Claus Möhlenkamp, Chief Executive Officer of Freudenberg Sealing Technologies (FST), examines the current energy crisis and explains the impact on FST, the opportunities in the renewable energy sector, and the strategy the company is pursuing.
Mr. Möhlenkamp, let’s look back for a moment: How did 2022 turn out for Freudenberg Sealing Technologies (FST)?
2022 was another unusual, difficult year. It was marked by familiar events: supply chain interruptions and delivery shortages, mainly involving the chemical industry and computer chips – which worked their way to us through our automotive customers – and COVID-related lockdowns in China. The war in the Ukraine was an added burden. It all resulted in rising inflation and an energy price shock that we all had to battle. All in all, it wasn’t easy for FST to achieve the goals we had set. But we adopted effective counter-measures in time – and we were able to achieve our key performance indicators for revenue, profitability and cash flow. Our employees performed tremendously well in all the problem areas. That kept our operating business on course in difficult circumstances.
What has the current energy crisis been like for FST? What impact is it having on our economic situation?
The war in the Ukraine has had an appreciable effect on energy prices and costs. Still, the worst fears that the energy supply in Europe would collapse have not materialized so far. Currently, the energy we require is available, albeit at dramatically increased prices. In some countries, the cost of energy is three, four or even five times more than it was previously. In others, it is likely that the increases will have their full impact next year. In the United States, the situation has turned out to be less strained. The costs there have certainly risen, but not nearly as much as in Europe. But ultimately everyone in the world will be affected, even if the effects may be delayed and the impact may vary. We are talking about an energy market that operates globally. China and India, however, are largely shielded from the energy price shock. Both countries continue to receive oil and gas from Russia, presumably at moderate prices.
Has the era of renewable energy arrived? If so, what opportunities are ahead for FST?
The global objectives on protecting the climate are clearly defined and unalterable. In the long term, there’s no way around the replacement of fossil fuels with renewable energy. In this regard, we are superbly positioned and have a broad array of products. We also have a great capacity for innovation. From photovoltaics and wind power all the way to “green” hydrogen – we have developed solutions for each application. Paradoxically, the loss of gas and oil, especially in Germany, is leading to a return to coal. It sometimes seems as though we are taking two steps forward and one backwards. But the trend is clear: We are increasingly positioning ourselves for renewable energy.
The first voices are saying that the energy crisis and high inflation rate could have a negative impact on the electric-car boom. They are even calling the retreat from the internal combustion business into question. How do you assess the situation?
Due to short-term events – such as high prices at the charging station – various things are being called into question. The calls for alternatives are getting louder. Prices, whether for traditional fuel or electricity, are volatile. They rise and fall constantly. FST has a clear vision. We expect to see the end for cars with internal combustion engines by 2035 – with continuing volume for the replacement parts market at that time. If the transformation in powertrain technology were to take a few more years, that basically would not be relevant for our exit scenario. Instead, the crucial question for us is, how long we can view the internal combustion market as a viable business? What will the overall volume of the market segment be at some point? In the end, we have to decide whether and how long we want to stay active in the remaining business. But that is still a long way off.
So we are continuing our current strategy. We naturally acknowledge the possibility of course corrections. At FST, the transformation will lead to a complete change in our portfolio in the medium-term. Between now and 2035, we would like to maintain our position to the very end wherever we are the market leader. Due to our global manufacturing structures, we have the opportunity to adjust capacity flexibly and, when necessary, extend the production of appropriate products here and there. But we would do well to deal with a set of issues now: What is in store for the plants where we primarily manufacture products for internal combustion engines?
This kind of transformation requires innovations: What new products are in our innovation pipeline?
What markets and segments is FST concentrating on?
We have a broad product portfolio that we continue to expand. Our strategic focus has been on renewable energy and electric mobility for four years. Quite a lot has happened in this area. We are making great progress in diaphragms with the DIAvent product family, which has grown into a product platform. We expect strong sales there. We are assuming at least 30 million euros by 2025. The potential in the medium-term is 100 million euros. We have received series orders from various car makers, and even from battery producers.
Are we going to produce DIAvent solely in Reichelsheim in the future as well?
We have received major orders from Ford in North America, for example. So we are going to manufacture at various facilities worldwide – in the U.S., in China, where the first customer inquiries have come in, and in various facilities in Europe. Incidentally, DIAvent is a prime example of the way we successfully develop products for new applications, bring them to production readiness and then manufacture them in large volumes. When components or even entire production lines are eliminated, we are able to substitute new ones in their place.
What about future innovations?
We had so many ideas that we had to seriously consider sharpening our focus. We had to set priorities. There are promising products for thermal management, including new developments like flame barrier materials and heat shields along with established products such as our Plug&Seal connectors. With the advance of electric vehicles, some of our former sales are going away. But we can offset them successfully. For one thing, with entirely new products. For another, with proven products that have been further developed and can also be used in non-automotive applications such as agricultural and construction equipment or in trucks and buses.
We have series orders for products used in battery applications that hold out the prospect of sales in the three-figure-million range. We are working on components for high-voltage transmission. Here we have many products in pre-development and in the prototype phase.
“The global objectives on protecting the climate are clearly defined and unalterable. In the long term, there’s no way around the replacement of fossil fuels with renewable energy. In this regard, we are excellently positioned and have a broad portfolio of products.”
Claus Möhlenkamp | Chief Executive Officer
Freudenberg Sealing Technologies
What are we offering our customers in the sensor area?
We see many promising applications in the sensor field, for example, the wave guide antenna. This is an antenna for automotive radar. It permits us to offer real added value surpassing the current solutions – and do it at a lower cost. We have received an order for series development in this case as well. At present, we have the luxury of getting more customer requests than we can accommodate. We are naturally addressing the situation with due diligence and setting priorities. We are pursuing many opportunities.
Other promising products include protective cell caps for battery cells. Here the work is well advanced with projects for the VW Group, Mercedes and PSA, to mention just a few. And then there are countless classic components, such as the seals made in Öhringen for solar connectors – which the leading manufacturer of plug connectors for photovoltaic systems sources from us. In this case, we are now providing 600 to 800 million units per year. The volume will soon rise to more than a billion. So a lot is happening across the portfolio. Here is what is important to us: About 60 percent of the inquiries that we receive involve renewable energy or electric mobility.
Let’s talk about the global supply chain: Are the supply shortages for microchips and raw materials such as FKM a thing of the past?
The latest shortages are not as serious as they once were. The situation has eased somewhat and we are working on solutions to eliminate them entirely. But I’m sure that there will be new shortages in the future. The recent chip shortage in the auto industry affected us indirectly. We also suffered from the shortage of shipping containers for delivery logistics and the dramatically increased prices for them. The FKM shortage was a serious problem for us since it is a raw material in many of our products. For the coming year, one supplier has announced it will not be able to provide materials in the required quantities. So the next shortage is already looming. However, we are working hard to identify suitable alternatives.
What are the reasons for sudden appearance of supply problems like these?
Materials that were widely available in the past are suddenly in short supply because they are needed – in large volumes, no less – for new applications, such as battery technology. The transformation to new technologies is dramatically changing the demand streams in these markets. Due to our comparatively small quantities, we are no longer an appealing prospect for some manufacturers. Some raw materials are generally in shorter supply and are becoming expensive. Still others are subject to regulation or are prohibited for environmental reasons. And then there is the trend toward de-globalization, which will continue to weigh heavily on supply chains. In other words, we will have to steel ourselves for shortages in 2023 as well.
Now a look at China: First, pandemicrelated lockdowns, then COVID infections on a mass scale. Ships are stuck in ports. There are massive distortions in the supply chain, plus political tensions. How is FST’s future China policy being shaped?
Our principle has always been to manufacture in a particular country if the products are intended for it. This applies to Europe and the U.S. as well as China. As we have defined the company’s objective for our global manufacturing sites, exporting has never been the focus – on the contrary. In fact, our export share from China is under 1 percent. When it comes to the total value creation in China, we are exactly where we wanted to be. We buy the raw materials we need in the country, manufacture our compounds and components there, and sell them to local customers. As far as development is concerned, we can still do better. Our message for the future is “China for China.” This applies to employee development as well: We would like to have local people in top management and at the level below it, with no employees seconded from Europe or the U.S.
What other markets and production sites is FST looking at in Asia?
We have to look at all of Asia, set new priorities, and build up and gradually expand our business in Southeast Asia. Then during the next strategy period, which starts in 2024, we will focus on Malaysia, Indonesia, Vietnam and Thailand. It’s not just the markets that are interesting and important to us. Their workforces also offer enormous potential. We will proceed much as we have in China and India, that is, building up production and making products for the local markets.
We are not starting at zero in Southeast Asia. Because we already have a service center in Kuala Lumpur and operate a software engineering center there. In Batam, Indonesia, we operate a manufacturing facility with NOK and recently expanded its production area by 4,000 square meters (43,000 square feet). That puts us in a very good position, although we are still underrepresented overall.
