Investors don’t like modules and they don’t like suppliers that are majority-owned by carmakers. So how is it that Faurecia is doing so well when it is owned by PSA/Peugeot-Citroën and relies heavily on modules for growth?
Financial analysts say modules demand a disproportionate amount of management time, and are insufficiently rewarded by carmakers.
And they say companies that are majority owned by automakers may be unable to pursue an independent strategy, and can be pressured into cross-subsidising the wrong activities.
Worse, they may not always be run in the interests of the independent shareholders – particularly if they are a minority and especially if the company is quoted on a European stock exchange.
But Faurecia, which is 73% owned by PSA, has become the largest French-based automotive supplier (overtaking Valeo in 2002) and is ninth on SupplierBusiness.com’s global industry rankings.
And CEO Pierre Lévi is relaxed about shareholder concerns regarding the potential for modules.
He sees a potential €120 billion market for the six main modules of the €10 billion turnover company – “plenty of room for growth” says Lévi.
Edmund Chew interviewed Lévi and extracts are reproduced below:
What share of your business is module-related at present?
I do not think we have any business that is not module-related. That does not mean that we do not sell components as well. A typical example is the seat recliners or seat track. It is not an open and shut case. The issue of what is the technological depth we need … is not something that is frozen forever. But the fact is they are a single part of the seat module, and we perceive the depth of technology that we have is a competitive advantage to our module.
There have been doubts about the durability of the trend to modules? Is it just a fashion?
Modules are the way our customers think about their cars. When you look at how the car is made, there is a seat, a cockpit, a front end for those who have it. That is how they design it, assemble it, and that is how they want to talk about it. Growth comes if you are close to your customer and you understand their needs. It does not mean that within the functionalities inside the modules there are not lots of issues. But the module is here to stay as a way of designing the vehicle.
Financial analysts following suppliers are sceptical about the return on the effort involved?
When you are in the module business, somebody has to pay for the development. Either it is paid through piece price or it is paid cash, but it has to be paid. In general the module business is less capital intensive than the components business and it is normal that the margins tend to be lower. That does not mean you should not be profitable, but you are contemplating lower margin percentages. The issue for a company like ours meeting its cost of capital has a lot to do with high efficiency, or purchasing or productivity. It is not just an issue of whether we are in the module business or not. But the fact that we are in the module business gives us the opportunity to have a superior growth rate.
Has shadow engineering at OEMs disappeared?
No, it has not disappeared, and it is another difficult subject. To work with module suppliers such as us needs a degree of understanding at the OEMs to make it a fruitful relationship. The OEM cannot exit completely and at the same time we should not duplicate [functions]. It is a fine line that everybody is looking for.
Is it best to have a few long-term partners for your module business, or best to form alliances on an ad hoc basis?
You need the best of both worlds. Neither model is overwhelming. It is an evolution, and again I think this model is still in its infancy, so it will evolve. In cockpits we have an agreement with Siemens VDO [the SAS Autosystemes joint venture], and we still have to work with the mandated partners that the OEM wants to work with. We have experience of what it entails. At the end of the day you need to serve your customer.
What are the benefits to you of PSA owning most of Faurecia?
A stable shareholding is always an asset for a company, because we have the peace of mind to think about projects that evolve over a 10-year period. That is a competitive advantage because when an OEM wants to work with you they want to be sure you are going to be there to deliver the results.