Nexteer
Automotive Group Limited Jeffrey Au
1316:HK
March 28,
2020
As of March 2020
(USD)
Market Cap 950M-1.3B (7-9B HKD)
Total Backlog 25.6B
Net sales 3.69B
EBIT 335M
LT Debt 278M
Gross Debt 338M
Cash & S.T
Inv. 580M
Credit
Facilities 376M
Employees 13,000
Enterprise Value 1800 + 278 – 580 = 1.49B
FCF = 388M
Tangible Book Value = 1B = fixed assets + working capital
Fixed assets = 750M machinery + 130M
construction in progress = 880M
Net Property Plant & Equipment = Fixed
Assets = 880 to 980M
Working Capital = Current Assets – Current
Liabilities = 1350 – 820 = 530M
Working Capital – Cash = 530 – 580 = 50
Immediate liquidity = Credit Facilities +
Cash = 376 + 580 = 956M
Capital Employed =
LT Debt + pensions + Tangible Book + Working
Capital
= 278M + 20M + 1B + 530M = 1.8B
Average annual income = 300-350M
ROIC = 13-17%
(ROIC for previous 4 years = 11-16%
Book value in 2014 668M
Book value in 2020 1.127B
2014-2020 CAGR 9-11%
Table of Contents
- Brief financial breakdown
- Summary
- Company History
- Shareholder Structure
- Industry Background
- Description of Products
- Competition
- Suppliers
- Supply Chain Logistics
- UAW (labor union) Strike
- J.Vs and Strategic Partnerships
- Court Cases
- Customers and Backlog
- Techonology, R&D
- Tangible Book Value
- Cash flow, cash conversion cycle, margins
- Debt
- Change in Management
- ASP, Utilization Rate
- Valuation
- Buybacks
- Catastrophe Risk- Technology
- References
Summary
Nexteer has a market capitalization of
USD 950M as of March 24, 2020. This price has reached a new low— matching its
IPO price. Meanwhile, since IPO, AVIC, a State Owned Enterprise in China has
injected professional management with a keen eye on financials and inventory
and has made the company world class.
Its sales alone is 3.7B, and it is
growing book value at a healthy rate of 13-20%. Assuming the economy slows
down, I assume that there was still be a healthy growth of 6-11% when stretched
over a five year period. With an earnings power of 350M, it is definitely worth
USD 3.8B. Its sales alone is 3.7B.
Nexteer Automotive Group Limited
supplies steering systems for cars, pick-up trucks, etc. It is the world's
third largest manufacturer of electric power steering, or EPS. Most cars are
shifting from hydraulic steering towards electronic power steering. As a
complementary business segment, Nexteer also engages in column shafts, and
driveline systems such as half shafts.
Nexteer is one of the few pure players
for steering systems; most competitors divert their focus by manufacturing
other automobile components. Compared to its peers, Nexteer is more flexible in
changing specifications for steering and driveline to fit a specific car model
and they have an effective, close-knit network with their suppliers. Nexteer
also has good inventory management. Their cash conversion cycle has improved
the most in the last five years and is best industry. They are consistently the
3rd or 4th largest in terms of market share by unit
volume.
Business risk in Nexteer lies in the
customer concentration. Even though Nexteer has 60 customers, 4 customers– GM,
Ford, Fiat Chrysler Automobiles, and BMW make up 76% of total revenue. As of
June 2019, 53% of the backlog is still in the U.S for U.S automobile brands,
which is mostly manufactured in Mexico and Saginaw, Michigan. Most of the
production is in the U.S and a strike from UAW commenced for a few months in
September of 2019. Production was halted until an agreement was reached.
Many European and American car brands
manufacture overseas. Through Nexteer, Ford’s mid-size pickup (Ranger) is
manufactured in Thailand, while its full size pickup truck manufactured in US
and Mexico.
Nexteer’s future depends on its ability
to ramp up production to generate revenue from its backlog from its J.Vs in
China. In Nexteer’s 2019 supplier conference, it mentioned about reducing its
manufacturing and labor force in the U.S by outsourcing. Nexteer will also
commit to operating both fully owned and J.V manufacturing plants in Asia
Pacific. Outsourcing requires additional cooperation and coordination with current
and new American suppliers.
To further exacerbate this situation, a
new Wuhan plant was launched in the second quarter of 2019 and was ramping up its
EPS utilization rate in a J.V with DongFeng motors. In 2020, this was halted by
the Corona Virus, originating from Wuhan. Production has also been halted in
other Chinese due to health safety. To the speculator and short term investor,
these brief setbacks seem catastrophic.
Through Nexteer’s connections and
considering that the majority owner, AVIC with Beijing E-town is a Chinese
State owned enterprise, conquest of Chinese market share should not be a
problem. AVIC owns 23% of ChangAn automobile post restructuring with China South
Industries Group. Domestic brands have captured 38-40% of their local market in
China. 65% of these domestic brands are State owned enterprises. Nexteer’s
joint venture with current Chinese automobile enterprises, will allow it to capture
20% of the domestic automobile market by default if they are able to meet
production demands.
Company
History and Reform by AVIC (Chinese SOE)
Nexteer was founded in 1906 as Jackson,
Wilcox and Church. In 1909, they were purchased by Buick and transferred to
parent company General Motors. The division was renamed Saginaw Steering Gear
Division in 1928.
In 1917, the Company became the first
automotive parts manufacturing division of GM engaged in steering systems
research, design and manufacture.
Saginaw
Steering was a part of GM for 90 years. Saginaw Steering Gear invented power steering
and tilt steering wheels. In 1999, GM spun off its parts group as
Delphi Automotive. It
soon drifted into financial trouble— Delphi entered bankruptcy in 2005, and it
announced plans to sell Steering Gear the following year.
Former Nexteer CEO Bob
Remenar, who had run steering since 2002, had to whip his division into shape
for the sale. Steering Gear was unprofitable despite its portfolio of fuel efficient
electric power steering units. Remenar closed four plants in Spain, Italy,
France and Alabama, and he laid off one-third of his salaried work force.
Delphi still could not
find a buyer, so GM took Delphi back in 2009. With Delphi
entering a lengthy Chapter 11 bankruptcy proceeding, GM purchased Delphi
Steering through their subsidiary, GM Global Steering Holdings LLC, in 2009 and
renamed the company, Nexteer Automotive.
GM moved to have the union change their
contract with Nexteer in order to prepare the company for a sale. After the
first offered agreement, GM warned the employees that an inability to come to a
union agreement may hamper finding a buyer— GM may just have to shut Nexteer
down.
A second agreement was ratified by the
union. The Michigan Economic Growth Authority gave a 70 million state tax
credit over ten years to Nexteer in November 2009. Nexteer announced that same
month investment plans totaling 440 million across the board and will keep its
headquarters in Buena Vista Township. The Township responded with a 100 percent
20 year tax abatement.
A Chinese company saw
Delphi’s storied steering business go up for sale. Pacific Century Motors was
looking at the bargain bin of distressed U.S. suppliers. Pacific
Century Motors, a venture formed by the city of Beijing, owns Beijing
Automotive Industry Corp., one of China’s big state automotive enterprises, and
AVIC Aircraft Corp., which makes components for aircraft and autos.
Having to
compete with over 30 international enterprises, AVIC joined hands with Beijing
Yizhuang International Investment & Development Co., Ltd. to bid.
Pacific Century wanted UAW wage concessions,
but in June 2010, hourly workers rejected Nexteer’s $ 12-an-hour starting wage
offer. After Nexteer restored family health care coverage, the union accepted
the deal. In return, the UAW demanded assurances that the buyer would not
transfer jobs out of U.S. factories. Pacific Century agreed, while a rival
bidder did not. That did the trick, said Remenar. The next month, Pacific
Century bought Nexteer for $ 465 million to complete the acquisition of
Nexteer in April 2011— gaining 51% of controlling stake in Nexteer—by
which Mr. Zhao became its Chairman, bringing his lengthy service experience in
AVIC as the branch CEO of aircraft engines and parts.
"I have served as CEO in the aircraft engine and parts company of AVIC for almost 20 years, so I have my own understanding, perception and passion for technologies. To become a leader in intuitive motion control, we must base our work on technological innovation. That is why we have always taken technology as the key factors to win the competition in the market, we are striving for leadership in technologies, profits, and market share," said Zhao.
According to Chairman Zhao, building the company into a global enterprise is a strategy developed by AVIC when it joined the purchase bid. "When I met the company leaders in America, some of them showed concerns that we might turn it into a Chinese company. But I told them we were growing it into an international enterprise instead," he said.
The day after the acquisition, three senior
executives were recruited from across the world who immediately took their
posts as consultants of the audit committee, compensation committee, and
strategy committee under the board of directors. Chairman Guibin Zhao “would come
to Michigan periodically, and I went to China fairly often,” Remenar said. The
three U.S.-based Chinese executives “did not have decision-making positions.
They observed. They did not decide.” Remenar made day-to-day decisions.
When explaining the key to Nexteer's success, Chairman Zhao Guibin said, "It is all thanks to reform - a term we Chinese like to mention." To carry out a successful reform, it is important to first get a clear understanding of the company. The American automotive industry enjoys a first-mover advantage in the world, as is the case with Nexteer, which, after century-long growth, has its own technical expertise and rich product portfolio. However, it also has its weak links.
For Zhao, it is only natural to feel the urgency for reform while enjoying the success of the purchase. "How to turn a company that even the Americans fail to manage well enough to become success? If you follow their practice, it cannot get you far. So, the only way is to implement reforms," Zhao recalled.
After taking office, Zhao made a candid critique to his American management team on the problems: "When I visited them in America, I told them that the current state of the company resembles pre-reform Chinese state-owned enterprises - over-staffed, fixed in operation model and inefficient." Nexteer suffered from its incomplete functions: "The then Nexteer, though seemingly a large company with many plants in different places, was actually a business division of incomplete functions, and was far from an independent company."
To address the gap, Zhao focused his efforts on two aspects: first, to turn Nexteer into a fully functional and efficient independent company by reorganizing its business in North America; and secondly, to speed up its global expansion to grow it into an independent global company. "We saw that in a special industry automobile steering, Nexteer must go global, or it would not stand a chance. In this sense, it is unlike other sectors such as the construction business, which can gradually expand its business by focusing on a regional market," said Zhao.
Also, Nexteer has launched reforms and optimization of its internal processes, and pursued lean manufacturing and productivity restructuring, to enhance efficiency and better support a global footprint. Zhao raised Nexteer’s R&D budget by 50 percent, and bankrolled expansion into new regions. “They did throw a lot of capital into the business,” previous CEO Remenar said, “and they were in it for the long term.”
In addition, Nexteer previously internally used the calculation of EBITDA. But now it focuses more on net profit and return on capital. Now, the financial department is also required to conduct global tax planning to help the company maximize its profits.
Talking about its future development strategies to drive a robust growth, Zhao said, "We are going to promote diversification on three fronts: product portfolio, customer base, and regional operation. This strategy will help us take a bigger market share and lay a firm foundation for future growth."
“A lot of water has passed under the bridge, but Nexteer today is a robust business,” said Remenar, who departed in 2012 due to an argument in executive compensation. “The whole U.S. footprint, with UAW factory jobs, is working.”
Two years after the purchase, Nexteer went public on the Hong Kong Stock Exchange in October 2013. AVIC, and Beijing E-Town are now Nexteer’s largest shareholders. AVIC—the city of Beijing and a Chinese aerospace conglomerate — bankrolled a global factory expansion before IPO.
Chairman Zhao Guibin implemented a series of reforms that created the rapid business growth for the company, resulting in Nexteer seeing a 72.7% growth in revenue and over five-fold growth of profits from 2012-2018. In 2017, the company registered a 19.4% increase in net profit year-on-year.
With Pacific Century’s financial support, Nexteer lined up new customers. The company enjoyed a major win when Ford Motor Co. installed its electric power steering in the 2011-model F-150 pickup.
When explaining the key to Nexteer's success, Chairman Zhao Guibin said, "It is all thanks to reform - a term we Chinese like to mention." To carry out a successful reform, it is important to first get a clear understanding of the company. The American automotive industry enjoys a first-mover advantage in the world, as is the case with Nexteer, which, after century-long growth, has its own technical expertise and rich product portfolio. However, it also has its weak links.
For Zhao, it is only natural to feel the urgency for reform while enjoying the success of the purchase. "How to turn a company that even the Americans fail to manage well enough to become success? If you follow their practice, it cannot get you far. So, the only way is to implement reforms," Zhao recalled.
After taking office, Zhao made a candid critique to his American management team on the problems: "When I visited them in America, I told them that the current state of the company resembles pre-reform Chinese state-owned enterprises - over-staffed, fixed in operation model and inefficient." Nexteer suffered from its incomplete functions: "The then Nexteer, though seemingly a large company with many plants in different places, was actually a business division of incomplete functions, and was far from an independent company."
To address the gap, Zhao focused his efforts on two aspects: first, to turn Nexteer into a fully functional and efficient independent company by reorganizing its business in North America; and secondly, to speed up its global expansion to grow it into an independent global company. "We saw that in a special industry automobile steering, Nexteer must go global, or it would not stand a chance. In this sense, it is unlike other sectors such as the construction business, which can gradually expand its business by focusing on a regional market," said Zhao.
Also, Nexteer has launched reforms and optimization of its internal processes, and pursued lean manufacturing and productivity restructuring, to enhance efficiency and better support a global footprint. Zhao raised Nexteer’s R&D budget by 50 percent, and bankrolled expansion into new regions. “They did throw a lot of capital into the business,” previous CEO Remenar said, “and they were in it for the long term.”
In addition, Nexteer previously internally used the calculation of EBITDA. But now it focuses more on net profit and return on capital. Now, the financial department is also required to conduct global tax planning to help the company maximize its profits.
Talking about its future development strategies to drive a robust growth, Zhao said, "We are going to promote diversification on three fronts: product portfolio, customer base, and regional operation. This strategy will help us take a bigger market share and lay a firm foundation for future growth."
“A lot of water has passed under the bridge, but Nexteer today is a robust business,” said Remenar, who departed in 2012 due to an argument in executive compensation. “The whole U.S. footprint, with UAW factory jobs, is working.”
Two years after the purchase, Nexteer went public on the Hong Kong Stock Exchange in October 2013. AVIC, and Beijing E-Town are now Nexteer’s largest shareholders. AVIC—the city of Beijing and a Chinese aerospace conglomerate — bankrolled a global factory expansion before IPO.
Chairman Zhao Guibin implemented a series of reforms that created the rapid business growth for the company, resulting in Nexteer seeing a 72.7% growth in revenue and over five-fold growth of profits from 2012-2018. In 2017, the company registered a 19.4% increase in net profit year-on-year.
With Pacific Century’s financial support, Nexteer lined up new customers. The company enjoyed a major win when Ford Motor Co. installed its electric power steering in the 2011-model F-150 pickup.
Shareholder Structure
As mentioned before, Pacific Century Motors owns Nexteer. Out of
2.5B outstanding shares, as of 2020, AVIC owns 67% of Nexteer, or 1.68B
shares. The
next largest shareholder is EastSpring Investments (Singapore), which owns
2.39% of Nexteer.
Industry Background –How big is this industry?
According to PricewaterhouseCoopers
(“PWC”), global production volume in the automobile industry grew from 56
million units in 2003 to 93 million units in 2016. PWC expects global
production volume to rise to 112 million units in 2023, representing a CAGR of
2.8% during 2017 to 2023. China now makes up 30 percent of the global passenger
vehicle market.
The automotive steering market has a higher
compounded annual growth rate at 5-6%. With this rate of growth, the global
market is expected to reach USD 26B by the end of 2025. Currently, in 2020, it
is approximately at USD18B.
In terms of geographic markets, in 2020,
Nexteer is the largest steering systems supplier in the U.S. and ranked third
and fourth in China and Europe respectively. Through GM and Ford, Nexteer has dominance
in the U.S especially in pickup trucks, but competition is breathing right
behind.
According
to Nexteer’s prospectus by IPSOS—“The global steering system market is
dominated by the top seven manufacturers, which collectively held approximately
73% of the global steering system market in terms of sales revenue in 2012. In
2012, a volume of 100 million steering and shaft units were sold annually, with
total industry sales of 27B for steering.” In 2018, at a 5% growth rate, there
are currently 150-160 million units, which amounts to a global sales revenue of
41-45billion. For EPS, according to IPSOS’s report in Nexteer’s prospectus, Nexteer
only captured 4.8% of global market share.
In
2020, there were approximately 148-150 million units steering units sold. Of
these units, Nexteer sold over 9 million units in EPS, and about 3-5million
units in HPS and shafts. This gives Nexteer approximately a 10% market share,
which is a 4% gain from 2012, where Nexteer had a 5-6% market share.
There are only 3 serious players with significant production facilities to generate economies of scale and R&D— ZF-Bosch-TRW, Nexteer, and JTEKT; NSK and Mando are smaller players with limited R&D and have other automobile parts and segments of their business to worry about.
Today,
in 2020, there are only 5 top manufacturers due acquisitions from Nexteer’s
competitor ZF Friedrichshafen, the German steering manufacturer. ZF received approval
from anti-trust departments in Europe and has merged with Bosch, which already
had a steering division in J.V with Taiwanese company Huayu. To gain shares in
the American market, ZF also acquired TRW, which specialized in automobile
safety—brake pads and discs, which they supply for the Tesla model S.
Management
indicated that new customers from China (BYD, Geely) and EU will be the driver
in the future. Nexteer’s new factory in Africa—Morocco, mainly serves EU
customers.
India
launched Nexteer’s first EPS line last year after passing regulations with
positive results, but management at Nexteer still view China as more resilient
and scalable for long term operations. Nexteer has been selling half shafts and
column shafts for many years, so the fact that it has launched EPS in India is
a significant move.
Description
of products – EPS, HPS, CIS, Driveline Systems & their financials
Nexteer specializes in 2 tiers or
categories of automobile products for OEMs – the manufacturing of steering and
driveline systems and components.
Vehicles which employ electronic power
steering are generally lighter in weight and more fuel efficient. The
elimination of extra accessories simplifies manufacturing and maintenance.
Whether the steering system is engaged or not, hydraulic steering consumes
energy whenever the engine is running.
Next generation column EPS are called
Gen 3.5— it has a 30% cost reduction in that smaller space and enables a
broader application range of vehicles with added content to deliver increased
product reliability, greater power output, more software content with faster
processing speed. That is a 30% model to model reduction compared to just 5
years ago.
The Gen 3.5 EPS unit and mid-drive has
made tremendous progress and is where Nexteer differentiate themselves from
competitors and where the margin lies. This is a product which is very power
dense, low lash, low friction, and quiet, with excellent NVH characteristics. These
products have been very positively received by GM.
Nexteer
generates more than 60% of its revenues from electronic powered steering. 15%
of its revenues are from driveline or shaft systems. Hydraulic steering is slowly phasing out. With
CIS, column in shaft steering, and Driveline, which includes half shafts,
Nexteer has strategically approached their factories to cater to specific
customers or have certain niches. Despite GKN being the largest supplier to
driveline, Nexteer still supplies some products to them. EPS is gradually
taking over HPS. The global penetration of EPS in 2016 was approximately 57%.
Steering
Systems
Steering systems include electronic
power steering (EPS), hydraulic power steering (HPS), as well as steering
columns and intermediate shafts. Hydraulic power steering is slowly being
phased out by electronic power steering.
Steering System: Hydraulic Power
Steering (HPS)
HPS uses high pressure fluids to assist driver steering. An engine driven power steering pump creates system pressure.
Steering System: EPS
- Column Assist EPS (CEPS)Column assist EPS is mainly used for small cars. CEPS integrates system electronics such as the motor, controller, and sensor, to assist the mechanism in the steering column.
- Rack Assist EPS (REPS)Rack assist EPS is mainly used for pickup trucks. It integrates the required electric assist mechanism with the steering rack where they are contained under the hood in the engine compartment.
- Pinion Assist EPSSingle pinion assist EPS integrates the electric assist mechanism with the steering gear pinion shaft.
Nexteer has a long history of having
their own wholly owned facility. They compete with everybody and are top 3 or
top 5 in market share with the exception of India.
Driveline
Systems
Driveline systems consists of components
required to transfer power from the transmission to the driven wheels.
Nexteer’s driveline systems include front wheel drive half-shafts, intermediate
drive shafts, and rear wheel drive half-shafts as well as propeller shaft
constant velocity (CV) joints.
Intermediate drive shafts work together with half-shafts to enhance comfort and handling by eliminating driveline disturbance issues on the front wheel drive vehicles with unequal length axles, higher torque, running angles.
Intermediate drive shafts work together with half-shafts to enhance comfort and handling by eliminating driveline disturbance issues on the front wheel drive vehicles with unequal length axles, higher torque, running angles.
Propeller shafts are designed mainly for
high speed use in vehicles which employ a front engine with a rear drive
powertrain.
The North American driveline business,
particularly in the U.S., has since inception been highly vertically
integrated. To improve the profit profile of the business, Nexteer is shifting
more of their current in-house component manufacturing to their supply base.
In 2018, restructuring initiatives drove
an incremental cost increase of about $9 million compared with the previous year
as Nexteer continues to balance out our manufacturing activities. This
initiative will drive a much more cost competitive profile in North America and
will further Nexteer to position themselves to take advantage of customer opportunities.
Nexteer was previously disadvantaged
because they were exclusively driveline in steering columns in India until 2018.
In late 2019, Nexteer finally had their breakthrough in India— automobile OEMs
have finally issued a purchase order for the safety-critical electric power
steering. Nexteer established a beachhead in the Pune, India which puts them
geographically closer to customers with a trained workforce and to minimize
actual and perceived risk in the eyes of our customers by having a local plant.
In China and South East Asia driveline
revenue is more than 5-6x of CIS revenue.
China and India have vibrant and profitable driveline businesses for
Nexteer to take advantage of, despite their current small size compared to the
size of Nexteer’s current U.S. based revenues— about 70% of the driveline
business is centered in the U.S.
Nexteer’s success outside the States is
due to recent investment in productive assets, which enables different product
design. The U.S. has generally retained legacy processing that is no longer
cost-effective, it's highly vertically integrated.
Steering Columns & Intermediate Shafts (CIS)
CIS connects the steering wheel to
control lateral motion through sensor and actuators to manually or
automatically transfer of the driver’s input torque from the steering wheel.
While steering columns make up a
minority of Nexteer’s revenues, it is still worth mentioning. Nexteer has world
class column and intermediate shaft assemblies.
One thing to note is that GM in North
America had problems with its K2 / T1 platform transition driving for column
shafts which resulted in drop in quarterly revenue in 2019.
Competition
The
steering systems industry is rather concentrated, which is primarily dominated
by multinational companies including
- JTEKT (Japanese),
- Bosch- ZF Lenksysteme(German)- TRW (US),
- NSK (Japanese), Mando(Korean),
- Nexteer (US-Chinese)
- Mando (Korean)
The automobile tend to favor and purchase steering components from their home country.
Japanese
brands favor JTEKT and NSK, Germans favor ZF-Bosch, American brands favor TRW
(acquired by ZF) and Nexteer, while Korean brands favor Mando and Hyundai
Mobis.
For a customer to choose a specific
brand of steering system, there are only a few categories which are practical:
- Available
customization and flexibility from the OEM; Trucks, smaller vehicles, electric
vehicles require different models. - Price;
- Lead Time & location (local factory available);
- Product Quality, materials, engineering,
- ISO certifications, government and safety regulations to pass
- Warranty
- Adaptability to ADAS and other automation standards
- Job references
- Special Relationships
In 2012, there use to be 12 OEMs to
choose from. Now there are only 4-5 major steering OEMs. After the contract is
awarded to a specific vendor, a deposit for product development for a specific car model is received and it will take 3-4 years before actual production
starts. This contract amount is recorded in the company’s backlog.
Description of competitors:
JTEKT
- Japanese
maker of auto parts and machine tools with annual sales of about USD12B, about
50% from steering parts, USD6.9B. Owns 15-20% of the market.
ZF
Friedrichshafen / TRW
-
privately held German auto parts group with annual sales of about $39B. ZF
acquired TRW Automotive Holdings in 2015. TRW's annual steering sales were
about $2.5Bn prior to the merger.
Bosch
Group
-
privately held German conglomerate with annual sales of about $82Bn. The
company does not disclose total steering revenue but did report 2016 revenue of
about $1.1Bn for its China steering joint venture. Bosch has acquired the remaining
shares of ZF and is fully consolidated. The table above may contain inaccurate
information, as Bosch may not have as much as 60% of sales in steering, there
are other auto-components it produces. With Bosch, ZF practically owns 36-40%
of the market.
NSK
-
Japanese producer of precision bearings and some automotive and industrial
products incorporating bearings. Annual sales are about USD 8.5B of which about
USD 3.2B are auto parts, but the company does not explicitly detail steering
revenues. Owns 5-6% of the market.
Mando
- Major Korean auto parts company which
produces steering, braking, and suspension systems. Total revenue is USD5.8B,
steering revenue is approximately 1.3-2B. Owns 3-4% of the market.
In 2012, approximately 73% of global steering system sales were contributed by the top seven manufacturers. With industry consolidation, in 2020, there are only 4-5 main steering companies for automobile OEMs to choose from which adequate job references, certifications, and technological ability have. The others are relatively smaller players.
Operating
margins and gross margins are largely the same for all in the industry. One
could make the case that since gross margins are similar in the industry, Nexteer
succeeds through better inventory, supplier, and cash flow management. Is this
a competitive advantage? Yes. Also, relative to their revenue, JTEKT, ZF, and
Nexteer are spending the most on research and development.
ZF Lenksysteme
As
mentioned before, ZF’s merge with Bosch has made it a behemoth with dominating
sales around the world.
On
January 30, 2015, the Bosch Group completed its acquisition of ZF
Friedrichshafen AG’s 50-percent share in the joint venture ZF Lenksysteme GmbH (ZFLS).
The antitrust authorities have approved the acquisition. Bosch now owns all
shares in the formerly 50:50 joint venture.
ZF
will be incorporated into the Bosch Group as a new division with the name
Robert Bosch Automotive Steering GmbH.
Another
notable acquisition came from ZF to enter the American market. ZF employs more than 13,000 associates in
eight countries.
ZF’s
recent acquired safety system supplier TRW for 12.4 billion, on May 2015. After
this acquisition, ZF fortified their dominance of the European market with
36-40% plus market share, over 25% market share in China, and over 30% of the
US market. They have the largest production and more than 33% of global market
share.
In
March 2019, ZF acquired all outstanding shares of Wabco for $136.50 per share
in an all-cash transaction for an equity value of over $7 billion. ZF brought a
solution to series production which allows a car hooked up to a trailer to be
maneuvered from outside the vehicle with a smartphone. Thanks to the
development of the Servo-twin electro-hydraulic commercial-vehicle steering
system, this principle also now works in trucks with well over 40 metric
tons of load volume
ZF
and Baidu are creating a production-ready AI autonomous vehicle platform
designed for China, the world’s largest automotive market. ZF also has a
collaboration with Nvidia using their expertise in graphics cards to help
automobile automation. On a side note, Tesla’s model S uses ZF Lanksysteme for
their steering.
Driveline & Half-Shaft
Competitors
Nexteer
also competes in driveline systems; despite GKN being the dominant player with
50% of the global market, Nexteer’s management feels that it is a bit bloated
due to private equity ownership. Instead of manufacturing their own brushless
motor-based unit, GKN sources some of their drivelines directly from Nexteer’s
wholly owned plant.
For
driveline systems and half-shafts, major competitors include GKN, NTN, Wan
Xiang Qian Chao, and Neapco.
Nexteer’s
driveline revenue was 550M in 2019, while GKN’s revenue was USD11.4B.
NTN,
which ranks 2nd or 3rd in terms of market share, had
sales of USD6.1B.
Steering Market in
China – domestic players
China's
passenger vehicle sales are approximately 45% domestic brands, 45% foreign brands
produced by joint ventures with major Chinese auto makers, and 10% imports.
Domestic
vehicle brands like Geely, Great Wall, and JAC, have been competitor CAAS’s
main customers, which competes with lower prices for more basic vehicles using
less advanced components.
In
addition to CAAS, there are several smaller domestic Chinese suppliers,
including Zhejiang Shibao and Xinhang Yubei.
Suppliers
Nexteer’s attempt to outsource to more suppliers in the US and restructuring of the assembly column shaft and driveline systems is slowing being felt at the bottom line.
Nexteer’s attempt to outsource to more suppliers in the US and restructuring of the assembly column shaft and driveline systems is slowing being felt at the bottom line.
From a graphic above
which was taken from Nexteer’s supplier conference, you can see that one of
their goals is to decrease their COGS and reduce labor rates by outsourcing.
Their largest supplier in 2019 makes up 13% of purchases, and could possibly be a steel supplier. The five largest suppliers in aggregate made up 32% of total purchases.
Their largest supplier in 2019 makes up 13% of purchases, and could possibly be a steel supplier. The five largest suppliers in aggregate made up 32% of total purchases.
The primary types of
materials purchased are
- Electrical parts, particularly controllers, motors and sensors;
- Machined parts, including castings and forgings, bearings, and stampings;
- Commodity purchases.
Suppliers of raw
materials are not concentrated or differentiated, implying greater bargaining
power for Nexteer.
Despite the cost of commodity purchases, such as steel and rare earth materials, significantly impacted by market price, the impact can be mitigated by a full or partial pass-through clause within customer contracts. Aluminum and steel has hit Nexteer the most with an annual inflation that adds 20-30 million of additional cost depending on the rate.
Raw materials account for more than 70% of COGS, and 58-60% of consolidated revenues. There are several important differences to Nexteer’s purchasing in different regions. In North America, Nexteer purchases approximately 80% of its material within the region, while in Poland, local sourcing is around 50% of material— from Europe. For markets such as China, India and Brazil, there are a higher number of suppliers based in the US and Europe.
Chairman Zhao of Nexteer also mentioned that in the past all the processes from material sourcing to manufacturing were done inside the company, but now certain things need to be outsourced. "This is decided by our capital input ratio management. That is, considering the risks and return of investment despite having more than adequate funds," he said.
Nexteer manager Miller also adds that he anticipates that the balance is shifting towards sourcing in emerging markets as volumes in those regions grow, particularly in China. He notes a trend at Nexteer towards sourcing more material globally, both in purchasing for lower-cost locations as well in following OEM customers as they expand their manufacturing.
Despite the cost of commodity purchases, such as steel and rare earth materials, significantly impacted by market price, the impact can be mitigated by a full or partial pass-through clause within customer contracts. Aluminum and steel has hit Nexteer the most with an annual inflation that adds 20-30 million of additional cost depending on the rate.
Raw materials account for more than 70% of COGS, and 58-60% of consolidated revenues. There are several important differences to Nexteer’s purchasing in different regions. In North America, Nexteer purchases approximately 80% of its material within the region, while in Poland, local sourcing is around 50% of material— from Europe. For markets such as China, India and Brazil, there are a higher number of suppliers based in the US and Europe.
Chairman Zhao of Nexteer also mentioned that in the past all the processes from material sourcing to manufacturing were done inside the company, but now certain things need to be outsourced. "This is decided by our capital input ratio management. That is, considering the risks and return of investment despite having more than adequate funds," he said.
Nexteer manager Miller also adds that he anticipates that the balance is shifting towards sourcing in emerging markets as volumes in those regions grow, particularly in China. He notes a trend at Nexteer towards sourcing more material globally, both in purchasing for lower-cost locations as well in following OEM customers as they expand their manufacturing.
The
categories are listed below:
Nexteer currently utilize about 100,000
square meters of manufacturing floor space across 2 manufacturing plants.
Through the outsourcing and plant consolidation effort over the next 2 years, Nexteer
hopes to move into 1 plant utilizing about 50,000 square meters. Nexteer will
reduce production and eliminate half of rural or local production workers by
utilizing the supply base and new assembly automation.
This is a disruptive change for the business.
Over 3,900 part will be impacted by those changes. Over 500 part numbers are
sold to suppliers and more than 50 sequences of equipment and production
material relocations will be performed to complete the consolidation. About
1,100 pieces of equipment will be either moved or relocated into 1 facility.
And all of those changes will reduce the production floor space by over 50%.
Compared to the old assembly line, the
newly launched assembly line uses global bill of process.
We improved our manning by 70%, reduced
our production standard hours by 36%, made our production footprint smaller by
63% and reduced our scrap costs by 83%.
We know the new global bill of process works with Nexteer’s global driveline plan. This production launch proves the global bill of process also works in with the Saginaw driveline plant.
This initiative also shifts greater
reliance on a strategic supply base. The GM T1XX full-size truck in the U.S.
employs the future state bill of design, bill of material, bill of process.
Most of the wholly owned factories will
be in China. Staffing is cheaper, manufacturing is cheaper.
Nexteer has always used Texas
Instruments CPU chips, but is transferring to Renesas (Renesas Electronics
Corporation TYO: 6723) Since managers have discovered at autonomous vehicle
conferences, they're invested heavily in vehicle automation. Renesas very
conversant in what autonomous vehicles will need and they were willing to adapt
to the kind of requirements that we have for a CPU with cybersecurity
capability.
Supply Chain & Logistics
Nexteer has 20 plants in seven countries across five continents. Nexteer is gaining better control over costs by redesigning its global transport network. “Our old enterprises were much larger and were not focused on optimizing our transportation system. We now have the opportunity to tailor the network to meet Nexteer’s requirements,” says Jim Miller, executive director of global production control and logistics.
Nexteer has 20 plants in seven countries across five continents. Nexteer is gaining better control over costs by redesigning its global transport network. “Our old enterprises were much larger and were not focused on optimizing our transportation system. We now have the opportunity to tailor the network to meet Nexteer’s requirements,” says Jim Miller, executive director of global production control and logistics.
While
Nexteer produces and sources material globally, about 75% of its global
logistics expenses are from North America, with 10% in Europe and the rest in
emerging markets. China accounts for 7% of Nexteer’s inbound logistics
business, while India is 3% and Brazil 2%.
Although emerging markets are still a minority of Nexteer’s expenses, logistics can be more expensive in these countries relative to total product costs. For example, Nexteer’s plant in Porto Alegre, located in the southern part of Brazil, requires material to be transported long distances to feed OEM plants.
Nexteer has been working more with third party logistics providers in growing regions, particularly over its freight movements and costs. “We need to manage the variable cost structure by working with a lot of third party logistics and brokers. The volatile pricing environment for full container ocean lanes affects all of our emerging markets as we struggle with general rate increases and peak season surcharges” Miller explains.
In addition to relying on third party logistics for managing freight, Stuart Turner, enterprise commodity manager for purchasing, says Nexteer been able to lower its costs using an effective cloud-based collaboration platform provider, GT Nexus, for its international ocean freight procurement, which allowed it to change between hydraulic to electronic steering without adding manufacturing floor space.
This IT platform that will provide ‘door-to-door’ visibility of the supply chain for its international freight movements “We are experiencing our fastest growth in international air to China and Poland and in ocean transportation to the US, China, and Poland as we increase global sourcing in low cost regions and match our manufacturing footprint to our customers’ global platforms,” Stuart says.
To manage an expanding and increasingly complex global supply network, Miller says that Nexteer makes purchasing decisions according to ‘total landed cost’, which adds together logistics factors such as transport, fuel, fixed costs such as warehousing, customs and duties as well as risks based on customer scheduling and inventory carrying costs— all elements for risk must be accounted for.
“Inventory is the biggest variable involving cash management. We need to lower inventory and increase turns,” says Miller. “We try to make the logistics cost structure as variable as possible. It is difficult to reduce fixed costs and to react quickly to volume swings, so we design the network with a bias towards a variable cost structure that requires us to consider supply base issues.”
The global team has introduced milk run collections in markets such as China, and converted from less-than-container (LCL) shipping to using full container loads (FCL) more often. “Milkruns have generated 10% to 20% savings and we have just begun,” says Miller. “This will enable us to achieve a 25% reduction in transit time and reduced the cost per cubic meter by 35%.” Nexteer ships by air for less than 2% of its total freight budget, including standard routing for high-value, small and light material such as electronics, but air freight makes up a larger share of costs in some developing markets.
Miller says that for cases in which Nexteer is responsible for delivery, customers generally insist on frequent deliveries as a means of minimizing their inventory. This requires Nexteer to use trucks that are partly empty, but this disadvantage is overcome in part by using final assembly sites close to its customers. “We become more efficient by achieving a higher cube, which also means less frequency,” says Miller.
Another trend in emerging markets like China, as well as Mexico, is the use of vendor managed inventory (VMI). According to Miller, VMI is growing in China, US, Mexico and Poland for both inbound and outbound warehousing. “VMI is growing especially as international supply chains become more common and as we seek to dedicate expensive manufacturing floor space to high value-adding activities,” explains Miller.
Almost all of Nexteer’s domestic suppliers in China and India are responsible for delivering inbound material to its factories or warehouses. In terms of pure transport costs for China, India, and Brazil, Miller says the modal split is approximately one third each for truck, ocean, and air – the high ratio of air costs standing as clear evidence of the infrastructure issues that manufacturers face in such countries. Nexteer faces problems such as limited port capacity and slow, unpredictable and expensive customs bureaucracy in India and Brazil.
Nexteer also runs several distribution centers globally, including in Laredo and El Paso, as well as in Germany. Nexteer's warehouses in Europe repack expendable packaging into returnable packaging.
In Poland and elsewhere, Allen Holcomb, global director of logistics, says Nexteer has moved towards in-sourcing certain operations. “We continuously evaluate vertical integration as increased demand for our products drives the need for more capacity. In some instances, on a total cost basis, it makes sense to selectively utilize existing manufacturing capacity,” he says.
Nexteer’s role for outbound logistics mirrors the trends for its own delivery terms in each region.
In North America, Nexteer’s customers typically control the supply chain from its docks. From Mexico, finished goods move northbound by truckload to an OEM distribution centre in El Paso.
To give you an example, in North America, Nexteer’s largest region, the supplier has six plants in Michigan and four in Mexico. Southbound components cross the border at El Paso, Texas for its Juarez plant, and at Laredo for Nexteer’s two plants in Queretaro and Sabinas Hidalgo.
Allen Holcomb, says that cost control is now more of an issue on US-Mexico routes. Holcomb says 70% of Nexteer’s shipments from the US to Mexico start with LTL collection and are consolidated at a US point before being trucked to the border. From there, Nexteer does a tractor swap or, if other clients’ freight is on board, it unloads the trailers before trucking to the Mexican plants.
Where volumes are expanding, Nexteer has explored changing the lane or transport mode. “Do we use the existing network or form a new one? We need to consider lane performance as well as supply chain security,” Holcomb says. “We are evaluating additional intermodal lanes to determine whether the cost reductions justify the additional transit time,” adds Miller.
An example of Nexteer engineering a new transport lane was for the movement of cut steel blanks from the Midwest to the US-Mexican border, where it converted the truck lane – which was moving heavy and dense freight – from long-haul truck into intermodal truck and rail.
In Brazil, Nexteer is responsible for about half of its flows to customers. By contrast, in Asia most OEMs want Nexteer to deliver to them. “In China, mainly we deliver by truck to our customers’ warehouses that are located near their assembly plants,” says Miller. In India, where Nexteer manufactures components at its plant in Bangalore, it ships material by truck to its final assembly facility in Gurgaon near the customer’s plant, which means trucking a distance of 2,400km for JIT delivery. Miller admits that consolidation would help reduce the cost of this long-distance trucking in India.
Whether carmakers in Asia start to change their delivery terms may depend on the structure of the industry, says Miller. Should the Chinese industry consolidate to a smaller number of players, it is likely that Nexteer’s customers would be large enough to assume control of their own inbound networks. “Generally, our customers have much more commercial advantage due to their size, and are interested in controlling material flow to their operations in order to increase their visibility and control of their supply chains,” he observes. “In Asian warehouses, materials are near the customer location, unlike in the US. So the close proximity ameliorates the effects of reduction in shipping frequency.”
Nexteer has also recently overhauled the logistics for its European operations, which are based mainly around Poland. “More than a year ago, in Poland, we leased a new off-site shipping and receiving facility next to our plant, with kitting and just-in-time lineside delivery, to our manufacturing operation,” says Miller.
Nexteer serves its plants in Tychy and Gliwice with local and Western European suppliers. Overseas shipments from Asia Pacific and North America regions enter through the German port of Hamburg and the Polish port of Gdynia. “Our Poland facility grew out of a necessity for outside warehousing,” says Miller. “Nexteer provides data and inventory management and contracts trucking for both of our plants in Poland. Here, JIT delivery is a fairly important process.”
Although emerging markets are still a minority of Nexteer’s expenses, logistics can be more expensive in these countries relative to total product costs. For example, Nexteer’s plant in Porto Alegre, located in the southern part of Brazil, requires material to be transported long distances to feed OEM plants.
Nexteer has been working more with third party logistics providers in growing regions, particularly over its freight movements and costs. “We need to manage the variable cost structure by working with a lot of third party logistics and brokers. The volatile pricing environment for full container ocean lanes affects all of our emerging markets as we struggle with general rate increases and peak season surcharges” Miller explains.
In addition to relying on third party logistics for managing freight, Stuart Turner, enterprise commodity manager for purchasing, says Nexteer been able to lower its costs using an effective cloud-based collaboration platform provider, GT Nexus, for its international ocean freight procurement, which allowed it to change between hydraulic to electronic steering without adding manufacturing floor space.
This IT platform that will provide ‘door-to-door’ visibility of the supply chain for its international freight movements “We are experiencing our fastest growth in international air to China and Poland and in ocean transportation to the US, China, and Poland as we increase global sourcing in low cost regions and match our manufacturing footprint to our customers’ global platforms,” Stuart says.
To manage an expanding and increasingly complex global supply network, Miller says that Nexteer makes purchasing decisions according to ‘total landed cost’, which adds together logistics factors such as transport, fuel, fixed costs such as warehousing, customs and duties as well as risks based on customer scheduling and inventory carrying costs— all elements for risk must be accounted for.
“Inventory is the biggest variable involving cash management. We need to lower inventory and increase turns,” says Miller. “We try to make the logistics cost structure as variable as possible. It is difficult to reduce fixed costs and to react quickly to volume swings, so we design the network with a bias towards a variable cost structure that requires us to consider supply base issues.”
The global team has introduced milk run collections in markets such as China, and converted from less-than-container (LCL) shipping to using full container loads (FCL) more often. “Milkruns have generated 10% to 20% savings and we have just begun,” says Miller. “This will enable us to achieve a 25% reduction in transit time and reduced the cost per cubic meter by 35%.” Nexteer ships by air for less than 2% of its total freight budget, including standard routing for high-value, small and light material such as electronics, but air freight makes up a larger share of costs in some developing markets.
Miller says that for cases in which Nexteer is responsible for delivery, customers generally insist on frequent deliveries as a means of minimizing their inventory. This requires Nexteer to use trucks that are partly empty, but this disadvantage is overcome in part by using final assembly sites close to its customers. “We become more efficient by achieving a higher cube, which also means less frequency,” says Miller.
Another trend in emerging markets like China, as well as Mexico, is the use of vendor managed inventory (VMI). According to Miller, VMI is growing in China, US, Mexico and Poland for both inbound and outbound warehousing. “VMI is growing especially as international supply chains become more common and as we seek to dedicate expensive manufacturing floor space to high value-adding activities,” explains Miller.
Almost all of Nexteer’s domestic suppliers in China and India are responsible for delivering inbound material to its factories or warehouses. In terms of pure transport costs for China, India, and Brazil, Miller says the modal split is approximately one third each for truck, ocean, and air – the high ratio of air costs standing as clear evidence of the infrastructure issues that manufacturers face in such countries. Nexteer faces problems such as limited port capacity and slow, unpredictable and expensive customs bureaucracy in India and Brazil.
Nexteer also runs several distribution centers globally, including in Laredo and El Paso, as well as in Germany. Nexteer's warehouses in Europe repack expendable packaging into returnable packaging.
In Poland and elsewhere, Allen Holcomb, global director of logistics, says Nexteer has moved towards in-sourcing certain operations. “We continuously evaluate vertical integration as increased demand for our products drives the need for more capacity. In some instances, on a total cost basis, it makes sense to selectively utilize existing manufacturing capacity,” he says.
Nexteer’s role for outbound logistics mirrors the trends for its own delivery terms in each region.
In North America, Nexteer’s customers typically control the supply chain from its docks. From Mexico, finished goods move northbound by truckload to an OEM distribution centre in El Paso.
To give you an example, in North America, Nexteer’s largest region, the supplier has six plants in Michigan and four in Mexico. Southbound components cross the border at El Paso, Texas for its Juarez plant, and at Laredo for Nexteer’s two plants in Queretaro and Sabinas Hidalgo.
Allen Holcomb, says that cost control is now more of an issue on US-Mexico routes. Holcomb says 70% of Nexteer’s shipments from the US to Mexico start with LTL collection and are consolidated at a US point before being trucked to the border. From there, Nexteer does a tractor swap or, if other clients’ freight is on board, it unloads the trailers before trucking to the Mexican plants.
Where volumes are expanding, Nexteer has explored changing the lane or transport mode. “Do we use the existing network or form a new one? We need to consider lane performance as well as supply chain security,” Holcomb says. “We are evaluating additional intermodal lanes to determine whether the cost reductions justify the additional transit time,” adds Miller.
An example of Nexteer engineering a new transport lane was for the movement of cut steel blanks from the Midwest to the US-Mexican border, where it converted the truck lane – which was moving heavy and dense freight – from long-haul truck into intermodal truck and rail.
In Brazil, Nexteer is responsible for about half of its flows to customers. By contrast, in Asia most OEMs want Nexteer to deliver to them. “In China, mainly we deliver by truck to our customers’ warehouses that are located near their assembly plants,” says Miller. In India, where Nexteer manufactures components at its plant in Bangalore, it ships material by truck to its final assembly facility in Gurgaon near the customer’s plant, which means trucking a distance of 2,400km for JIT delivery. Miller admits that consolidation would help reduce the cost of this long-distance trucking in India.
Whether carmakers in Asia start to change their delivery terms may depend on the structure of the industry, says Miller. Should the Chinese industry consolidate to a smaller number of players, it is likely that Nexteer’s customers would be large enough to assume control of their own inbound networks. “Generally, our customers have much more commercial advantage due to their size, and are interested in controlling material flow to their operations in order to increase their visibility and control of their supply chains,” he observes. “In Asian warehouses, materials are near the customer location, unlike in the US. So the close proximity ameliorates the effects of reduction in shipping frequency.”
Nexteer has also recently overhauled the logistics for its European operations, which are based mainly around Poland. “More than a year ago, in Poland, we leased a new off-site shipping and receiving facility next to our plant, with kitting and just-in-time lineside delivery, to our manufacturing operation,” says Miller.
Nexteer serves its plants in Tychy and Gliwice with local and Western European suppliers. Overseas shipments from Asia Pacific and North America regions enter through the German port of Hamburg and the Polish port of Gdynia. “Our Poland facility grew out of a necessity for outside warehousing,” says Miller. “Nexteer provides data and inventory management and contracts trucking for both of our plants in Poland. Here, JIT delivery is a fairly important process.”
UAW Labor Unions and
strikes in the U.S
On September 2019, about 3,200 UAW-represented Nexteer employees at the company’s main North American factory walked off the job and halted production until they agreed to a contract proposal. The walkout halted production of steering systems and other components essential to vehicle production by General Motors and other automakers.
On September 2019, about 3,200 UAW-represented Nexteer employees at the company’s main North American factory walked off the job and halted production until they agreed to a contract proposal. The walkout halted production of steering systems and other components essential to vehicle production by General Motors and other automakers.
If
this happens twice every decade, this is indeed a big problem to Nexteer unless
it ramps up its production in China immediately and generates more of its
revenue from Chinese manufacturers.
Leaders of United Auto Workers’ union Local 699 announced that production workers will be paid between $15.88 and $18.69 per hour by the end of the five-year deal. The range in the rejected agreement was between $15.85 and $17.25. Wages will rise between $1 and $2 per hour upon ratification.
Other differences include a $2,000 signing bonus, up from $1,500, employees being able to defer holidays into the next calendar year and changes in vacation or relief time from the previous contract. Voting took place over two days following two days of informational meetings, a stark contrast to the one-day voting period and rollout for the first contract.
The contract scraps a previous provision that would have required workers on PPO health care plans to pay as much as $350 per month in contributions. The new contract calls for employees to contribute nothing toward either the PPO or HMO plans. This is a huge setback for Nexteer, and one just has to look at how pensions, insurance contributions, and other staff liabilities ruined GM and almost put them in bankruptcy.
Leaders of United Auto Workers’ union Local 699 announced that production workers will be paid between $15.88 and $18.69 per hour by the end of the five-year deal. The range in the rejected agreement was between $15.85 and $17.25. Wages will rise between $1 and $2 per hour upon ratification.
Other differences include a $2,000 signing bonus, up from $1,500, employees being able to defer holidays into the next calendar year and changes in vacation or relief time from the previous contract. Voting took place over two days following two days of informational meetings, a stark contrast to the one-day voting period and rollout for the first contract.
The contract scraps a previous provision that would have required workers on PPO health care plans to pay as much as $350 per month in contributions. The new contract calls for employees to contribute nothing toward either the PPO or HMO plans. This is a huge setback for Nexteer, and one just has to look at how pensions, insurance contributions, and other staff liabilities ruined GM and almost put them in bankruptcy.
J.V, Strategic PartnershipsJ.V’s and partnerships will determine how much market share and new technology Nexteer will gain.
Nexteer’s strategic joint ventures and
technical alliances have made progress, including CNX-Motion, a joint venture
in the R&D of advanced steering and braking technology with Continental AG,
the long-term strategic alliance with WABCO to make Active Front Steering
available for commercial vehicles, and the joint venture company specializing
in electric power steering system between Nexteer and Dongfeng Motor Parts
& Components Group. Nexteer is also
working with Waymo, Google’s self-driving division.
In 2018, Continental, Chong Qing Nexteer, and Dong Feng Nexteer
resulted in a loss of USD4.3M, with a carrying amount of approximately 17M. Despite
that the collaboration may not be relevant to earnings in the short term, it is
strategically meaningful to Nexteer to become a leading steering systems
supplier in the future.
Nexteer’s partnership with Continental
AG has put them in a strong position for the next product cycle in the field of
automation (ADAS / AD).
Nexteer partners with WABCO to develop
and supply active steering systems for medium to heavy duty commercial
vehicles—including small cars up to Class 8 trucks, using Nexteer’s Magnetic
Torque Overlay (MTO), a breakthrough ADAS-enabling product.
In the simplest terms, vehicle autonomy
requires: longitudinal control, engine, powertrain, brakes; and lateral
control, steering. Among candidate partners considered, Nexteer has found to
have the highest compatibility with Continental. They're ten times Nexteer’s
size and technically capable in braking systems. One thing Continental lacked
was steering capabilities, and that's something they needed. So they each have
what the other lacks to make a perfect match.
Yubei, which is now owned by Addway is a
subsidiary of AVIC. Nexteer has a small to negligible amount of purchase
agreements from Yubei for cheap hydraulic rack and pinion gears (Spare Parts) components
until September 2019, whether this was renewed remains to be announced.
Court
Cases
Nexteer had a previous project with
Korea competitor Mando, and sued Mando for alleging trade secret theft and
other numerous claims. The court ruled in favor of Nexteer.
Another case involved dealing with a
supplier to give you some flavor of how things can go wrong—In Landstar,
the Michigan Court of Appeals affirmed the trial court’s grant of summary
disposition in favor of Nexteer Automotive Corporation (Nexteer). Landstar, a
shipping company, had sought to recover unpaid expedited freight shipping charges
for automotive parts under an implied contract theory, despite the fact that
Landstar’s contract was with the supplier of the parts, Contech Casting, not
the buyer, Nexteer. Landstar argued that merely by accepting the parts, Nexteer
became liable for unpaid freight charges under the theory of “consignee
liability.” The court rejected this argument, holding that the express contract
between Contech Casting and Landstar covering the same subject matter precluded
Landstar from bringing an implied contract claim against Nexteer. The Court of
Appeals also affirmed the trial court’s dismissal of Landstar’s unjust
enrichment claim, finding that the only benefit that Nexteer received — the
timely delivery of automotive parts — was nothing more than what the parties
contemplated and that all parties contemplated that Contech Casting would be
liable for the shipments.
Customers
& Backlog
To know how well Nexteer will perform
just look at their order-to-deliver backlog. There's no better metric for
predicting what's in store for Nexteer in 3 or 4 years. When Nexteer’s
management gets together, they spend most of our time on electric power
steering; for good reason— it is 2/3 of their revenue base and about 70% of the
current backlog. For example, in 8 customer launches they are able to secure
$1.2 billion lifetime revenue. 5 of the 8 were electric power steering. In a
heavy launch year like 2016, there were 20-25 launches.
Of the $25.2 B in backlog, as of June
30, 2019, future orders, or backlog indicates that 16% of total backlog will
come from driveline and half shafts and only 10% from CIS.
The new booking composition is conquest 55%, incumbent 45%. Depreciation
schedule of each backlog of USD 11 billion.
Even though the backlog is composed of
60+ customers, 35% of the backlog is from GM (896 million), 18% Ford, 12% Fiat
Chrysler Automobiles, 11% BMW, 8% PSA group.
GM makes up 42% of annual revenues,
while the top five make up 89% of revenues. The backlog suggests, that GM’s
revenue contribution will hopefully shrink to a third in the future to near
35%.
This backlog shows huge risks in terms
of the concentration of customers. As of February 2020, GM and BMW have their
total debt about twice or exceeding of their total equity. Ford was at an outrageous four times debt to equity. With Fiat Chrysler being more
conservative with half of their debt to equity. High leverage is always a risk
in a downturn like the Corona virus and a downgrade in credit rating with have
huge implications for raising money.
Geographically, the backlog indicates a
concentration in North America, 53-60% (13.56B), with Asia Pacific (mainly
China) (5.8B), at 20-22%; and Poland, Morocco, Africa at 18-26% (5.37B).
EPS is mainly installed in full size and
pick-up trucks for GM and Ford in North America. All Mexican manufacturing
facilities are for North America. 9 out of 10 pick-up trucks are installed with
Nexteer’s steering equipment.
For Europe, a quarter of all small cars
use Nexteer’s EPS. In China, EPS is mainly installed in SUV’s and a few other
cars.
In
USA and Mexico, CIS was 611M while driveline was 411M, while in Poland and
Brazil, CIS generated 3x as much revenue as driveline.
Most
of the independent aftermarket steering components are largely hydraulic based
and fragmented, which is why Nexteer is mainly involved in the OEM part, but
has indicated that they are still concerned with after-market quality of
components—traditionally, after-market products goes in boxes. It might be
labeled genuine GM or Ford motor-craft, but they've got a vested interest in
what's inside the box because their name is on it. Nexteer now also has full
approval to put remanufactured product in the OEMs' boxes. So this is returned
product and Nexteer has a sanctioned remanufacture process to completely
certify it to be good as new.
Chinese
Customers
Car sales in China fell 92% in the first
half of February as the coronavirus shutdown took its toll, according to the
China Passenger Car Association. China is the world's biggest car market,
selling just over 21 million cars last year, according to Statista. The US is
the second biggest market.
China was about 70% converted from
manual/hydraulic steering to electric at the end of 2015. For Nexteer, their
China operation requires conquest of business from competitive peers and
ramping up vehicle volume. China brings a big upside for Nexteer.
Unless Chinese government regulations
change and treat domestic producers different than global brands, there are a
couple more cycles out there to be converted. Currently, 90% of Nexteer’s
product goes on SUV, MPV minivan, which continues to sell well.
Most of Nexteer’s production goes to the
global OEMs who sell their brands locally. Nexteer operates one plant in Wuhan,
south east of Anhui Province; two in Suzhou, which is near Shanghai; and one in
Zhuzhou, in Hunan Province. Nexteer has been moving manufacturing location to
be adjacent to customers, to shorten the supply line and to have a close
relationship with Wuling, DongFeng, and ChangAn.
SAIC motor (Shanghai Automotive Industry
Corporation) combined with GM make up 33% of Nexteer’s China sales.
Nexteer doesn’t really export too much.
There are just a couple of exceptions where they export. The Buick Envision,
produced by SGM Wuling, will be exported to the U.S. For the most part, a
product produced in China is consumed in China.
Wuling makes up 14% of all revenue in
Asia and 20-28% of revenues in China. Nexteer is opening a factory in Indonesia
to increase capacity for Wuling. However, from earnings calls and from talking
to management, and listening to earning’s calls, we can tell that SGM Wuling’s
contracts and SKU’s aren’t very solid.
Previously, Nexteer had been outbid for
a Wuling car model/project— since the price was too low. Wuling continues
testing other steering suppliers to find lower cost alternatives, but has
failed for the most part— there are some small, local Chinese companies who
were awarded and failed at launch. Nexteer eventually took business back from
them. It seems like Wuling is more interested in getting the lowest price
rather than delivering and having an enduring business relationship.
BYD and Geely were added in the last
five years and will slowly grow. They both only make up less than 5 percent of
all revenue in China.
China is one of Nexteer’s most important
regions since both ChangAn and DongFeng are 50-50 nonconsolidated ventures.
Dong Feng’s new manufacturing plant in Wuhan initiated in 2019. These 2
domestic OEMs hold about 20-26% of all China domestic vehicle sales, and
Nexteer is deeply embedded in both OEM level alliances.
On
the other hand, with the joint venture with ChangAn, while there is a lower
revenue growth, the cashflow is more steady and can be anticipated. Changan and
Dongfeng, together will be enough to capture 26% of the China market, and
Nexteer has established a very solid access to this market via relationships
from AVIC and Beijing E-town.
ChangAn only makes up 5-8% of total China
revenues and their vehicle sales is not very strong in the Chinese market, but
in contrast to Wuling, Nexteer is very happy with their relationship, and they
provide a stable stream of cashflows. This year, Nexteer will cross more than
half of all Changan domestic vehicles, from the wholly owned Suzhou plant,
Nexteer’s source plant, providing in all 36 million in component sales, which
is largely modular power packs.
Changan was deployed both at the
entry-level as a brush product and at a more advanced exportable global
standard as a brushless product. Changan, gathered up their in-house steering
manufacturing capabilities, and they were contributed to the JV on the first day.
The Changan JV crossed 100 million in revenue in 2018. Nexteer finished 2018
covering 45% of all Changan domestic vehicles, which is quite an accomplishment
since Nexteer started from scratch.
The Changan JV, we always anticipate
that the ramp-up is going to be in the -- a slow ramp-up. The only effect,
there's really 2 effects. One is that the -- in Changan, the. This is the
negative impact.
And the second is that we are launching
new models within that JV that will -- the launch cost will impact on this
profit. And this is mostly in the short term. And as I mentioned before, this
will be in a steady growth for the Changan joint venture.
With Dongfeng, it launched on a global
platform. Dongfeng does not have component manufacturing capabilities specific
to steering. The Dongfeng JV required 30 months for construction to be
complete, launched its first program in Q4 of 2019. DongFeng’s manufacturing is
efficient, and is locally established with CPCA G&P platform. Nexteer has
been working with the Dongfeng Group for the Dongfeng, Nissan and the others— a
group ODM plus others. They continued to ramp up in a similar fashion and slope
to the ChangAn alliance.
In the J.V, DongFeng will be hiring a
new team, and they will be mentored by Nexteer’s wholly owned Suzhou site. This
mother plant will be the source of modular power packs consumed in serial
production. Suzhou remains as the source plant for brushless product which
comes packaged as a modular power pack.
Nexteer has been investing in
development in Suzhou’s technical center, and it is starting to pay off. The
SuZhou technical center has helped improve the material performance as well as
manufacturing performance. Many of the domestic OEMs are ones who have the
technical capabilities, and they're starting to come to Nexteer for the
operational opportunity. This will all be in a slow ramp-up, but long term,
Nexteer’s management is very optimistic about the Chinese market.
One other local domestic certainly that
impacted our year-over-year comparisons from a revenue perspective was China
Passenger Car Association, CPCA, down some 50% on a year-over-year basis with
respect to the vehicle demand for their products in the marketplace.
Opel’s
PSA acquisition, cancelation
Orders were affected by order cancellation of USD 1.4 billion associated with the sale of Opel-Vauxhall from GM to PSA group—Nexter backlog has slightly decreased from 2016-2018. However, it is promising that Nexteer can win back orders from PSA, as the Company has a good working relationship with PSA group, and has just won CMP platform orders with PSA.
Orders were affected by order cancellation of USD 1.4 billion associated with the sale of Opel-Vauxhall from GM to PSA group—Nexter backlog has slightly decreased from 2016-2018. However, it is promising that Nexteer can win back orders from PSA, as the Company has a good working relationship with PSA group, and has just won CMP platform orders with PSA.
Nexteer was the long-term incumbent
supplier of V Corsa and other vehicles. And Nexteer applies a proprietary EPS
product. Recently, the conquest winner of the CMP platform at PSA that applies
a different type of steering of single pinion EPS.
With that change, Nexteer has been
notified by the customer of the program cancellation, so it was removed from
the backlog. But Nexteer will be immediately competing to restore this business
because we're now going be in the CMP platform. It will be recorded, resourced,
and as the supplier of that volume, it will restore Nexteer’s backlog. Nexteer
has made both products for a number of years for Opel in the same plants in
Tychy and Poland.
GM North America was K2 /
T1 platform transition
The strategy for GM to produce both old (K2) and new (T1) Chevrolet Silverado and GMC Sierra 1500 pickup trucks was a clever way of making a smooth transition from one important set of half-ton pickups to a set of all-new and just as important (some might say more) half-ton pickups. GM’s transition to single pickups will require new expenditures and adjustments for tooling from Nexteer for column shafts, which affect North America’s revenues temporarily.
The strategy for GM to produce both old (K2) and new (T1) Chevrolet Silverado and GMC Sierra 1500 pickup trucks was a clever way of making a smooth transition from one important set of half-ton pickups to a set of all-new and just as important (some might say more) half-ton pickups. GM’s transition to single pickups will require new expenditures and adjustments for tooling from Nexteer for column shafts, which affect North America’s revenues temporarily.
EPS
backlog with ADAS/AD (automation functions)
10% of Nexteer’s total backlog is
enabled for Level 3, 4 and 5 ADAS capability.
Across the SAE-defined scale for ADAS
levels 1 through 5, Nexteer considers level 3, 4, 5to be most relevant. Level 3
is where the driver can be legitimately out of the loop while on autonomous
mode. And In fact, the driver is allowed a fairly generous amount of time to
reengage. These changes the safety case and represents significant
vehicle-level capability.
Technology,
R&D & automated driving
The next technology shift to advanced driver
assistance systems feature electronic steering and steer by wire. Nexteer is
well-positioned in the next technology upgrade due to its strong R&D
investment (6% of revenues) and the formation of key partnerships.
EPS, coupled with its steer-by-wire system, will
create more possibilities for OEMs in active safety and autonomous driving.
Nexteer supplies a wide range of products
from the cost-efficient Column-EPS for smaller vehicles, to powerful Rack-EPS
products for pick-up trucks, to commercial vehicles such as heavy-duty trucks
and buses with its MTO systems.
With its in-house R&D, design, testing,
verification and production capacities, the company is now one of the few
automotive steering system supplier that has all the core technologies and
design of all key components in house.
Nexteer’s partnerships with Google’s
Waymo and GM’s cruise ensures them to be supplier of choice in autonomous
driving for the long run. With automation and artificial intelligence being
developed, we don’t know who the winner will be for steering companies.
However, we do know that if research and development is not employed to
integrate steering to advanced automation technologies, some steering companies
will become obsolete.
For automation, China is still lagging
behind peers in installation for ADAS content. Nexteer has installed ADAS in
top selling local brands such as GAC’s GS8, and Geely’s NL-3. Nexteer has a
R&D center located in SuZhou China to serve as a technical center to
support product development in China on brush motor-based column EPS.
Steer by wire technology helps to remove
the physical/mechanical connection between the steering wheel and the wheel on
the road with the help of electronics and actuators on the steering column and
rack— helping to change the direction of the front wheels. The increasing
number of mandates by governments to control vehicle emissions with a lighter
EPS system will drive sales, but is hampered by a premium price. The drive by
wire technology helps in achieving that by reducing the weight of the vehicle,
and thus, increasing fuel efficiency.
The SBW market, by value, was estimated
to be USD 19.12 billion in 2018 and is projected to reach USD
34.63 billion by 2025, at a CAGR of 8.86%.
The major factor restraining the growth
of the drive by wire market is the high incremental cost, the risk of failure
in electronics, and a lack of public acceptance. The major players in the steer
by wire market are Bosch (Germany), Continental (Germany), ZF (Germany),
Infineon (Germany), Nexteer (US), CTS (US), Ficosa (Spain), Kongsberg
(Switzerland), Hitachi Automotive (Japan), and Curtiss-Wright (US).
Nexteer staff Liu Chen explains in an
earning call that the most important feature in steer by wire is redundancy. Nobody
is out in the market effectively has a pure steer by wire, due to a lack of
redundancy.
Infiniti has a vehicle with steer by
wire, but it has a complete redundant backup. It's very costly, and the take
rate has not been very healthy. The Tesla Model X and vehicles like that have a
high degree of redundancy in the collaborating Tier 1 subsystems, including
steering.
What car OEMs are effectively after is a
device designed such that a single point failure will not take it off-line. And
there are a number of ways to achieve a cost-effective solution.
In North America, for full size trucks
and SUV electric vehicles, with GM, Ford and FCA all as customers for Nexteer’s
Rack EPS, Nexteer holds 90% of the internal combustion engine and electric
vehicle truck market. Nexteer is well-positioned with developed technologies
applicable to truck EV’s up to 24 kN Rack EPS loads. Battery packs result in
heavier vehicles.
As of today, electric vehicles are still
low volume businesses, most business still comes from combustion engines; only
a different type of customer base buys EV Trucks— once the price point drops,
this might change.
As of today, 12 volt systems are
standard, but there are many built to 48 Volt capabilities. The advantage of
higher voltage means lower current, which results in less line loss. I2
R loss. So would be energy loss in the form of
heat, enabling cars to further their range and will require less effort on the
part of our products. Higher voltage is a good thing for Nexteer. The reason
why adoption of higher vehicle voltages has been so slow, such as 48 volts being
in discussion for at least 15 years is due to the gains in the efficiency of
power electronics.
Nexteer did a steering system on the
EV1, the General Motors EV1. That was at 300 volts. So 48 is certainly no
problem. Modular Power Pack (MPP) electronics applicable for both ICE and EV’s
including ADAS L3-5.
Book value
If
you’re an owner of Nexteer, you’d like to know what tangible book value
consists of. It consists of working capital and assets in machinery stored in
plants around the world.
Due
to aggressive expansion, working capital is negative (-52M) if cash is omitted.
There is currently 585M of cash and 950M ~ 1.1B of tangible book stored in 27
manufacturing plants with machinery located around the world. This brings us to
a total book value of 1.6B.
Most
of Nexteer’s tangible book value comes from machinery purchased for
manufacturing steering equipment. North America had the bulk of book value at
785M, with China at 331M, and Poland at 150M. Approximately 15%, or 125-165M of
book is work in progress/under construction.
The U.S effectively makes up 57% of
non-current assets, with Mexico, China, and Poland making up about 11-15% each.
In
assessing current assets, trade receivables at 510M was double of inventories
at 230M.
Payables
exceeded receivables at 560M with accruals of up to an additional 112M.
Cash flow, cash conversion cycle, changes in working capital, margins
Free cash flow for 2018 rose to 300
million, an increase of $42 million or almost 16% compared with 2017. March 30
2020’s delayed earnings call will most probably have a figure which is lower
than 300M due to a shutdown of factories from the virus. Cash balances was $675
million at the end of 2018, in 2019, it was near 580M.
In the
first half of 2019, Nexteer continued its focus on operational excellence with
the successful launch of 21 new customer vehicle programs across multiple
product lines and regions – including nine programs in North America, 10
in Asia Pacific and two in Europe, Middle
East, Africa & South America.
North
American driveline business is being restructured to improve its global bill of
design and bill of process similar to our current operations in Asia Pacific
and as planned for Nexteer’s new Morocco operation. Operating margins are much
higher in China. Chinese automobile OEMs are known to be price conscious, so a
higher margin may imply better utilization rates or factory expenses or labor
costs.
After 200-300M capital expenditures, with free cash flow of 300-450 million a year, Nexteer will be paying out 77-85 million annually in dividends. This leaves us with 220 million and an annual debt repayment of 60-80 million, which leaves us with 150 million to retained earnings.
Increase in steel and aluminum prices and currency fluctuations were only partially offset by material and net manufacturing efficiencies— including lower quality and warranty costs.
Revenue to working capital went from 6.9x in 2013 to 5.5x in 2019. When we scrutinize the cash flow statement, from 2011-2014, the change in working capital was negative, which varied from negative 20 million to 60 million. In 2015, change in working capital finally became positive; from 2015-2019, change in working capital was a positive 50 to 70 million each year.
One positive feature compared to other competitors is that Nexteer has brought down its cash conversion cycle from 31 days to 16 days. This is due to restructuring of logistics, starting with global bill of design and process, and by having more bargaining power with suppliers. Nexteer use to pay in 41 days, now they have lengthened the number of days to an average of 67 days. Competitors Mando has a cash conversion of 36 days, ZF 41 days, JTekt 51 days, and NSK 90 days. This is an area where Nexteer really shines.
Over a decade (2010-2020), with 1.57B
invested and 3.1B of debt employed, 3.7B of cash was generated from operations.
Nexteer’s debt to equity has decreased from 520% in 2010 to a manageable 23%
today. Going forward, capital expenditures will have to increase to double book
value by 2025 to have 9M EPS units produced a year to about 15-17M units
produced a year. Capacity doesn’t increase unless capital expenditures are
made, and additional R&D is required to keep up. Which is why Nexteer is
capital intensive and it is good that they are building the new factories in
China instead of America to control their labor force.
Debt
Nexteer also has USD 250 million of senior unsecured corporate debentures which was issued in November 2014 which yields a coupon of 5.875 with a rating of BBB- and matures at November 2021. Senior debt makes up 67% of total loans. Moody’s had recently upgraded Nexteer’s rating.
Debt
Nexteer also has USD 250 million of senior unsecured corporate debentures which was issued in November 2014 which yields a coupon of 5.875 with a rating of BBB- and matures at November 2021. Senior debt makes up 67% of total loans. Moody’s had recently upgraded Nexteer’s rating.
Term
loan due Oct 2020 from the export-import Bank of China
Nexteer has 90 million of term loans due
in October 1 2020 with financial lease obligations of 67 million.
By way of two loan agreements dated
October 29, 2012, PCM (Singapore) Steering Holding Pte. Limited and PCM (US)
Steering Holding Inc., both of which were direct wholly-owned subsidiaries of the
Company, agreed to borrow USD126M and 300M, respectively, from Guaranteed Bank Loans from Export-Import
Bank of China. The EXIM Guaranteed Bank Loans were intended to repay previous
loans and fund certain acquisitions and operations of the Group, which shall be
repaid in 14 installments which commenced in June 2014 and shall be fully
settled in October 2020. The total amount of guarantees provided by AVIC and
Beijing E-Town to our Group amounted to US$426.0 million. The balance of the
EXIM guaranteed bank loans as at December 31, 2016 was US$243.0 million.
Source: CapitalIQ
Change in Management—too much turnover
Nexteer endured a
period of management churn. From 2010 through 2016, the company had four CFOs.
French executive
Laurent Bresson, who was president, departed in 2016. Bresson’s replacement,
Michael Richardson, handled strategic planning, mergers and acquisitions.
Michael Richardson is
a Steering Gear veteran who joined the company in 1974 as a 17-year-old high
school graduate, he served as CEO from 2016-2019, guiding COO Tao Liu, who was
vice president of China operations.
Tao Liu, who, ran
day-to-day operations as COO knows all about how to manage from an operational
standpoint and will grow sales to a point where China affects the bottom line. Tao
Liu is also the liaison with Chairman Zhao, who is based in Beijing. As of
2020, Tao Liu will be the new CEO, and he was involved in a few earnings calls
before Michael stepped down.
The auditor has always been
PriceWaterHouseCoopers, and the opinion is always unqualified, which is a good
sign, but CFO and CEO churn is not a good sign. Hopefully Chairman Zhao can
make changes.
ASP,
Production Capacity, Utilization rate, UnitVolume
Volume in terms of units produced and
capacity was not revealed by management, therefore utilization rates can only
be estimated. Units produced can be estimated from average sales price and
revenue. Capacity is still not revealed, but in the 2018 annual report,
regional book values for machinery was mentioned.
taken from Nexteer’s supplier conference slide
Unit volume
growth was at 18-20% a year, and we expect this to drop briefly to single
digits due to the Corona virus. Nexteer has a plant in Wuhan and may have to
shut down for half a year. Overall, in the worst case scenario, over a span of
five years, unit volume growth will be at 8-10% a year, which will be a very
satisfactory result. To
reach a volume of 17-20M units, at 7-10% growth in volume a year, the book
value also has to double to support that capacity
Nexteer has continued expansion and diversification
of its global footprint in regions strategically important to key customers –
including the opening and launch of Nexteer's India
Software Center to further support
downstream software production and validation, the grand opening of the
Company's first production facility in Africa in Kenitra, Morocco, and new production facilities in Chennai,
India and Liuzhou, China.
ASP or average
sales price will go up in a consolidating industry. A decade from now, average
sales prices will go up, and while it is currently rising faster than
inflation, I cannot predict if it will continue. Notice how ASP is higher in
Europe (Poland, basically) and North America at 301-325 and in Asia Pacific
(China, basically), it is 215. I can’t tell you exactly where it lies on the
range, but speaking with IR (Tony Wang) on the phone, he confirmed that ASPs
were in the 200 range for Chinese operations. Which is why I am skeptical of
the 11% operating margins mentioned earlier for China compared to other
countries have operating margins at 4-6%? China’s net profit margin is at 8%,
while the rest are at 3-4% (see below).
While I wouldn’t
go as far as accusing Nexteer as pawning off fake numbers, there could be the
possibility that costs or salaries are lower in China, but it all doesn’t add
up. However, if we look at the tax rate, it is at 14.7%, whereas most other
countries are over 20%. But this shouldn’t affect operating margins, since EBIT
is “before interest and tax”, should the comparisons amongst countries should
be apples to apples. Could this be one of the leading factors? Also, how long
will China suppress taxes on high tech industries? What I am trying to get at
is—are these high margins in China sustainable? Or are they actually really low
since ASP is masking it?
Nexteer’s market capitalization has hit
a low with the decline in OEM production in North America and China. To top
this off, GM, a customer accounting for more than a third of Nexteer’s backlog
experienced a strike from workers on September 2019, which hurt both of their
bottom lines.
When you look at North America, Mexico
is accounts for 1/3 of production, and Michigan and the rest are 2/3s.
Nexteer’s steering systems are in almost all North America pickup trucks.
Opel being acquired by PSA and GM
changing models for their column shafts substantially affected production for
Nexteer in North America. Being an automobile component manufacturer has many
unforeseen hazards, and production is by no means an easy business.
Despite Nexteer’s high backlog, it needs
to ensure that its conversion to annual sales is increasing by making sure
utilization rate is high. Most of the volume produced in China is for SUVs.
SUVs have had a slightly faster growth than other vehicle types in China for
the past few years. Can Nexteer keep this up and churn out its backlog?
Nexteer has 27 manufacturing plants, three technical centers and 14 customer service centers strategically located in North and South America, Europe, Asia and Africa. The company serves more than 60 customers in every major region of the world including BMW, Fiat Chrysler, Ford, GM, PSA Groupe, Toyota and VW, as well as automakers in India and China.
Nexteer has 27 manufacturing plants, three technical centers and 14 customer service centers strategically located in North and South America, Europe, Asia and Africa. The company serves more than 60 customers in every major region of the world including BMW, Fiat Chrysler, Ford, GM, PSA Groupe, Toyota and VW, as well as automakers in India and China.
In China, Nexteer now owns 4 wholly-owned manufacturing plants, 4
joint-ventured plants and 1 technical center - the only one and the
headquarters of Asia-Pacific region. Last November, Chairman Zhao
broke ground on the new technical center building in Suzhou Industrial Park.
The new technical center encompasses 30,000-plus sq. meters, including 14,000 sq. meters of office space and 12,000 sq. meters of R&D facilities and a test & validation lab. Departmental functions housed at the site will be product engineering, manufacturing engineering, purchasing, finance, sales and management. Nexteer's plans for the site also include a 4,500 sq. meter vehicle test track with eight lanes, incorporating complex roadway environments. The Suzhou plant was completed at the end of December 2020, and an official press release was sent early January of 2020. The Suzhou site will house approximately 1,000 employees, enhance technical support as well as customize product solutions, R&D, production, testing and validation for the local market.
In India, Nexteer already has 3 facilities manufacturing EPS and driveline products. It is also planning on building a new software center near Bangalore with over a couple hundred engineers to support the digital transformation and upgrade of its global business.
The new technical center encompasses 30,000-plus sq. meters, including 14,000 sq. meters of office space and 12,000 sq. meters of R&D facilities and a test & validation lab. Departmental functions housed at the site will be product engineering, manufacturing engineering, purchasing, finance, sales and management. Nexteer's plans for the site also include a 4,500 sq. meter vehicle test track with eight lanes, incorporating complex roadway environments. The Suzhou plant was completed at the end of December 2020, and an official press release was sent early January of 2020. The Suzhou site will house approximately 1,000 employees, enhance technical support as well as customize product solutions, R&D, production, testing and validation for the local market.
In India, Nexteer already has 3 facilities manufacturing EPS and driveline products. It is also planning on building a new software center near Bangalore with over a couple hundred engineers to support the digital transformation and upgrade of its global business.
We know that EPS revenue was 2.5B US
dollars for 2018, and ASP for 2018 was approximately 280-330 (assume 300 for
easy calculation), so volume was around 7.7 to 8.3 million units for EPS. This
means that capacity, at 70-85% utilization rate, had to be around 9.4-10.3M
units. Therefore, management and IR’s guidance from Tony Wang that Nexteer’s
production was near 10M units for EPS is not far off.
Units produced (estimate)
N.A 4.5M + Asia Pacific 1.7M units +
EMEA & SA 1.46M = 7.7M EPS units produced in 2018.
N.A 5M + Asia 2.2M units + EMEA SA +
1.7M = 8.9M in 2019
With new factories in China and Morocco,
Africa, it seems like expansion will not be focused in North America, Mexico,
or Poland, which is rightly so. However, IR has told me that China will be a
greater focus than India, as they believe it will reap greater rewards.
For N.A, capacity is most likely at
5.5-6M, with a 4.5M unit volume, this gives a 75-85% utilization rate.
Likewise, with Poland, Brazil, and Morocco, utilization rate is close to
70-85%. With aggressive expansion, it is interesting to see if China will
retain highest operating profit margins if utilization rate targets are not
met.
Valuation
Nexteer’s supplier conference in 2019
assumed the worst case scenario would still mean that they would be producing
17 million units of EPS by 2025.
Now with the Corona virus, management
has even more conservative estimates of 15 million units. Currently, in 2020,
we are at 9 million units. This means that we are assuming a unit growth rate
of 7-8%, where as previously management was assuming the worse case scenario
would have 11-13% of growth. Remember, from 2015-2018, there were years where
there was 20-25% of growth a year.
In order for 8-9% growth to be realized,
the tangible book value (mostly machinery) would still have to double, and
plants in China and South East Asia would have to be aggressively built. Plants
in Poland and Europe will probably increase their book value by 50-60%. North
America and Mexico would probably increase tangible book value by 20-25%, as
they want to rely more on suppliers.
My estimates for Nexteer’s existing
plants in Poland are conservative. Some news articles claim Nexteer is already
producing almost 3m steering systems per year
(https://www.automotivemanufacturingsolutions.com/nexteer-announces-european-expansion/35015.article) for vehicles including: BMWi3, BMW 1 Series,
BMW 2 Series Active Tourer; Mini Cooper; Alfa Romeo MiTo; Fiat 500;
Opel/Vauxhall Adam, Corsa and Insignia; Citroen C3 and DS3. Since 2010, these
facilities have received over $80m of investment
This means that 1.5-1.7B of machinery in 2019
would have to be boosted to near 3.23B to bring capacity to 21 million steering
units. At a utilization rate of 70%, this would mean in 2025, 15 million units
would be produced that year. 15 million units of EPS produced would yield over
USD 4B of revenue and hopefully 280-320M of profits. CIS & driveline, will
reduce in contribution from 35% to possibly 20-25%, so probably 100M of profits
come from that segment. Assuming a multiple of 10x, this would mean 400M of
profits bring in a valuation of 4B 5 years later as a conservative estimate. In
March 2020, Nexteer’s market capitalization fluctuated between 900M to 1.28B,
and sales were 3.69B.
If the market capitalization reaches
sales you would triple or quadruple your investment. If you assume a modest 10%
growth, which is half the growth of what Nexteer achieved in the past 3 years,
5 years later, at a multiple of 10x, you would also quintuple your investment.
The biggest risk is a factory imploding,
having strikes, or if a major supplier fails to deliver. Another catastrophe
would be if GM, Ford, Fiat Chrysler, PSA, or BMW goes broke due to debt or some
other unforeseen circumstance. Otherwise, I expect nothing less than doubling
your money if you buy under hkd4.5 dollars a share or at a market cap under USD
1.3B. I expect this to be achieved in under 5 years.
Currently, ZF-Bosch, Nexteer, and Continental
are the dominant players in the drive by wire market. The extensive competition
in the automotive industry has led these companies to primarily focus on
innovations. ZF-Bosch is leading the pack with 33% market share or more, but I
think Nexteer will make strides. I am not smart enough to know if Nexteer will
come out as a winner, but I know that it will be a survivor if steering OEMs
get weeded out.
A good growth rate even if it is cut in
half from a previous 20%, a 20% payout of 60M in dividend, about $20 million
higher than the year before, and a cheap price makes Nexteer an obvious
purchase for me.
Buybacks
Since IPO until now, Nexteer has not
re-purchased shares and there is no treasury stock as a result. Will this
change in the future? I asked IR and there was an evasive response. Hopefully,
in light of the Corona virus, they do buyback shares. Shares were as low as 2.9
Hong Kong dollars, which was almost the IPO price, which is unjustified,
because Nexteer has improved so much since 2013.
Catastrophe
Risk –Technology
The biggest risks to Nexteer isn’t
financial solvency or liquidity or ramping up utilization rates to be
profitable. The biggest risk is becoming too big and complacent and missing the
next big trend in ADAS or steering.
Microsoft never missed the mobile
era—those of you old enough remembered it tried to compete with Blackberry with
the PocketPC in 2001, and it even bought Nokia and tried to launch a bunch of
apps to compete unsuccessfully.
The iPhone pulled the rug underneath
everyone—Research in Motion, Motorola, Nokia, Microsoft, and change the rules
of the game. They were no longer tied by the big carriers, there would be a
different graphical user interface (GUI) with new apps, and new hardware with a
new operating system based on linux and apple’s old operating systems. Pretty
soon Google would buy up Android and open source it to become the new priest of
the industry. Essentially they decide the fate of hardware industries and app
developers. No one could have seen such a change in power.
There is no doubt that there’s a
tectonic shift in the steering industry and ZF-Bosch with Nexteer have spent
the most research dollars and created partnerships ready to pounce on ADAS/
automated driving. But who knows what the future will bring? I’m no automobile
engineer, and I can’t predict who will win in a paradigm shift.
References
Nexteer Prospectus 2013
CapitalIQ data
Nexteer Annual Reports 2013-2019
Tony Wang from Nexteer’s IR
Industry Reports from Automotive
Steering
Industry Magazines about automobile
components
NSK annual report
Jtekt annual report
ZF annual report
Bosch annual report
https://www.nexteer.com/news-releases
*please do not be offended if I did not cite you. I used many, many sources for this article, so if I missed you, let me know. Thanks.
