In January 2016, Johnson Controls (NYSE:JCI) announced the spinout of Adient (NYSE:ADNT, the “Company”), the largest automotive seating supplier on a global scale. Operating 230 manufacturing plants in 33 countries worldwide, the Company produces and delivers automotive seating for all vehicle classes and all major original equipment manufacturers (“OEMs”).
Bruce McDonal, previously Johnson Controls vice chairman and current Chairman and Chief Executive Officer of Adient, said that the spinout of “Adient will increase its investment in innovation in order to gain share and increase value to customers and shareholders” (Source).
The global automotive component supply industry is highly competitive. Competition is based primarily on price, technology, quality, delivery and overall customer service. In order for Adient to remain a global market leader (35% market share in both North America and Europe, 45% market share in China), Adient must continue to innovate its products and processes. Suppliers with strong technologies are best positioned to meet OEM demands for rapid innovation given the trend towards more customer preference changes and the introduction of new safety and environmental regulations. Digitalization presents both opportunities and risks for the automotive interior supply chain.
One particular aspect of digitalization that Adient management should be concerned with is the fragility of contract terms with OEMs. OEMs reserve the right to cancel and move business for any reason due to quality deterioration, volume constraints, and late shipments. Further, the ability for OEMs to switch suppliers is heavily dependent upon the supplier’s level of technical complexity. For example, it can take up to 1.5 years for an OEM to switch suppliers within the integrated console space given complex sub-assembly agreements and safety testing. However, for more commoditized products such as interior trim, OEMs can switch suppliers within 4 days.
How should Adient invest in innovation per the spin-out objective? How can the Company provide integral services to OEMs and maintain long-term contracts?
Adient is actively taking measures to maintain contracts by providing high quality products in response to evolving customer demands and investing in R&D for future success.
In the short term, Adient is focused on introducing new and innovative products. For example, Adient introduced the T3000 recliner, which offers increased seating recliner strength in a smaller package, and Vibratech foam, which provides less vibration transmittance to the occupant. Adient is working to capture the increase in passenger-focused technologies, such as occupant sensing, seat heating / cooling, massage features, and passenger health and wellness.
In the long term, Adient is also investing in a new Product Lifecycle Management (“PLM”) system. This system is intended to serve as a management database for program, product and process related data (Source, Page 76). The system is also expected to aid in the standardization of the development process and in communication with all sites that support global program execution. Ultimately, the objective is to support workflow, schedule and change management of ongoing or upcoming programs, thereby enabling effective decision making and program management.
However, the steps mentioned above (new product innovation and investment in the new PLM system) will not be enough to counterbalance the larger pressure on commoditized players in the supply chain.
In the short term, I recommend Adient should pursue ways to qualify for long term strategic source awards (up to 15 year contracts) by demonstrating financial stability and completion of dynamic customer requests. Once Adient establishes strategic contracts, Adient can pass on R&D costs associated with new products to OEMs in a pre-established, tiered structure. Without securing these long-term contracts, Adient is at-risk of losing existing business and is unsupported in product innovation efforts.
Furthermore, other players, such as Faurecia and Delphi, have made greater advancements in technology than Adient. While Faurecia focuses on seating and interiors like Adient, Faurecia also focuses on electronics within instrument panels and recently announced its majority stake investment in Jiangxi Coagent Electronics in order to develop integrated and innovative in-vehicle infotainment solution. Similarly, Delphi announced its partnership with AutoNavi, a leading Chinese map and location service supplier.
I recommend Adient align itself through vertical integration with a tech industry partner that has greater expertise in developing digital components and software. Technology features (infotainment, connectivity, navigation, safety, fuel economy) are what differentiate suppliers. If Adient does not make itself relevant within the supply chain, OEMs may bypass suppliers and find technology partners directly, as is the case with BMW i Ventures, a venture capital fund, and Toyota Connected, a partnership with Microsoft.
How do you think Adient should adjust its strategy to grow in the macroeconomic environment? Would vertical integration with technology players help Adient to be more resilient to market changes? What other forms of industry consolidation do you anticipate?
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Adient, 2017, Fourth Quarter Earnings Call. http://investors.adient.com/~/media/Files/A/Adient-IR/reports-and-presentations/q4-2017-earnings-presentation.pdf, accessed November 2017.
Adient Ltd., June 27, 2016 Final Information Statement, http://investors.johnsoncontrols.com/~/media/Files/J/Johnson-Controls-IR/about-the-spin-off/Adient%20-%20Final%20Information%20Statement.pdf, accessed November 2017.
Bruce McDonal (Chairman & CEO, Adient) and Jeffrey Stafeil (EVP & CFO, Adient) presentation at the Deutsche Bank Global Auto Industry Conference, January 2017.
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Johnson Controls. “Johnson Controls Announces New Automotive Company to be Named Adient.” Press release, January 12, 2016. http://www.johnsoncontrols.com/media-center/news/press-releases/2016/01/12/johnson-controls-announces-new-automotive-company-to-be-named-adient, accessed November 2017.
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