The Spinout of Adient to Increase Innovation

The Spinout of Adient to Increase Innovation – the Opportunities and Risks of Digitization for the Automotive Interior Supply Chain

In January 2016, Johnson Controls (NYSE:JCI) announced the spinout of Adient (NYSE:ADNT, the “Company”), the largest automotive seating supplier on a global scale.  Operating 230 manufacturing plants in 33 countries worldwide, the Company produces and delivers automotive seating for all vehicle classes and all major original equipment manufacturers (“OEMs”).

Bruce McDonal, previously Johnson Controls vice chairman and current Chairman and Chief Executive Officer of Adient, said that the spinout of “Adient will increase its investment in innovation in order to gain share and increase value to customers and shareholders” (Source).

The global automotive component supply industry is highly competitive.  Competition is based primarily on price, technology, quality, delivery and overall customer service.  In order for Adient to remain a global market leader (35% market share in both North America and Europe, 45% market share in China), Adient must continue to innovate its products and processes.  Suppliers with strong technologies are best positioned to meet OEM demands for rapid innovation given the trend towards more customer preference changes and the introduction of new safety and environmental regulations.  Digitalization presents both opportunities and risks for the automotive interior supply chain.

One particular aspect of digitalization that Adient management should be concerned with is the fragility of contract terms with OEMs.  OEMs reserve the right to cancel and move business for any reason due to quality deterioration, volume constraints, and late shipments.  Further, the ability for OEMs to switch suppliers is heavily dependent upon the supplier’s level of technical complexity.  For example, it can take up to 1.5 years for an OEM to switch suppliers within the integrated console space given complex sub-assembly agreements and safety testing.  However, for more commoditized products such as interior trim, OEMs can switch suppliers within 4 days.

How should Adient invest in innovation per the spin-out objective?  How can the Company provide integral services to OEMs and maintain long-term contracts?

Adient is actively taking measures to maintain contracts by providing high quality products in response to evolving customer demands and investing in R&D for future success.

In the short term, Adient is focused on introducing new and innovative products.  For example, Adient introduced the T3000 recliner, which offers increased seating recliner strength in a smaller package, and Vibratech foam, which provides less vibration transmittance to the occupant.  Adient is working to capture the increase in passenger-focused technologies, such as occupant sensing, seat heating / cooling, massage features, and passenger health and wellness.

In the long term, Adient is also investing in a new Product Lifecycle Management (“PLM”) system.  This system is intended to serve as a management database for program, product and process related data (Source, Page 76).  The system is also expected to aid in the standardization of the development process and in communication with all sites that support global program execution.  Ultimately, the objective is to support workflow, schedule and change management of ongoing or upcoming programs, thereby enabling effective decision making and program management.

However, the steps mentioned above (new product innovation and investment in the new PLM system) will not be enough to counterbalance the larger pressure on commoditized players in the supply chain.

In the short term, I recommend Adient should pursue ways to qualify for long term strategic source awards (up to 15 year contracts) by demonstrating financial stability and completion of dynamic customer requests.  Once Adient establishes strategic contracts, Adient can pass on R&D costs associated with new products to OEMs in a pre-established, tiered structure.  Without securing these long-term contracts, Adient is at-risk of losing existing business and is unsupported in product innovation efforts.

Furthermore, other players, such as Faurecia and Delphi, have made greater advancements in technology than Adient.  While Faurecia focuses on seating and interiors like Adient, Faurecia also focuses on electronics within instrument panels and recently announced its majority stake investment in Jiangxi Coagent Electronics in order to develop integrated and innovative in-vehicle infotainment solution.  Similarly, Delphi announced its partnership with AutoNavi, a leading Chinese map and location service supplier.

I recommend Adient align itself through vertical integration with a tech industry partner that has greater expertise in developing digital components and software.  Technology features (infotainment, connectivity, navigation, safety, fuel economy) are what differentiate suppliers.  If Adient does not make itself relevant within the supply chain, OEMs may bypass suppliers and find technology partners directly, as is the case with BMW i Ventures, a venture capital fund, and Toyota Connected, a partnership with Microsoft.

How do you think Adient should adjust its strategy to grow in the macroeconomic environment?  Would vertical integration with technology players help Adient to be more resilient to market changes?  What other forms of industry consolidation do you anticipate?

 

773 Word Count

 

Sources

Adient, 2017, Fourth Quarter Earnings Call. http://investors.adient.com/~/media/Files/A/Adient-IR/reports-and-presentations/q4-2017-earnings-presentation.pdf, accessed November 2017.

Adient Ltd., June 27, 2016 Final Information Statement, http://investors.johnsoncontrols.com/~/media/Files/J/Johnson-Controls-IR/about-the-spin-off/Adient%20-%20Final%20Information%20Statement.pdf, accessed November 2017.

Bruce McDonal (Chairman & CEO, Adient) and Jeffrey Stafeil (EVP & CFO, Adient) presentation at the Deutsche Bank Global Auto Industry Conference, January 2017.

Global Auto Parts Bull & Bear Case, via Bloomberg LP, accessed November 2017.

Johnson Controls.  “Johnson Controls Announces New Automotive Company to be Named Adient.”  Press release, January 12, 2016.  http://www.johnsoncontrols.com/media-center/news/press-releases/2016/01/12/johnson-controls-announces-new-automotive-company-to-be-named-adient, accessed November 2017.

PricewaterhouseCoopers.  “2017 Automotive Trends.”  https://www.strategyand.pwc.com/trend/2017-automotive-industry-trends, accessed November 2017.

Tech Crunch.  “The top 7 trends in the auto industry for 2017.”  https://techcrunch.com/gallery/the-top-7-trends-in-the-auto-industry-for-2017/slide/1/, accessed November 2017.

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2 thoughts on “The Spinout of Adient to Increase Innovation

  1. Interesting article and take on a less discussed part of the automotive supply chain. As you mentioned, its very important for Adient to be able to differentiate itself in order to maintain some of the riskier contracts. Generally speaking, since its so easy for OEMs to switch over, keeping track of KPIs that you are measured against is very important. I think that digital technology like block-chain can help facilitate the tracking of these KPIs such as on time delivery and in-process quality. Ensuring that you keep on top of these key metrics in real time and demonstrate to you customer that you can do so at the best cost can be a great way to propagate a customer relationship.

    To adjust for the macroeconomic environment, I think it would be interesting to prioritize certain types of strategic customers, such as high end European manufacturers to lock in more complex products.

  2. This is a very interesting article. I agree with the point you made about the need for Adient to focus on technological advancements. This is the only way that they can attract customers in order to get those long-term contracts you mentioned. Customers would need to feel comfortable enough with Adient’s ability to innovate in order to make such commitments. Adient recently broke ground on the biggest automotive seating prototype facility in India, which it plans to open in 2018 [1]. It seems the company is taking your advice, KW!

    In the macroeconomic environment, I would suggest partnerships with other parts of the automotive supply chain, such as companies that build safety systems or interior trimmings (e.g dashboards).

    [1] Cision PR Newswire “Adient breaks ground on india’s largest ever automotive seating prototyping and testing facility in state of the art upgrade of its Pune technical center” https://www.prnewswire.com/news-releases/adient-breaks-ground-on-indias-largest-ever-automotive-seating-prototyping-and-testing-facility-in-state-of-the-art-upgrade-of-its-pune-technical-center-300556693.html – accessed December 2017

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