Conti's new world: Fuel saving, safety, connectivity

Samir Salman, CEO of Continental's North American operations, believes the U.S. auto industry is primed for growth in three technology sectors: fuel economy, safety, and connectivity.

The German supplier, once largely known as a tire maker, is branching out into collision avoidance, turbochargers, telematics, and other high-tech products.

Salman, 48, spelled out his growth strategy in an interview in suburban Detroit with Managing Editor Richard Johnson and Special Correspondent David Sedgwick.

Q: Which fuel economy technologies have the greatest growth potential?

A: Definitely turbochargers, direct injection, double-clutch transmissions, start-stop.

In Europe, start-stop has a penetration rate of roughly 30 percent. In the U.S., I'm guessing that it's less than 5 percent. So that technology has further potential.

Which of these technologies will generate the most growth for Continental?

Turbochargers are a new segment for us. In 2016 or 2017, we'll make about 2 million turbos a year.

Safety is another growth area. In Germany, you have a test program that explores a variety of safety technologies. What does that involve?

We are talking about everything possible for active and passive safety: lane departure warning, collision mitigation, radar technology, cameras, sensors.

We call it ContiGuard. [An automaker doesn't] have to use all of these elements, but you can have two or three. For example, you might have radar in the car. So then you might try adaptive cruise control. You might try emergency braking. You can enhance that even more by adding a camera. Stereo cameras combined with radars--that's the next thing coming to the market.

Is collision avoidance ready for compact cars?

If you take a small car, you wouldn't put a double stereo camera and a long-range radar into it. But you could [use] a midrange radar, which looks roughly 150 meters [492 feet] in front of the car.

A midrange radar is perfect for the U.S. because of pretty low speed limits. A midrange radar has a target price of probably $100 to $120 per unit.

How much would a collision avoidance system that combines radar and cameras cost?

The camera itself is probably $100 to $120. You could get a camera that is cheaper that has only one function. But we believe in [multiple] functions. In a small car, you could have a $100 camera, plus a midrange radar that costs about the same.

Do you have any contracts to produce a mass-market collision avoidance system?

We have [contracts for] midrange radars. It will be the next generation [of vehicles], in two or three years.

Connectivity is another of your major growth technologies. You have a new infotainment product called AutoLinQ, which lets motorists personalize it by choosing their own apps--just like a smartphone. Do you have any contracts?

We are starting with some projects. At the moment, we have one.

AutoLinQ uses Android as its operating system. Clearly you believe apps are the wave of the future for motorists.

Correct. There are thousands of developers out there. If you used an old operating system, you would have to bring all these developers aboard, which is not affordable.

How much did your R&D decline during the recession, and where are you now?

It declined a little bit during the recession. We totally believed the market would come back. Did we know when the market would come back? No. Was it faster than we expected? Absolutely yes.

Because we didn't know, we didn't take a lot of R&D cost out. We believed that [cutting R&D] would be exactly the wrong thing. We left most of our R&D cost structure intact, knowing that it was an investment in the future.

So our spending in 2009 was maybe 1.4 billion euros, and this year it is 1.6 billion euros. We were pretty stable.

If North American auto production rises significantly this year, is Continental ready for the surge?

Yes. Our expectation is that North American production in 2011 will be 13 million to 13.5 million units.

Do you have any spare production capacity in North America?

They are all running at the upper end, at 85 percent or more of capacity. In the past, we had plants that were at 60 or 65 percent.

You're expanding your tire plant in Mount Vernon, Ill., and you plan to build a new tire plant in North America. Do you have any other brick-and-mortar projects in mind?

Not in the immediate future. We will probably expand some plants, but I don't see any new projects in the next four to five years.

Is Continental looking for acquisitions?

No, we are not.

How did the March 11 earthquake in Japan affect your supply chain?

We absolutely had a disruption. In Japan, we have 1,000 employees. The expatriates had to go back to their home countries for a few weeks.

We also rented 400 or 500 apartments in southern Japan for our employees because we weren't sure what [would happen] with the Fukushima nuclear plant. Roughly 50 percent of our employees did go south.

Then we had to look after our supply base. It took us about a week to get our arms around it--to reach the people that we normally reach, because their infrastructure was heavily hit.

We had constraints in the supply chain, especially of electronic components.

There were severe global shortages of microchips last year. Did the earthquake worsen a bad situation?

It was good training for this kind of crisis. More or less the same type of products [were in short supply]. So we had learned some lessons. We were lucky. We were not so dependent on some suppliers that were hit the hardest by the quake.

Is Renesas Electronics, the world's largest maker of automotive computer controllers whose Naka factory shut down for months after the quake, a major vendor to Continental?

They are a supplier, but not a major supplier.

So you dodged a bullet.

Exactly.

Who are some of your big computer chip vendors?

Freescale and Texas Instruments are big suppliers. They have operations in Japan. But they are global, so they had operations elsewhere. They came back pretty fast.

Was Continental's production ever constrained by shortages caused by the earthquake?

We did not have any shutdowns as a result of the crisis. But we did have to use premium freight, flying parts to a customer rather than using ships.

Do you expect automakers to change their purchasing operations to reduce the risk of disruptions?

My personal view is yes.

Some automakers are thinking about whether they did [enough] to spread the risk. That's a question that everyone should ask. I think there will be changes here and there to [reduce] the risk.

This year's Henke report, which asks suppliers to rate the purchasing operations of six North American automakers, concluded that the Detroit 3 are improving. Do you agree?

Definitely. It's much more open dialogue. It's absolutely a different game.

Is there a shortage of engineers among automakers and suppliers?

There is absolutely a war for talent going on. I think it will even increase, going forward.

Even in the United States?

Yeah. Definitely in software, there is a war for talent.

(Source: Automotive News)