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Introduction

The advantages of the ICE era may become liabilities.

After much speculation, Continental AG has finally made decisive progress in its business split. Earlier this month, the company announced its intention to spin off its automotive subgroup, with details of the split and listing to be decided in the fourth quarter.

If approved, this will mark the latest round of restructuring for Continental AG, leaving only the tire and ContiTech subgroups under the parent company after the automotive subgroup is spun off.

Over the past five years, Continental AG's market value has plummeted from €50 billion in 2018 to €13 billion. To boost its share price, the company has undertaken a series of restructurings in recent years, aiming to improve overall profitability.

Within the company, management has been sharpening its knives, contemplating restructuring and transformation as early as last year. In February of this year, Continental AG announced plans to lay off 7,150 employees, accounting for 3.6% of its global workforce, with the goal of completing the layoffs by the end of 2025.

In fact, Continental AG's restructuring mirrors the transformation and upgrading of established European auto parts giants. According to statistics from a reputable German authority, 20 automotive parts suppliers in Germany with annual revenues exceeding €10 million went bankrupt in the first half of this year, a 60% year-on-year increase.

During the golden age of ICE vehicles, these European and American auto parts giants became accustomed to the strategies of "addition" and "multiplication." Tactically, they often preferred "vertical and horizontal integration," with larger players acquiring smaller ones, integrating technologies and business segments. As long as their customer base remained stable, their businesses continued to grow like snowballs.

Now, however, the golden age of ICE vehicles has become a distant memory, and the former advantages have transformed into potential liabilities. How can these giants survive in the new industrial landscape? They have realized that the old strategies of "addition" and "multiplication" may no longer be effective and must learn to apply "subtraction" and "division" to different business segments, integrating while making strategic adjustments.

A "Sample" of German Manufacturing Restructuring

Currently, Continental AG's organizational structure comprises three independent segments: the automotive subgroup, tire subgroup, and ContiTech subgroup.

Among them, the automotive subgroup (including the Safety and Dynamics Business Unit, Vehicle Networking and Architecture Business Unit, User Experience Business Unit, Smart Mobility Business Unit, and Autonomous Driving and Mobility Business Unit) and certain automotive-related businesses within the ContiTech subgroup, such as automotive belts and sealing systems, are closely tied to the automotive industry.

Therefore, it is crucial to note that—

Once Continental AG spins off its automotive subgroup, the remaining automotive business will primarily consist of the automotive segment of the ContiTech subgroup, focusing on shock absorbers, sealing systems, hoses, belts, and interior components.

These businesses are heavily rooted in traditional auto parts, making it difficult to create new value increments in the era of intelligent vehicles. They are akin to the " chicken ribs " of the automotive industry—tasty yet not filling.

With limited profitability and limited space for innovation, industry insiders speculate that this business segment may eventually be spun off, sold, or merged with other companies.

Continental faces an issue of internal profit imbalance.

At the corporate level, the established and dominant tire business consistently maintains high profit margins. However, these profits are continuously funneled into other loss-making segments, such as the automotive business.

Financially, Continental AG's automotive, tire, and ContiTech segments generated revenues of €20.3 billion, €14 billion, and €6.8 billion, respectively, in fiscal year 2023, with the automotive segment accounting for the highest proportion of total revenues. However, it is worth noting that this segment has been in a state of chronic loss for several years, with the automotive subgroup incurring losses for four consecutive years from 2019 to 2022.

The loss-making automotive subgroup has undoubtedly weighed heavily on Continental AG's overall performance. Moreover, this segment is highly capital-intensive, particularly in terms of research and development expenditures. Only when new mobility and technology orders significantly increase, creating economies of scale, can the exorbitant R&D costs be gradually amortized.

Under the pressure of the new automotive trend, another century-old auto parts company, Bosch Group, has also taken a crucial step towards transformation and survival.

Last May, Bosch revamped its automotive business structure, reorganizing its automotive and intelligent transportation technology operations, and officially renamed the segment as "Bosch Intelligent Mobility Solutions" in January of this year.

Concurrently, the Bosch Intelligent Mobility Solutions China Board of Directors was established to oversee the company's operations and teams in China. This was followed by senior-level changes, with Xu Daquan succeeding Chen Yudong as President of Bosch China, and Wang Weiliang appointed President of Bosch Intelligent Transportation Solutions China, reporting to Xu Daquan.

Bosch has always been keenly aware of industry changes. Chen Yudong once mentioned in an interview that while Bosch is essentially a traditional auto parts company, management hopes to be seen as a "new force" in the industry in the new era. To this end, Bosch China has been undergoing transformation in recent years, from organizational structure to technological innovation, to adapt to the development of the new era.

Anxiety Among Established Manufacturing Powers

Earlier this month, an article titled "Are German Automakers Hitting a Roadblock?" directly addressed the real crisis facing Germany's established automotive industry, a traditional manufacturing strength.

First, there is the issue of profits.

Riding the wave of the ICE era, German automakers once raked in significant profits. However, those glory days are long gone. Compared to the same period last year, only Volkswagen Group has seen a slight increase in sales revenue in the first half of this year, while other companies have experienced varying degrees of decline or stagnation, with profits generally lower than in previous years.

Second, there is the transition to electrification.

Data indicates that BMW is the only winner in the electric vehicle race. In the first half of this year, BMW Group's pure electric vehicle sales increased by approximately 25% year-on-year. Volkswagen, which leads in sales volumes, faces the most severe issues. The German industry generally believes that the group will struggle to achieve long-term profitability in the pure electric segment.

As the saying goes, "A duck knows the water's cold before the spring thaw." When a crisis arrives, those at the upstream end of the industry are the first to feel its chill.

German automakers' difficulties are keenly felt by the country's auto parts giants. According to Falkensteeg, a renowned German business restructuring consultancy, 162 companies in Germany with annual revenues exceeding €10 million filed for bankruptcy in the first six months of this year, a 41% year-on-year increase. Notably, the auto parts industry accounted for the highest proportion of these bankruptcy filings.

Giants that have long dominated the top 10 auto parts revenue rankings, such as ZF Friedrichshafen and Bosch, are also under significant transformation pressure. Faced with immense pressure to reduce costs and increase efficiency, they have had to resort to layoffs or strategic retrenchment.

ZF Friedrichshafen previously announced plans to cut the majority of its workforce in Germany by 2028, reducing the headcount from the current 54,000 to between 10,000 and 15,000, potentially resulting in the loss of tens of thousands of jobs.

Another set of data reveals a significant increase in German direct investment in China this year. The Bundesbank disclosed to the Financial Times that German direct investment in China reached €7.3 billion in the first half of this year, compared to €6.5 billion for the entire year of 2023.

It is worth noting that the surge in investment is largely driven by major German automakers, and these investments in China are primarily reinvestments of profits earned there.

It is evident that amidst the collective cooling of the German automotive supply chain, the Chinese market has become a top priority for most companies. However, luxury automakers represented by BMW, Mercedes-Benz, and Audi (BBA) continue to face new challenges in China. The Süddeutsche Zeitung analyzes that the widespread anxiety among German premium automakers in the Chinese market stems from declining purchasing intent among wealthy Chinese consumers and the gradual upscaling of Chinese automotive brands.

Not only BBA is in trouble, even in the mass market where Volkswagen Group operates, Chinese manufacturers pose fierce competition.

Experts from the Center of Automotive Management in Germany have even pointed out that even if Chinese manufacturers survive the brutal price wars, Volkswagen's models will struggle to launch competitive vehicles in the foreseeable future to counter the intense competition from the Chinese automotive industry.