Why ZF expects to get even stronger during EV shift

ZF Friedrichshafen recently tempered expectations for 2022, saying growth will be "moderate" because of rising inflation, supply chain bottlenecks tied to the war in Ukraine and the continuing COVID-19 pandemic. Despite the cautious outlook, ZF CEO Wolf-Henning Scheider is confident the world’s third-largest supplier will outperform the overall market based on the early numbers the company sees from Europe, North America and China. He is also bullish about ZF’s ability to become a key supplier to full-electric cars. He explained why in an interview with Automotive News Europe Managing Editor Douglas A. Bolduc.

What is ZF’s outlook when it comes to its transition to electric cars?

ZF, without question, believes the world will be fully electric and for passenger cars it will be battery electric. When will this happen? For ZF, we expect that by 2028 there will be a 50-50 share between the number of combustion-engine only vehicles and vehicles with electrified powertrains sold worldwide. That is two years earlier than we anticipated in 2021. Somewhere at the end of the 2030s, we anticipate we will only be supplying fully electric new vehicles. Since we took the decisions early enough, we are confident we will be a strong partner that can provide components or complete powertrains to electric passenger cars, buses, trucks and delivery vans. Based on our strong order book, not only are we ready for the changeover to electric components, but we think that by the end of the decade we will have a stronger business in the e-mobility area than we ever had in combustion engine-related components.

What areas of the electric powertrain will ZF target?

We are so bullish because we have some very nice innovations in the pipeline, specifically those that focus on high efficiency, resulting in longer driving distances without having to make the battery bigger. The products include our 800-volt silicon-carbide converters and highly efficient e-motors. In addition, we are heavily investing in the software that makes all of these items work together. Our strength is that we know how to build the entire module to provide maximum efficiency.

Doesn’t this come with a significant cost?

Yes, the industrialization of these products is a big challenge that consumes a lot of capital because we have to build a number of new plants. Therefore, the forthcoming years will be tough for us, and for our Tier 1 competitors, because everything comes from scratch. There is nothing that is already on our shelves. That is something we have to manage strategically and financially.

What is ZF's industry outlook for vehicle production for Europe, the United States and China for 2022?

Before Russia’s invasion of Ukraine in the second half of February, we were confident that China would have a strong growth and that Europe and the U.S. would rebound from the weak figures of last year and 2020. We are at a very low vehicle production level globally of 75 to 76 million, which is more than 20 million less than we had during the peak years. We were anticipating a good rebound. That said, I'm still confident about China, although the COVID situation there is giving us some headaches. I also remain confident that North America will grow -- it might be the most stable of the major markets during these volatile times. Europe, however, is the big question mark. It really depends on the war in Eastern Europe. Our outlook is much more cautious because Europe might face another year of stagnation. So, we anticipate slight vehicle production growth overall, whereas a month ago we would have predicted global growth of 8 to 9 percent compared with 2021.

Will ZF grow faster than the overall market in each location?

Yes, I'm confident ZF will outperform the market in Europe, North America and China. We are already seeing high growth rates for the company in each of these areas.

When will we have full-autonomous cars on the road in significant numbers?

The autonomous vehicle is the most complex robot that scientists and engineers will ever build. It is more difficult than flying to any planet in outer space. Since there are significant challenges to overcome to provide consumers the safety level they expect, we are many years away from having a vehicle that can fully handle all the complexities of urban driving.
 

What will we see in the interim as we move toward full autonomy and how will ZF contribute?

From the beginning of this journey, ZF decided to take a step-by-step approach, starting with lower complexity levels that could be put into series production. That is why we have a high market share for our cameras and radars that provide Level 2 and Level 2-Plus autonomy [these systems offer driver assistance such as lane-keeping but are not allowed to take control of the car.]. We are enhancing that step by step, for example, with our Level 4 shuttles [that can drive themselves without driver interaction]. These shuttles, which are used for public transportation, initially are only operating in low complexity situations. By 2024, 2025, we want them to run in mixed traffic, but probably only on one-way roads. Toward the end of the decade, we would aim to have the shuttles capable of handing the full complexity or an urban environment. But it would still need to be an environment where the shuttle knows exactly where it is driving.

ZF said the semiconductor shortage cost the company about 2.7 billion euros in sales due to lost auto production. What impact do you expect in 2022?

We see some improvement, but the shortage still hinders auto production because if only one chip is missing you can't build the unit. One the plus side, last year you were missing five. But this shortage is the reason why production will not take off in the first half. I am more optimistic about the second half of 2022. That is when we get closer to normal. We won't get all the way there, but regarding semiconductors it will be a much better situation than last year.

Has ZF be forced to pay wild prices for chips just to keep lines moving?

We strive to be as solution-oriented as possible for our customers. So, we used whatever means and measures possible to ship the maximum number of parts. Sometimes cost was secondary.

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

Definitely. We need a regionalized supply chain for chips in Europe as well as North America. It's good to see the U.S. government already took some clear decisions in that regard. Europe is moving forward with the so-called Chips Act, which I highly appreciate. In my opinion, Europe is a little bit slower than North America -- and Japan. Europe could speed up. While I'm sure globalization will remain important, I think we will see a different type of globalization.

What do you mean?

We strongly believe in increasing the supply chains in each region to make each region as self-sufficient as possible. Looking at semiconductors and some raw materials, we are clearly too dependent on a few regions. This should change. ZF will play a role here. We will support activities, maybe just as a customer, but also by helping to cover some of the ramp-up costs. We will support initiatives that make the overall supply chain more robust when it comes to these critical items. Although we are working systematically with our partners to boost the resilience of the supply chain, this will still take years to achieve.

What impact has the war in Ukraine had on ZF and what is the company doing to offset these issues?

Our No. 1 focus has been making sure our people are safe, which they are. We have daily contact with them, and we are supporting them every way we can. Some of the families of our associates have even come to Germany as refugees and are being helped by ZF. When it comes to supply disruption, so far ZF has not been hit directly, therefore we have not had to stop any production lines. But we are heavily affected by shutdowns at our customers’ plants. We are also trying to identify potential areas of concern deep in the value chain, so we are ready to respond if needed. Will there be another raw material or a certain production that suddenly becomes scarce? What if there is a lack of truck drivers in Europe because so many of them are Ukrainians? Could that hit us in the course of the next few weeks? Those are the topics we have a task force investigating because we know the importance of being agile and being able to act quickly.

What about your business operations in Russia?

We were in the first wave of businesses to say we would stop deliveries due to the unclear situation. We need to understand the new sanctions. This will take a few months because the local authorities are overloaded with questions. So, our business in Russia is on hold. We, however, continue to pay our people in the region and will take care of them because they are part of the ZF family. Also, since we have so many people of Ukrainian and Russian origin working for us in other countries, we are actively reminding everyone that we are one family, which is called ZF.

When it comes to difficulties with five being the highest level of trouble and one being the lowest, how do the chip crisis, pandemic and Ukraine war rank and why?

The shutdown caused by COVID-19 in a second quarter 2020 was the toughest crisis since World War II because of its wide reach, which caused global production to drop 60 percent. I hope we never see anything like that again. That is a five based on your scale. Other crises such as the war in Ukraine have a greater impact on one continent. Europe will feel the effects most severely because there is a high risk of a gas and energy shortage here. We will have to see how things develop. And the chip crisis has prevented tens of millions of cars from being built. Therefore, those two rank between three and four. What this all means is that we certainly don't expect 2022 to be any easier than 2021.

Stellantis has taken a hardline with suppliers because he wants them to cover more costs related to the shift to EVs. Meanwhile, Volkswagen Group recently said it wants to be more collaborative with suppliers. How are relations with automakers and what business approach have you found to be the most constructive?

We have seen all of these approaches come and go. There is nothing new. What do you do as business leader? You discuss things with your team, and you shift capacities and your best people to the constructive relationships. In my experience, having a constructive relationship doesn't result in a pricing disadvantage for either company. When my teams are highly motivated to work with the customer they will fight to get the deal done. Maybe the ideal margin is not yet where we want it, but we know that somehow we will get there over the course of the project because we have a good understanding with that customer. Those relationships have always been the most successful. We see this with startups because they understand it's the most beneficial way for them to get access to key technology so they can differentiate themselves. The other [more hardline] approach is a short-term approach that we have seen, we know how to handle, and we believe will change over time.

At what point do you decide to walk away?

We accept whatever strategies our customers have, but we also have our own strategy. If the customer has demands we just cannot meet and there is no way to reach an agreement it's very important to always be ready to say no. Fortunately, we are large enough to avoiding having too much dependency on a small number of customers.

You are scheduled step down as CEO in January 2023. Could you provide some insights on where you see the industry heading in the future and share any advice you would give to whomever will be your successor?

Our industry is in the midst of a multi-faceted transformation. One is well underway, which is the shift to e-mobility. There is also the move toward the software-defined vehicle and cloud-based functions for mobility, both of which we see kicking in pretty heavily starting by 2025. And the fourth is the arrival of autonomous functions that could change mobility overall by providing practical, comfortable, reliable solutions that go beyond cars such as our Level 4 shuttles. ZF is working in all of these areas, which will resulted in unmatched changes for our industry. When it comes to me, I don't want to look too far ahead because I am fully committed to working with my team to master all of the challenges in front of us in 2022. There will be time for reflection later.