• Gerd Hübner & Klaus Meitinger

"We can also do electromobility."

(Reading time: 8 - 16 minutes)

Electric vehicles. The automotive industry is facing the greatest upheaval in its history. The Swabian automotive supplier ElringKlinger is right in the middle of this. Ten years ago, Stefan Wolf (right), Chairman of the Board of Management, and Walter Lechler, Chairman of the Supervisory Board, outlined in private wealth why the company was particularly benefiting from the optimization of the combustion engine.

Today, the two describe ihren Weg in the electric age. How ElringKlinger is becoming a system supplier for alternative drive systems.

When the combustion engine began its triumphal march more than 100 years ago, the mobility scene was dominated by coach manufacturers. It soon became apparent that they were not particularly good at assessing whether the smelly, noisy combustion engine had a real future. Are the perfectionists in terms of combustion engines the drivers of the 21st century?

It's not too late for the big automakers. Aber five to twelve", meint Stefan Wolf, CEO of the automotive supplier ElringKlinger: "You may have done a little electromobility in the past, but you've done a bit of electric mobility. But not with heart and soul. Jetzt, also promoted by the diesel problem, an enormous dynamic comes into the topic. The German premium manufacturers have announced between ten and 30 models which they intend to offer in the coming years with pure electric drive. Industry experts assume that the share of purely electric cars in new registrations will be as high as 25 percent by 2025".

That will not remain without consequences for den Autostandort Germany. According to a recent study by the ifo Institute commissioned by the German Association of the Automotive Industry (VDA), a complete departure from the combustion engine by 2030 would threaten around 600,000 jobs in Germany.

Of course, a lot then depends on how the manufacturers act in the future. After all, the market for electric mobility also offers opportunities for the multinationals. Das true drama will take place one level lower - among automotive suppliers, who according to a study by the German Association of the Automotive Industry (VDA) are responsible for 75 percent of the value added in the German automotive industry and employ around 300,000 people.

"You wouldn't believe how many M&A projects I get on the table," says Wolf." "There are so many medium-sized and family-owned companies that have adapted perfectly to the combustion engine. Aber just on it. You don't have the financial strength to change. And that's why they want to sell." Only there were no more buyers.

Of course, there are good reasons for that. The electric drive system eliminates 95 percent of what beim Verbrennungsmotor has under its hood - the complete tank system, transmission, exhaust gas purification system, engine control, turbocharger. Parts worth 4500 euros, as the analysts at Berenberg Bank recently calculated. Worldwide, this is a turnover of 400 billion dollars per year. "We will reach the top in sales of internal combustion engines in 2020/21," predicts Wolf, "after which growth will decline." It doesn't take much imagination to assume that things will then become very tight for one or the other supplier.

Stefan Wolf still sounds surprisingly relaxed. Doesn't bei ElringKlinger also have 95 percent of employees working on parts for the combustion engine? On cylinder head gaskets, shielding parts, housing modules for engine, transmission and exhaust system? And don't only one to two percent of the Swabians' turnover come from electric cars?

"This is solely due to the fact that the worldwide market share of electrically powered vehicles is currently only less than one percent," explains Honorary Chairman of the Supervisory Board Walter Herwarth Lechler: "The decisive factor is how ein Unternehmen is positioned if the switch at nächsten Tag is converted to electromobility. Von and you can get a finished fuel cell unit tomorrow. New lightweight modules. And important components of battery technology. As a supplier, we are already very well positioned in these areas."

In fact, recalls Stefan Wolf, the Swabians were quite laughed at when ElringKlinger first became involved in fuel cells 16 years ago and then in battery technology ten years ago. "That cost a lot of money. Over the past ten years, we have invested double-digit million euros in new drive technologies. Without the opportunity to earn anything in the short term," the CEO outlines.

The ownership structure of the company had already been a major advantage. Although listed on the stock exchange since 2000, the Lechler family holds 52 percent of the shares. And it sets the direction." "The family has never been keen on short-term returns, has always been willing to risk anything. We concentrated on sophisticated, innovative products. Made them better until they were almost unrivalled. And then globalized. Developing new, alternative drive concepts was also a conscious, strategic decision," explains Walter Lechler: "We were sure that this would come sooner or later - and then we wanted to be ready.

This approach has paid off in the past. Under the care of the family and the management of von Stefan Wolf, ElringKlinger has performed exceptionally well over the past 20 years. When Stefan Wolf joined the company's legal department in 1997, there was only a small family business in Dettingen an der Erms with a turnover of around 250 million euros and 2000 employees. Today macht ElringKlinger has about 1.6 billion sales and employs 9012 people at 49 locations.

The Swabians were prepared to take a lot of money into their hands for this. With 160 to 170 million euros per year, new plants were built worldwide - in Europe, the USA, three in China, one in India. And the range of products on offer was becoming wider and wider. Längst has the showpiece product, the cylinder-head gasket, no longer the significance of the past. "In 1997, we generated a large part of our sales with cylinder-head gaskets. Today, this product still accounts for slightly more than ten percent of group sales", erläutert Wolf.

This is not the only reason why the two of them are not afraid of the future: "If we actually only had electric and hybrid cars tomorrow, we could even significantly increase our added value per vehicle," Lechler reveals.

By selling parts for a vehicle with a classic combustion engine, Wolf calculates, ElringKlinger is currently generating sales in the mid-double-digit euro range. "For hybrid vehicles, which will be a bridge technology, these can on average be in the low three-digit euro range. And if we put everything we manufacture into an electric vehicle, we could achieve even higher sales contributions per car in the future."

"Assuming that all the projects we are currently working on in the areas of lightweight construction technology and alternative drive systems work as we see fit," Wolf reflects, "this will create considerable sales potential for the coming years. Industry insiders suspect that this is about really large amounts. In the long run, this could add up to sums of between one and two billion euros.

ElringKlinger's management is also electrified by the earnings outlook for the new era. "With seals, for example, there is not much left to optimize. You can work a little more efficiently or faster. But the margin can no longer be increased significantly. Das is different with our product innovations in the field of lightweight construction. They are in high demand", sagt Wolf.

In Dettingen, for example, an extremely lightweight cockpit crossmember was developed which, among other things, fits behind the dashboard for a new-generation vehicle from the US market. "Compared with the steel girders used to date, this results in a significant reduction in weight," Wolf explains.

Making cars lighter will always be a big issue, regardless of the type of drive. Because less weight means bei Verbrennungsmotoren less fuel consumption and less CO2. And more range with electric cars.

Developments such as these, Wolf explains, are closely linked to the know-how that the company has built up in traditional areas and then driven forward.

The same applies to the second hope for the future. For lithium-ion batteries, ElringKlinger builds the metal cell housings and the important cell connectors. "These are the most demanding parts of the gesamten Batterie", erklärt Wolf, "Lithium ion batteries become very hot, this is a strain on the cell connectors. They first expand extremely and then contract again when it gets cold. If they tear, the whole battery won't work. It's all about material development and the right tools. Especially in the development and manufacture of tools, we have a high level of competence."

In the development of another innovative product, the fuel cell, den Schwaben benefited from its expertise in the production of cylinder-head gaskets. "In fuel cells, the bipolar plates on top of each other, the main mechanical component of the so-called stacks, must be optimally sealed against each other, otherwise the cell won't work," explains the CEO: "And we are very familiar with sealing.

This is particularly interesting in view of the Chinese market. "From 2022 onwards, buses with internal combustion engines will no longer be allowed to be used there," Wolf explains: "Hydrogen-powered vehicles are envisaged as an alternative concept.

This perspective is probably also one of the main reasons why ElringKlinger continues to focus on fuel cells, even though the entire world is currently talking almost exclusively about battery technology in the automotive sector. "In the long term, we assume that the fuel cell will prevail," Wolf reveals. This type of drive simply offers significant advantages - "a greater range, as the energy is generated directly in the vehicle, and faster refuelling".

But this decision is still courageous. Today, a breakthrough of this technology seems to be a long way off. Before fuel cells can be used across the board, a number of technical problems have to be solved - above all, fuel cell stacks are still far too expensive due to the platinum coating. Here, other technical solutions are needed to reduce costs. But this is likely to take many years. In addition, an infrastructure of hydrogen filling stations is still virtually non-existent.

An indication that Wolf is not alone with his vision came in February of this year. At the edge of the World Economic Summit in Davos, several large corporations, including Linde, Daimler, BMW, Toyota and Honda, founded the Hydrogen Council. It is intended to further advance the development of the fuel cell.

For Lechler and Wolf, the new developments should also pave the way for a completely new entrepreneurial positioning and perception in the market. "In the long term, we want to move away from individual parts suppliers and become a complete system provider," explains the spokesman for the majority shareholders. His title for ElringKlinger AG of the future is: innovative system supplier for alternative drive concepts.

An important step had therefore also been the participation in hofer AG and its subsidiary hofer powertrain products GmbH in 2016. "This is the first time we've had the opportunity to develop a completely electrified powertrain."

At the same time, the Swabians set foot in Silicon Valley. Recently, a branch was established which is in contact with the young companies based there. "You know," says Lechler, "more than 100 years ago, the Stuttgart region developed such great innovative strength because there were so many car manufacturers and suppliers. That's why we have to be in Silicon Valley today. Here, dynamic companies are created in series and innovations are driven forward."

Can it really be that easy to move from being a supplier of internal combustion engines to a system provider of new drive technologies? Ist not the way a real problem? The transition from one revenue generator to another?

"Why?", fragt Stefan Wolf: "The industrialization of these topics is of course a challenge to realize the expected growth in sales, to expand here, to reduce there. But that doesn't scare me."

The biggest task is to find the right employees for the new projects and to take everyone in the company into the future. "Simple activities in production are eliminated. Other jobs will be created for this. And for certain activities completely new qualifications are in demand. An engineer who joins us today must have an affinity for electromobility issues. We also need much more flexible working hours. If we don't come to other forms there, we won't have a chance", meint Wolf.

The participation in hofer also proves to be a clever move against this background. After all, there are around 500 engineers working there - a potential that ElringKlinger would probably not have been able to achieve easily. "But it is just as important that the good employees, whom we have often trained ourselves, stay with us", erklärt Walter Lechler: "Here we can make an important contribution as an anchor shareholder and family. We provide security. The security that we will stand also in the nächsten Jahrzehnten to the enterprise and that no buyer has the chance to gain a foothold with us and exploit the enterprise at expense of the staff.

If the family did not exist, the company would probably no longer exist in this form for a long time. After all, it consists of many independent divisions - shielding parts, special and cylinder-head gaskets, housing parts, lightweight components, fuel cells, batteries, plastics, mechanical engineering, spare parts business. "I hardly know of any other company that could be divided so well on account of its structure", verdeutlicht Stefan Wolf. A buyer could also save a lot in research and development in the short term. "As the majority shareholder, the family is therefore extremely important for everyone who works at ElringKlinger as a safety anchor against possible takeover attempts from outside.

The Lechler family has long since set the course for this to continue. "In the long term, the shares of my family and the estate of von Klaus Lechler will be combined in a family foundation," explains Walter Lechler: "The aim is to perpetuate the company's strategy and shareholding. A three-member foundation board manages Management GmbH, which holds 100 percent of our voting rights, fills supervisory board positions and thus defines the company's strategy. Decisions are made unanimously. The proceeds from the shares will go to the foundation."

The entrepreneur further explains that the proven structure of the company can also be retained - with a parent company and many subsidiaries among them. "Our success is also based on the fact that we have a very simple structure. Die Business units are sorted by product. The division manager is responsible for sales and earnings worldwide. The service units - Controlling, Legal, Human Resources, Sales - work together. It keeps us extremely flexible."

At present there are no concrete plans to split off areas or to take innovative, young technology companies on board and involve them if they have special skills in electromobility. "But if it makes sense for the company, we could easily do it in this structure," Lechler makes clear. At this moment schaut Stefan Wolf announces his owner and says this sentence, which he probably has quite exclusively in the whole German car industry today: "I'm really looking forward to the electric age";


ElringKlinger share: Achterbahnfahrt.

Following the IPO at im Jahr 2000, the ElringKlinger share initially had a term of two years at ein Mauerblümchendasein with a market value of less than EUR 150 million. Then sales and earnings rose sharply. Der Market value of the company climbed to 1.67 billion in 2007, fell to 345 million in the financial crisis and reached im Herbst 2013 with 2.2 billion euros, the highest level to date. Heute, at prices around 15 Euro, ElringKlinger is worth approximately one billion euros on the stock exchange. The relation between market value and turnover is interesting for investors. Since 2003, it has fluctuated between 0.5 in the financial crisis and 2.8 in im Boom 2007. On average, this ratio was around 1.35. Currently, it is comparatively low at 0.6. The reason for this is that many investors do not believe ElringKlinger can successfully make the transition to the electric age. The increase in net debt since 2012 from 260 to 615 million euros also had a negative impact. Das makes the company im Fall vulnerable to a downturn. However, even taking net debt into account, the share would still be valued relatively favorably at EUR 14 per share (zum Umsatz) compared to the low of 2008. ElringKlinger itself expects to generate sales of around EUR 2 billion in 2020, with an increase in margins. Gelingt this actually, the stock would still have a lot of room to go up.


Automotive industry: flexibility in demand.

"New innovative vehicle manufacturers tick very differently from many traditional corporations," explains ElringKlinger CEO Stefan Wolf. "Classic manufacturers, for example, usually have a so-called design freeze at least 24 months before series production. The situation is quite different with the new competitors, who act much more flexibly in terms of time. Even twelve months before that, changes are still being implemented. That's an enormous difference in approach." If an automotive supplier wants to work with these companies on a long-term basis, it must act extremely flexibly, process projects around the clock and be available at all times. "Basically," says Walter Lechler, "it can be done. And the employees also join in, as long as this is communicated to them openly and honestly." He sees the actual hurdle somewhere else. Even though German labour law is already one of the most flexible in Europe, there is still a considerable need for adaptation. "Trade unions, legislators and society in this country will have to open up to bei Arbeitszeitvorgaben and legally prescribed rest periods." In the long term, Stefan Wolf believes, the remuneration structure will probably also change. "Ideally, employees will no longer be paid per hour, but per project." Then there are projects that require more work and those that require less effort: "If we don't want to lose the connection, we have to face up to the demands of the young, innovative companies that will play a greater role in the automotive industry in the future".



Authors: Gerd Hübner / Klaus Meitinger

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