Is Gestamp compensated for these late-minute changes?
In our agreements with the automakers, we are asked to supply a certain part at volume the customer forecasts for a year or a month. The forecast can be revised up or down by a certain percentage. A situation such as the chip shortage is very similar to force majeure, therefore, they are not required to provide any compensation.
How long will the crisis last?
After being very worried about demand for three years in a row, demand is finally very solid but now we have a problem with supply. It’s crazy! I think this problem will be solved faster than expected and that volumes will return to the same level as the previous years. Recovering the lost production will take a little bit longer. I don’t think we will catch up until mid-2022.
Has Gestamp reached pre-COVID-19 levels of activity?
No. Despite a quick recovery in China, where we ended up selling more than in 2019, and despite having second half 2020 sales close to level we had in the second half of 2019, we couldn’t offset a very bad second quarter of 2020.
In the first quarter of this year we nearly matched our sales volume from Q1 2019. In the second quarter, however, our sales level decreased substantially compared with Q1 in line with the decline in the number of vehicles manufactured globally. As a result, in the first half of 2021 we are below the volumes of 2019, but ahead of the volumes of the first half of 2020.
What did Gestamp do in 2020 to preserve cash?
We reduced working capital and capital expenditures. As a result, despite a profit decline, we were able to generate a free cash flow of 270 million euros in 2020. [Gestamp posted a 71 million euro net loss in 2020 versus a 212 million net profit in 2019.]
How deeply did you have to slash capital expenditures to reach a positive free cash flow?
Actually, we were coming from a period when we invested heavily to take advantage of many opportunities from our customers. We had a record year in terms of capex in 2018, with a ratio of capex to revenue of close to 10 percent. Last year our capex was 494 million euros [6.6 percent of total revenues of 7.45 billion. Capex was cut from 796 million of 2019]. Our guidance for this year and 2022 it to return to about 7 percent of total revenue -- on a higher level of revenue than in 2020.
How about profit margins?
In 2021 and 2022, we hope to be able to increase our Ebitda [earnings before interest, tax, depreciation and amortization] margins to 12 and 13 percent, respectively. We want to consolidate our position but keep a growth rate above the market average. This should be possible because of the investments we have made in the last few years. We have some spare capacity in terms of buildings and in terms of pressing machinery. We should not forget that in 2017 global vehicle production was 95 million unit, and we are still at levels around 82 to 83 million now. This means with volumes coming back, we could grow without using too much capex.
You said during a recent presentation to financial analysts that Gestamp would need to cut costs and consolidate in 2021 and 2022. Could you provide some details and tell us whether this will include any plant closures?
We started the transformation last year by shutting down some of our facilities in the UK. We closed a plant in Spain, which reduced our tool-and-die capacity, and we reduced our structural costs in Europe. That enabled us to improve our operating margins quite significantly last year. That means a very important part of this restructuring is already done. As part of our new Athenea plan we aim to increase the operational efficiency through a more centralized management and some Industry 4.0 concepts. Our long-term target is to reach a margin of 15 percent.
The Stellantis merger has changed the automaking landscape in Europe. The company has announced ambitious savings targets, many of which come from purchasing. How will this impact Gestamp?
In the last 10 to 15 years we have seen a consolidation among our customers. Every time there this happens it takes the new organization time to get everything into place. We see that Stellantis is building up a new purchasing organization, and we know the company will set very aggressive targets for all suppliers, like all automakers are doing. It makes sense after a merger to seek some synergies, but at the end of the day, that has to be related to the cost.
Could you elaborate?
In general, if we are asked to cut our costs because we are given a larger critical mass, that makes sense. If we are talking about moving money from one pocket to another, then we have a problem. I’m not singling out Stellantis when I say this. We need more time to see how the new organization is consolidated.
Stellantis aims to reduce costs by consolidating various vehicle platforms. Gestamp did a lot of work with Volkswagen Group, helping it with its MQB and MEB architectures. Will you play a similar role at Stellantis, which is now starting an accelerated multi-platform electrification process?
Actually, we did something like this within PSA Group after it integrated Opel [in 2017] and wanted to consolidate combustion engine platforms. The current situation is different as Stellantis [which was created when PSA combined with Fiat Chrysler Automobiles in January] needs to build new platforms for electric vehicles. PSA was more advanced on EVs than Fiat and Chrysler in general. We were an important supplier to both PSA and FCA, therefore, we will supply Stellantis as well as co-develop the new EV platforms with them. We recently started working with them on some platforms to develop ideas around battery boxes.
Gestamp has grown through acquisitions during the global financial crisis in 2008-09. Is the company ready to purchase struggling smaller suppliers again?
We are not actively looking to make any acquisitions. Our plan is to keep growing organically. It is true, though, that in the past 50 percent of our growth came from acquisitions, so we are open to them. After a period of crisis like this, when the liquidity injections dry out, suppliers that were already weak before the crisis could come under further pressure. If so, automakers will expect the stronger suppliers to act as consolidators to ensure their deliveries. This is not the case today. There is so much liquidity in the system that even the weak suppliers look healthy. In the coming months, however, we will see some weaklings get into trouble.
Which technologies would you consider adding or which regions would you like to create or expand your presence?
If we were looking for something, it would be related to additional growth in China or additional technology around EVs.
How has move to electrified models impacted Gestamp?
Gestamp is fortunate because it doesn't have a specific powertrain legacy linked to combustion engines, transmissions or similar products. Another advantage is that our longtime objective has been to reduce the weight of our component to help cut emissions. With the move to EVs, we will continue to reduce weight with the new objective of increasing range. Therefore, we are very much aligned with our customers’ needs.
Can you give us some hints about the most relevant innovations your R&D centers are working on and which are the most promising in terms of additional business?
The move to EVs is an opportunity for us because it has created the need for a new product: the battery box, which should be a significant revenue opportunity for us. Based on some of the contracts we have been awarded, the battery box represents a value of 500 to 600 euros. That is significant when measured against the value of the entire car. The battery box impacts the overall configuration of the car, particularly the body in white.
Stellantis and VW Group are looking to follow Tesla and fit battery cells into the car body rather than having a battery pack. Is Gestamp working on these so-called “cell-to-pack” and “cell-to-car” battery configurations?
Everything around batteries and battery boxes is changing nearly every day. The battery boxes we have been awarded are quite complex and quite expensive. It’s true that some of our customers are trying to move to cell-to-pack solutions. The aim of this technique is to reduce the complexity of the modules by adding a structure to the geometry of the cell that is more crash resistant. This helps reduce the crash requirements of the battery box, but you increase the crash requirements of the body, both on the sides and probably the floor. We are working with customers on these ideas.
Gestamp collaborates closely with automakers on new technological solutions. Who owns the intellectual property and can Gestamp sell the same solution to other automakers?
This is a grey area. In most cases, we develop the technology in-house. When we co-develop a product with an automaker, everything but the base technology is owned by the automaker, which can then use other suppliers to produce the product if we give them permission. We retain our technology, giving them a license to use it for specific applications.
Have you had any problems in this area with Chinese automakers?
Not very often. We try to just do application engineering in China and avoid doing base engineering work. We try to adapt technologies developed in Europe. We carefully protect our intellectual property. It’s also worth saying that the issue of Chinese companies taking advantage of technology from others is not longer a major problem. Many Chinese companies are quite advanced technologically.
Does Gestamp have a direct domestic rival that can match its level of expertise in China?
We have many competitors in China, but most of the suppliers work exclusively for one or two customers. It’s similar to the interlocking keiretsu partnerships used in Japan. In many cases Chinese automakers own stakes in their suppliers, so they aren’t completely independent like we are. Competitors at our level of expertise and independence are primarily European or American.
How successful is Gestamp at winning business with Chinese automakers?
We are improving dramatically, but if you ask me whether I am satisfied with what we have today, the answer is no. Our market share in Europe, North America and even in South America is higher than it is in China and Southeast Asia.
Many of the cars in those markets are entry-level vehicles in which cost is still the most important factor. It is very difficult for us to be competitive in such a low-cost part of the business. There is another part of the market, however, that we are targeting. Chinese carmakers moving into EVs need hot stamping and aluminum. We are growing in this segment because of the move to EVs. That is also the case for mid- and high-end premium segments, which are also growing; we are now shipping a lot of components for companies such as Geely-Volvo and Great Wall Motor.
VW Group recently announced its Scalable Systems Platform that is supposed to be implemented on 40 million vehicles. What is your understanding of how that's going to work in terms of the physical parts, body in white, suspension and chassis modules?
To be honest, I could ask you the same question. I first heard about SSP about four months ago. What I can say is that, as I understand it, this is not a real platform. It’s more like an integration of software, infotainment and common ideas that could work for different kinds of mechanical platforms. As I see it, SSP will not replace MEB [short for Modular Electrification Toolkit] and PPE [Premium Platform Electric]. All of them will use SSP.
Tesla has said it plans to use giant aluminum casting machines to build simpler chassis parts. For instance, the back end of the car. Is this the way forward or a passing trend?
It is quite impressive when you see the video of the Tesla facility doing that kind of big casting of the back end of the vehicle. It sounds like a revolution, but I have not seen any other automaker do this because the kind of facility needed to do this requires a huge investment. Why would an automaker with a facility that is already amortized commit so much more to EVs? And, even if you have a cost advantage during production, a big potential problem is repairability. If there is a crash, you would need to repair the whole car. I don't think any insurance company would be very confortable with this. Therefore, I don’t think it is going to be a lasting trend.
Do you have an idea of why Tesla did it?
Tesla has often tried to do new things. Sometimes they have been very successful.
