TRW grows with Chinese auto makers

Edward L. Carpenter
Vice President, Asia Pacific,
TRW Automotive

Gasgoo.com: Thank you very much for joining us at Gasgoo.com. First of all, can you give us a brief introduction to TRW?

Carpenter: Thanks for the opportunity. I'm very pleased to be here. TRW sales in 2006 were 13.1 billion dollars, which makes the company one of the largest automotive suppliers in the world. Some of the unique things about TRW that the audience may not recognize are: that our company is based upon a safety product portfolio; that we have industry-leading active and passive safety technologies; and TRW is one of the most diversified Tier-1 automotive suppliers in the world. We have a very significant diversification in our customer base and in our product offering. We are diversified in terms of geographic footprint around the world: we have a large and capable footprint in North America and Europe, we have been developing low-cost country footprints to support Europe and North America, we have very good positions in South America, and of course we have been growing rapidly here in the Asia-Pacific region.

Gasgoo.com: Thank you, that's very impressive. We know that TRW is a company based in the United States, while the largest business operation and customers are located in Europe. What's the main reason for that?

Carpenter: TRW is headquartered in Michigan and listed in the New York Stock Exchange. About 60% of our sales are in Europe, somewhat less in North America, and we,re growing significantly in Asia Pacific. We are well positioned with the automotive manufacturers based in Europe. Moreover, TRW has a diversified customer base--no single customer represents more than 16% of our sales.

The European market is broadly larger than North America to begin with. Our larger presence in Europe also has to do with how TRW has evolved as a company. The acquisitions we've made and the business development process we,ve been on have led to a significant position in Europe. The LucasVarity acquisition in the 1998-1999 timeframe brought us into the braking business. We,ve added pieces to the puzzle in the last couple years, with the acquisition of Dalphimetal adding to our passive safety portfolio located in Europe. In the mid 1990s, some significant acquisitions had helped our restraint systems and occupant safety business to grow in that marketplace. Not surprisingly we now have a significant market position in Europe. It's good for the company, as we believe the European market is important and European OEMs play a very significantly role in the globalization of the auto industry. And we,re considered to have a very significant leading position and large market-shares in the products we participate in North America as well. It has certainly helped the company grow and diversify in the last several years that we,ve gone through cost and growth strategies, positioning for appropriate profitability.

Gasgoo.com: Currently, the Asian business only accounts for less than 10% of the whole revenue of TRW, is that true?

Carpenter: That's true on a consolidated sales basis. I think what most people probably don't realize when they read our financial statements is that we don't consolidate sales from a number of joint ventures where we do not have a majority ownership position (e.g., where we have a 50:50 or minority JV position) in Asia, particularly as related to China and India. Naturally we don,t report those sales as a percentage of total TRW sales. Our market position in Asia Pacific is actually considerably larger. But due to the reporting regulations, we don't publicly report these JV sales.

Gasgoo.com: Now in Asia, auto industry is booming, especially in China as well as in India. What do these emerging markets mean to TRW? More opportunities?

Carpenter: It's a very important market to TRW. All the major countries in Asia Pacific are important. Japan is an important market to TRW, so is Korea, China obviously, and India. TRW is also participating in the ASEAN region as well. If you look at the Asia Pacific broadly, the two fastest growing countries on a pure growth-percentage base are China and India. Both are very important to TRW.

Gasgoo.com: What are the differences between the China and India markets?

Carpenter: To start off, there are more similarities than differences from an industry-expansion perspective. Both are growing rapidly, as I mentioned earlier, in terms of compounded growth rate. They are the two fastest growing countries in Asia Pacific in terms of vehicle manufacturing. China is projected to grow for the next five years by greater than 12%. India is projected to grow greater than 16%, in terms of annual manufacturing output. China and India combined represent almost 84% of the projected growth in the A and B segment class vehicles in Asia Pacific. The A, B and C segments together they represent probably 74% of the projected growth over the next five years. From that perspective, they are very similar. If you look at the significant players in the vehicle manufacturing area, there is a fair amount of similarities too. In both countries, the Korean OEMs, Hyundai and Kia in particular, are projected to grow very rapidly and so are the Japanese OEMs. The American companies are participating too.

There are some differences, such as in regulatory environment and the segmenting vehicle manufacturers try to do. The ultra low-cost cars segment for the specific domestic market is obviously a big focus in India. You have a very significant difference in the domestic players driving the growth: for example Tata and Mahindra in India, as opposed to the domestic companies growing in China. There are far more domestic participants in China than in India in vehicle manufacturing (Chery, SAIC, FAW, Geely, the ChangAn Group, etc.). And perhaps in the short term China domestic manufacturers have more export expectations than the Indian OEMs, although the Indian OEMs are trying to build their businesses to support export opportunities as well.

Gasgoo.com: We know that in North America, few spare parts suppliers make profits, while TRW has always done a good job. Can you tell us the main reason of TRW,s performance?

Carpenter: First of all, as I mentioned earlier, TRW has a very strong product portfolio. We have products that customers want to buy. We help our customers make better cars with enhanced features and functionality. Our strong diversification in customer mix and geographic base has certainly positioned us to perform well financially, or to mitigate the impact of down-turning volumes of our traditional customers in North America. Fundamentally, we have a very focused and strong cost-reduction program, operationally and from a sourcing and purchasing perspective, which has helped over the last several years maintain our competitiveness. For the last 10 to 15 years, TRW has constantly worked to appropriately shift manufacturing and sourcing to low-cost countries so that we can maintain and create competitive advantage.

We do a lot of other things that have been important to the company,s success as well, such as reducing our borrowing costs. There has been a significant amount of debt restructuring on our balance sheet over the last three or four years, which reduces the interest we pay to the lenders. We've also worked hard to optimize effective tax rate around the world, which ultimately improves our cash flow. It's like in a household, you have to pay rent, buy groceries, and buy clothes at the end of the day out of your pay checks. TRW's fundamental focus is on cash flow and cash performance. It's the life blood of any company. You can be profitable and not generate cash, but that's not a good situation. You need cash to invest in R&D. You need cash to be able to buy the equipment you use, the tooling that makes the parts. The focus on cash generation, I think, is a fundamental reason that TRW has been successful over the years.

Gasgoo.com: As you just mentioned, one reason of TRW,s profitability is sourcing in low-cost countries. China is one of the low-cost countries for global automotive sourcing. What is the progress you,ve made and any comments on the strategies?
  
Carpenter: While I haven't looked at the latest actual statistics, TRW has significantly advanced our sourcing levels in many low-cost countries. We have plans over the next five years to increase that level of global sourcing, which of course also includes localization of as many parts as we can in support of our Asia Pacific business.

The general strategy for low-cost country sourcing really varies quite significantly by commodity. What we buy—from machines, castings, forgings, to complex electrical and mechanical assembly, stampings, plastic injection molding parts—each a unique commodity strategy. A couple of factors are important particularly from a China perspective.

One is the value-add proposition. We typically prefer to source parts from a low-cost country, whether it,s China or Mexico for North America, or East Europe for Europe, that we can leverage the labor and overhead cost advantages to make those parts in LCC. In addition to the cost differential, factors that are considered in a sourcing equation include logistics, potential duties, inherent risk in quality risk, supply/delivery risk for a long supply chain... So value-add is a key variable.

Second, for most commodities, a significant key variable is the cost of the underlying raw material, for example scrap steel to produce iron casting, bar steel or sheet steel to manufacture forgings or machine parts or stampings, resin costs to make plastics parts, etc. In those areas China is either uniquely positioned in a very competitive way or noncompetitive way. In some cases China does not have a competitive advantage, for example, in injection molding and resins. What TRW is working on more and more though is trying to qualify local raw material grades that we don't typically specify in Europe and North America. Having said all that, our purchase amount from China is growing every year and is growing well in excess of the localization activity we have for our domestic business here in China. In China we operate our purchasing organization to ensure harmonization between what we buy domestically and what we source globally. I can't cite the actual numbers today, but we are very bullish on sourcing from China in a selective and focused manner.
 
Gasgoo.com: What's the business opportunity for TRW during the globalization of the Chinese local carmakers?
  
Carpenter: As I mentioned earlier, we are very focused on safety products. There are governmental regulations related to safety, related to braking performance, steering performance and the crash safety of a car in Europe and North America, a marketplace where I think consumers are much more aware of vehicle performance characteristics and specific safety ratings. You will find in Europe in particular, that many of the vehicle manufacturers tend to equip their vehicles with more safety features than are required on a vehicle to meet the minimum government standards, as they try to achieve a level of excellence in vehicle crash performance.

As the Chinese vehicle manufactures look to penetrate the European or North American markets, obviously they,ve got to be able to design and validate a vehicle that meets these kinds of performance characteristics, particularly in safety. We supply many of the critical components/systems that can make a vehicle safer and achieve a superior crash performance rating. TRW has the unique capability with passive safety product portfolio (seat belts, airbags, steering wheels, crash sensing technology, etc.) to work closely with the vehicle manufacturers on application engineering; and in a system engineering perspective, to select the products, to tune the parts to the vehicle, to make sure those products are properly harmonized for a crash-event passive-safety performance. We have the same capability to work with the vehicle manufacturer on our full array of braking components that can come together into an integrated system toward advanced safety features, such as Lane Departure Warning, Rollover Assistance and Electrical Park Brake. TRW has a broad array of product options and engineering solutions we can bring to vehicle manufacturer to create a vehicle that meet customers' needs.

We think the China market represents a terrific opportunity for TRW. That's why we have worked very hard to focus on developing our local engineering and testing capabilities in a way to enable us to deliver to the customer the value of TRW,s core engineering capability that they would get from any TRW operation around the world, at a China-application-engineering cost level. We do this through an organization that puts in the right investment and the right people, and by focusing on growing our positions with those Chinese domestic vehicle manufacturers that do have export aspirations.

Gasgoo.com: By cooperating with the Chinese local carmakers, TRW will get more global market share, and on other side, you will become more competitive in terms of costs and in technology.

Carpenter: That's right. That's how we think about it.


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