Why Brembo wants to boost its software, digitalization expertise

Brembo emerged relatively unscathed from the pandemic, which ravaged the Italian brake specialist's home region near Bergamo last year. While 2020 revenue declined 15 percent to 2.2 billion euros and net profit fell 41 percent to 137 million, Brembo reported healthy financial results in the fourth quarter and continued its rebound in the first three months of this year. To remain competitive, however, Brembo Executive Deputy Chairman Matteo Tiraboschi says the company has to grow, but he has given up on his goal of doubling annual revenue to 5 billion euros. Instead he wants to "achieve significant growth" by making acquisitions that boost Brembo's know-how in key areas such as software. He outlined his new plan in an interview with Automotive News Europe Associate Publisher and Editor Luca Ciferri and Correspondent Andrea Malan.

What is your 2021 outlook for the global automotive market?

In the last quarter of 2020 and in the first quarter of 2021 we beat the previous year's results. Admittedly, it was easy to top Q1 2020, given how bad the market was then, but what's impressive is that we also managed to increase sales by 1.5 percent compared with the first quarter of 2019. This year is a difficult one for many reasons. The pandemic is still a problem in many regions, commodity prices have shot up, especially for metals, and there has been a global shortage of microchips.

What is your 2021 outlook for Brembo?

We are confident we will increase sales by 15 to 16 percent compared with 2020 and that our EBITDA [earnings before interest, taxes, depreciation and amortization] margin will be about 18 to 19 percent of revenue. Rising commodity prices will have a slight negative impact on profitability. There was a temporary slowdown of production in the U.S. market because of the microchip shortage, but that hasn't impacted us as much as other suppliers because of our premium positioning. As far as our own production, there has been little impact because we are used to keep our stocks at relatively high levels.

If sales increase by 15 to 16 percent this year will Brembo exceed its 2019 numbers?

That is difficult to say because of the issues some customers are facing due to the chip shortage.

Has Brembo had to cancel any orders because of the chip shortage?

We have had no such problems.

Premium automakers including Mercedes-Benz have had production disruptions because of the chip shortage. Have these issues forced Brembo to halt deliveries?

So far, we did have just some limited slowdowns.

Do you need a lot of chips for your products?

We use some, but not as many as most automakers and other suppliers. As I mentioned, we maintain a high level of stock and that provides us a good amount of protection.

Which of your products use microchips?

They are in all kinds of brakes [including hydraulic, electric and by-wire systems]. There are chips in the control unit that manage the braking process through actuators. Chips will be installed in the brake caliper in the near future to collect data on the brakes and their usage.

How long do you expect the chip shortage to last?

Until the end of 2021. After that supply and demand should be more balanced.

Will the second half of the year be worse for the auto industry because of seasonal factors that affect semiconductor demand or will chipmakers direct more chip production toward the industry?

Your second statement is right.

Many automakers have chosen to prioritize production of their higher-end models. Has that been beneficial to Brembo?

We do believe our premium customers have tried to preserve their high-margin models, on the other hand, they sometimes remove options to maintain production of a vehicle.

Will the current crisis have any long-term effects on the overall semiconductor sector, potentially resulting in more chip plants being built outside of Asia?

I believe Europe and the U.S. will have to invest more in microchip capacity. The bulk of capacity was transferred to the Far East, and this strategy has to change. Chips are strategic not only for the automotive industry, but for the overall digitalization of all part of our societies.

How did the pandemic affect Brembo and will this and the chip shortage cause the company to re-think its approach to supply chain management?

Brembo has a global production footprint. Therefore, if there's a crisis in a region, it only affects that region, so it affects both us and our customers. In such cases we are partially shielded from wide-scale consequences. That being said, the hardest-hit area during the first wave of the COVID-19 pandemic was Italy's Bergamo area, where our headquarters and main plant are located. When that happened, we closed our plants one week before the government-imposed national lockdown. We took a risk because without official measures put in place by the government we had no right to close shop. Then all of Europe ground to a halt. There was no supply issue anymore because everything stopped. We, however, kept in constant contact with our customers, who appreciated our openness.

It's been two and a half years since our last interview. At that time, you said Brembo needed to grow and you targeted doubling the company's sales to 5 billion euros a year. Brembo made some minor acquisitions since we last spoke but is still far from reaching your goal. Do you need to dial back your ambition or does Brembo need to make what Warren Buffet would call an "elephant acquisition"?

In these two and a half years our world completely changed, both due to the pandemic and to the fast-paced technological changes happening throughout the automotive industry. The search for scale has been replaced by a search for know-how that we want to have on board. That means we need to acquire companies with expertise in software, digitalization and data management to remain in step with evolving automotive industry. While we won't buy an elephant, scale remains relevant. In this industry, you either grow or you have a foot in the grave. Everybody, from suppliers to automaker, is under pressure to grow.

Does that mean you have given up on your target of having annual sales of 5 billion euros?

Let's say we want to achieve a significant growth.

In which segments will you grow most and will this affect your profit margin?

Looking at our order book for the next three to five years, our traditional business will continue to grow. In the future, however, our main product will change. The metal will no longer be the most valuable part of our brakes, that will come from the electronics, software and data we will be able to gather from the brakes. We will have to provide services beyond the product.

To embed all this software will Brembo create electronic control units for the brakes like those that currently control the ABS systems?

Brake-by-wire will enable new software solutions different than standard ABS control units. This will allow the driver to manually switch between brake settings in similar way that a Formula 1 driver can change the car's drive setting to wet, normal or race. To create this software we need the expertise I mentioned before.

Will these capabilities be embedded in an ECU that works above or below an ABS system?

It depends. Some one-box solutions are closed [black box] systems. Ours will be an open interface architecture, so that it can work with others for a better integration at vehicle level. We are talking to customers about the possible system configuration. We are close to signing a deal for a brake-by-wire system with one of these customers.

What is the status of Brembo's so-called "Greentive" disc, which promises to significantly reduce pollution?

We have put substantial resources into this and leveraged EU funds toward this along with some other partners. In this field, we are also close to signing our first customer contract for a low-particulate-emissions brake disc. Our goal is to make all our products emissions free.

Another project Brembo is working on is brake spring technology that is designed to offset residual torque in the brake system, reducing caliper and brake dust and wear. How is that project coming along?

The product is derived from a need that our Formula One and other motorsport customers have to minimize friction to gain speed while keeping the calipers close to the disc to have a quick braking. This is not easy to achieve, but we are making progress and we are negotiating our first contract.

How has Brembo tried to capitalize on the recent boom in full-electric and plug-in hybrid vehicle sales?

It's difficult to give a figure, but we have a share of more than 90 percent among long standing full-electric automaker. We are also talking with many new entrants in this sector in the U.S. and China These companies have entirely new vehicle architectures. Since they are starting from scratch, they often seek advice on how to design a braking system. We like to call them the automotive rookies.

Are these rookies more or less premium than most of Brembo current customers?

They are companies looking to provide new forms of mobility, some of them through "provocative" products. Some offer logistics services within cities, while others try to reinterpret the role of the car – from owning a vehicle to mobility-on-demand.

That sounds like delivery services and ride-hailing, right?

Correct.

When it comes to regenerative braking is Brembo working to integrate the regeneration module in the brake-wheel module?

Yes, we are working on those types of solutions. Brake-by-wire will integrate regeneration, but we need to know what customers will expect from us.

You also mentioned the possibility of gathering data from brake systems. Can you elaborate?

We are talking about data on how the driver uses the brakes: braking times, pressure on the pedal, etc. This would help us better tailor the characteristics of our systems to each customer, or maybe result in helping us make lighter brakes. The data could also help drivers optimize their driving pattern.

How about data privacy? Who would own the data?

Bulk and anonymous data gathering would not impact privacy rights. Data ownership would be a matter between us and the automakers, which would be able to offer a better service. In case of aftermarket sales, we would have a direct link to the end customers. Microchips on brakes and calipers might help drivers better schedule periodic maintenance. That would be particularly useful for any size of commercial vehicle.