, and we expect that to continue.

What is your outlook for panorama roofs and sunroofs?

Our outlook is positive because even with the move toward connected, autonomous and electric cars there will be a need for panorama and sunroofs. But we know that we will have to adapt our systems because the positioning of the battery boosts the height of the seats. That means we will have to ensure there is still enough headroom for everyone in the car because a roof mechanism currently takes 2 to 3 cm. We are developing solutions that are even more compact and further reduce the differences so that we can maintain our market share and our fitment rate in these new-generation vehicles.

Are you still seeing higher-than-expected demand for battery systems for full-electric and plug-in hybrid cars? What is your outlook for this part of the market and how will Webasto's business develop here?

We can happily say we made the right decision in 2015 to enter the e-mobility market. The momentum of this trend can't be stopped, which means e-mobility will grow. We are also certain that while a lot of battery production will remain in-house at the automakers and cell makers will also have a share of the business, there will be a large enough portion of the market that we can serve. This will be for lower-volume products or when an automaker doesn't have enough engineering capacity. This view is confirmed by the high number of RFQs (requests for quotations) we are currently seeing. One challenge is that the market remains very volatile. Customers sometimes decide to change their minds and move in-house a battery project that was planned to be outsourced. But this is happening less frequently because the market it is stabilizing.

What parts of the battery market will Webasto target?
Our battery strategy has two pillars. The first is to meet an automaker's demand for a battery pack that is unique to them. We are aware that, at first, they will do a lot of this production internally but in similar situations in our industry in the past work has been moved outside to suppliers after an automaker builds up its own knowledge and expertise in the product. We plan to benefit when some of this capacity is outsourced. The second pillar is that we are making our own standard battery pack that we offer to customers that cannot afford to make a battery in-house or would rather invest in other parts of the vehicle. A focus here is on commercial vehicles and buses. For these segments we already have a very strong global sales organization in the key markets because of our establish aftermarket business for our parking heaters. These are lower-volume customers, so we have to get more orders, but this is already gaining momentum.

How close are you to getting into the passenger car market with your battery packs?
The start of production for our first car battery order for a vehicle is in 2022 and it will be for a South Korean automaker. The battery packs will come from our new plant in Dangjin, South Korea, where we have already started our first testing phase. The packs will be for small and mid-range models. The plant's initial capacity will be 160,000 battery systems a year.

Will Webasto make cells?

No, we will never produce cells. We think our strength is our years of experience as a systems supplier. We have succeeded in this area with roofs because we have a very deep understanding of how to integrate a large system into a customer's product.

Have you named which cell maker you will use?

We work with different cell makers and sometimes it depends on our customers. For the passenger car project, for instance, the automaker picks the cells supplier.

Webasto wants to be a leading systems provider in the electromobility sector. The aim is to have sales in 1 billion euros in this area by 2025. What are going to be the most important products for Webasto in this area.

No. 1 will be batteries packs followed by charging systems, including cord sets, and electrical heating systems.