GKN Driveline’s new CEO, Phil Swash, talked with just-auto’s Calum MacRae to discuss the challenges of maintaining leadership in the AWD business and the potential opportunities the VW scandal presents to the automotive industry. Here’s the second part of that interview.
ja: You mentioned investment. Group R&D spend is about GBP161 million, so a ratio of just over 2%. I look at some other suppliers and your R&D ratio looks quite low with many companies typically spending around 5%?
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Phil Swash: It depends where those companies are in the supply chain, and how far up the system integration ladder they are. We can’t give our exact R&D spend as GKN Driveline, but we are certainly comfortable with it. Innovation is central to this division. We don’t just pay lip service to that, we actively deliver through new products and technology that our customers want.
That’s where our leadership comes from. It stems from having the best products and the best technology that makes vehicles great to drive.
ja: How do you measure your return on R&D spend? Do you have any KPIs you have to hit? Percentage of new products in production?
Phil Swash: We have a range of measures, including the percentage of products in production or number of new platform launches. We know when our customers are launching new vehicles and platforms and we know where our technology should feature.
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By GlobalDataTherefore we can target our growth path, knowing we’re never going to win all of the business. It doesn’t matter how good we are because the OEMs, rightly, will want to maintain a level of competition.
Within that framework, we have a pretty good picture of where the opportunities are. We are investing in them today with a view of winning the platform launch in two or three years. We track that all the way through to know how we’re performing and the return on the investment in the technology.
ja: Do you foresee any adjustments where you might be spending your R&D in the future?
Phil Swash: It’s currently weighted towards AWD and eDrive and that will continue, but equally we make sure we don’t neglect our core CVJ business. As the market moves, and as our customer requirements change, we respond to reflect that.
For example, we forecast evolution in eDrives. Customers want eAxles and eTransmissions that are smaller, can deliver more power and offer increased functionality, such as torque vectoring.
Generation II eDrive technology will be fully integrated systems with the active electrical components embedded in the machine. We’re focusing our efforts in that space to ensure we have the right capabilities to deliver those systems for our customers.
There is an ongoing shift to ensure that we can offer the most integrated and optimized system. The more we can integrate the package, of course, the less space it takes up on the vehicle, the less mass it carries, so it is better from an efficiency point of view. That’s a big focus for us.
ja: If you move towards delivering more integrated solutions, do you foresee any pushback from OEMs saying, “Where’s the cost transparency here?”
Phil Swash: We have a mix of customer approaches, and that’s healthy. Some want to develop elements in-house, but others want to hand the whole development and integration to the supplier. We’re comfortable with that and happy to work with both approaches.
In terms of cost transparency I don’t think it’s any more or less a problem. The system is made up of a family of parts that consume raw materials. All of our customers have requirements on cost transparency that we have to fulfil. Some of them differ slightly to others.
ja: In terms of margins, your group target is 8 to 10%, Driveline’s at 8.1%, so you’re just there. What’s the ongoing process to improve margin?
Phil Swash: It’s in the DNA of GKN PLC and GKN Driveline. We have to be competitive and we have to maintain a focus on costs and margins. We need technology innovation so we can deliver something better than the competition, and, secondly, we can deliver improved margins.
Where does your leverage come from competitively for margins? It comes from your engineering capability and the technology you deliver. On the other hand, GKN is also good at optimizing, or even developing, our own manufacturing processes.
For example, if you look at what the GKN Powder Metallurgy division did on sinter press technology, it was a phenomenal step change in quality, speed and cost. That was in the manufacturing process development. We have to continually drive both of those things hard. If we do that, then we can keep on incrementally improving our margins.
ja: Automotive is brutal – a lot of the volume OEMs are operating a 2-3% margin. To see your margin at 8%, you’re going to have some pushback on that. How do you deal with that?
Phil Swash: It’s very similar to the aerospace world, by the way. It’s something we have to manage carefully because the further you go up that system integration ladder, then the more risk you take.
It’s a different reward system though in many ways. The margins can be subdued, but then cash generation can often be terrific. We’re in a different place, different risks, different value proposition perhaps. When the returns are good for them, the returns are phenomenal.
At the end of the day, if we’re delivering great products that perform and we’re globally competitive, we’re going to be okay.
ja: I think the other big pressure in the industry, you talked about it earlier, is the huge volume demands coming through to suppliers now. You have the global mega-platforms. Huge challenges for suppliers in terms of footprint optimization. Where do you see the challenges for your footprint in delivering to global volume platforms?
Phil Swash: We have to continue to grow our AWD and eDrive capabilities globally, and particularly in China. We have a number of AWD localisation programmes in China over the coming years, which presents an exciting challenge, but demonstrates the country is maturing as an automotive market.
We will expand our software capabilities globally because that is clearly an important area. There are quite a lot of optimization loops you have to go through between the mechanical and the electrical in vehicle development. That is one of our unique capabilities.
The ability to integrate and optimize performance, including all the software coding, is an incredible challenge. Making sure we can do that in close proximity to customers in our key three regions is one of the things we have to do more of going forward.
ja: And the CVJ business, I know that you don’t neglect it, but it’s largely a sunk-cost technology although there are embellishments. Where do you see the CVJ business going? Will it remain a core part or is it in a race to the bottom?
Phil Swash: It’s absolutely a core part of GKN Driveline and we continue to be fully focused on delivering innovation in this area. We’ve just been nominated for a Pace Award for the third consecutive year. We’ve two finalists this year and one of them is for a CVJ, the VL3 joint, which delivers a new benchmark in weight, packaging and torque capacity. This joint will feature on a major programme with one of our key customers.
So long as our engineers can keep producing innovations, we’ll keep investing in them to retain that market leadership. It’s a great business for us. Very few people can deliver 80 million shafts a year anywhere in the world.
ja: By 2020 how would you define success for GKN Driveline?
Phil Swash: Retaining market leadership in CVJ systems, AWD and eDrive. I’d like to think by 2020 we continue to be recognized as global leaders in both contemporary and electrified drivetrains, and that we’re the market leader in delivering fully integrated eAWD systems. We fully expect to retain market leadership in CVJ systems as well.
Part 1 of this interview can be found here.
