The new three-year strategy period began in 2021. Its core strategic themes – such as electric mobility, digitalization and renewable energy – are mostly long-term, so the company is dealing with them for more than a single strategy period. Freudenberg Sealing Technologies (FST) is also looking at other, new key areas They include the pharmaceutical and the health and safety segments. Chief Executive Officer (CEO) Claus Möhlenkamp outlines how FST is tackling these challenges.
After nearly two years of the pandemic with all its business highs and lows, how is FST ending the year?
From an economic standpoint, the past few months have been a roller coaster. At the start of the pandemic in early 2020, our revenue fell off dramatically, but we quickly made it past the low point. We were at a very good level again by the summer of 2021. But the situation has been totally different since July: We have had to battle massive disruptions in our supply chains worldwide. The auto industry was primarily affected at first. Urgently needed chips were suddenly no longer available. But today every industry in the world is suffering from supply-related difficulties, and our customers and suppliers have had to respond to them. The supply bottlenecks are no longer limited to chips. There are shortages of many materials, products and services.
What does that mean for our processes and our production workflows?
Since July, we have experienced unplanned production interruptions – in some cases without prior notice. Purchase quantities plummet overnight and then make a steep ascent. That means the company’s lines are down from one moment to the next.
These kinds of short-term stoppages are devastating for our equipment since we no longer achieve our usual level of productivity. We try to respond as well as we can to unplanned needs and customer requirements. Of course, it is impossible to avoid cost effects. Those responsible for production must constantly adjust their planning to new situations. In the end, when things are running badly, customers don’t accept the parts – because they have to constantly adapt their plans as well.
What are the causes of this major shortage of resources?
In part, this can be explained by the pandemic, but systemic and structural transformations are taking place as well. The chemical precursors that we need are finding their way into completely different end-products. The current FKM shortage, which is hitting us especially hard, can be traced to the fact that a monomer in the material is needed for battery and fuel cell manufacturing. If that’s the case, the new applications could be more attractive and profitable for the manufacturers, handing us a long-term headache.
Steel manufacturers are scaling back their production volumes. Less is being produced, leading to increases in prices. In the United States, steel producers face the challenge of ensuring that their steel is sustainable. So they are no longer investing in existing facilities. But more capacity is urgently needed in the sector, just as it is in the chemical industry.
When will the resource crisis be over?
Forecasts of this kind are difficult. Some experts assume that the chip crisis will be over in 2021. Others don’t believe that will be the case before 2023. I am afraid the crisis will be with us through 2022. In the next year or two, we need to focus on stabilizing our workflows and production processes again. To do that, we need strong supplier management so we get the materials we need – since our customers are actually predicting rising demand.
Does that apply to every region?
We assume this will be the case worldwide. It is likely that 6 million cars won’t be built in 2021 due to the chip shortage. For example, we know that the inventory of newly built vehicles has slipped under 30 days in the United States. The supply had previously averaged 65 days. There is a real backlog of demand, and the industry would prefer to ramp up production. But that would require an adequate supply of materials. What completely distinguishes the current crisis from the others is that everyone is in the same boat this time. We, our service providers, our customers and our competitors – everyone is battling the same “enemy”: a shortage of resources.
Irrespective of the pre-crisis level, what are the economic goals that FST set for 2022?
I expect moderate growth in 2022. Moderate because even the current supply difficulties won’t disappear overnight. Still, the economy will recover. Our initial planning assumption for 2021 indicates that we’ve already reached the 2019 level. That means we have recovered much faster than we first expected.
According to the latest studies, the transformation in the automotive business is occurring faster than expected. What does that mean for FST?
The transformation is clearly picking up speed. Today we have reliable data and binding statements from our customers. They definitely want to stop producing combustion engines, even if their end-dates vary. But the fundamental message is clear: The transformation is accelerating dramatically, especially in Europe. The change is taking place more quickly in China as well, even if Europe is the leader at this stage.
Now we need to understand the timeframes that we are talking about, how many vehicles are involved and what share of our business volume and portfolio is affected. We have already achieved a great deal and can point to good results. Now we must increasingly turn our attention to new technologies, use our resources differently and even break old habits occasionally. This also takes the courage to stop developing some things.
When the customer says he will no longer need certain products from us starting in 2028, why should we keep investing in them and reserving resources for them? We have to use our resources differently and in a more targeted way, and deliberately begin developing the company into a component and module producer. Today that means identifying the opportunities that the battery and fuel cell businesses are offering us, increasing our investments in them and stepping up the pace.
Do the exit scenarios call for us to stop producing seals for combustion engines at roughly the end of the decade?
Not at all. There will be seals for combustion engines for a long time, and the engines themselves are far from being scrapped. For example, there are hybrid vehicles, too. We serve a range of different buyer groups, and different regions such as India and Africa where internal combustion engines will be around for a long time. They will still be found in trucks and off-road applications. In addition, we still have to supply the replacement parts market for many years. It’s not going away overnight.
How is the industrialization of the fuel cell and battery business going?
In Munich, we are at work on a second location. We are building a 30-megawatt production operation for fuel cells. That puts us in a position to manufacture prototypes at a capacity of up to 30 megawatts per year. Large-scale production can begin in 2025. It is already clear that the available capacity will not be sufficient at that point and that we will expand to 2 gigawatts. That is nearly 70 times what we can do today.
For the giga factory to become a reality in 2026/2027 after various stages of expansion, we are going to have to start construction in 2023 at the latest. We are now carrying out a detailed site analysis indicating where we could carry out such a project, where the best governmental support is, where the energy costs are affordable, where we can make sure that we can hire a sufficient number of employees, and where a good infrastructure framework is available. The plant is expected to be built in Europe, preferably not far geographically from our fuel cell development center. The planning for the factory will begin soon, and we will choose the site next year.
We are planning a battery project of at least the same magnitude. In this case as well, we are exploring locations for a giga factory – with specifications comparable to those for fuel cells.
Even an electric car needs seals or other products with additional functions, in modules that are independent of the powertrain. What does our portfolio look like from this standpoint?
We are assuming that 65 percent of our current products in automobiles, specifically in the engine and transmission, are being eliminated. That means, conversely, that 35 percent will still be around. They include air-conditioning modules, bellows, shock absorbers, seals for axles and brakes, etc. – everything not assigned to the drivetrain. We are the market leader in the sector. It will be important for us to compensate for the 65 percent that is being eliminated with products for new technologies. For example, we provide flat seals and other seals for batteries and fuel cells. In Kufstein, our employees are busy assessing the components that are in a fuel cell and determining which of them can bring FST new business. Furthermore, we shouldn’t forget that we have an industrial business that is functioning very well. We want to generate strong growth in the segment and offset a great deal of what we are losing in other areas.
A new three-year strategy period began in 2021. After nearly one year, where do we stand?
All of our strategic initiatives are still in force. Certainly, our strategy periods are set for three years, but hardly any of our goals are in effect for just the short term. All the goals that we had in our last strategy period are contained in the new one as well. In light of what we have achieved during the first year, we are right on track. Our activities involving batteries and fuel cells are making progress, and our digitalization efforts are continuing. Our well-known focus segments are still valid. The bottom line is that we will achieve the goals for 2021 that we set despite the difficulties that we’ve talked about. That is the beauty of Freudenberg. We can continue our strategic projects as planned despite operational problems. The timelines are different and we set other priorities when necessary, but the work goes on.
Digitalization and automation continue to be strategic focuses for FST. According to the last survey on the company’s Guiding Principles, some employees see digitalization as a potential threat to their jobs. How do we deal with that?
In the survey, about one-fifth of our employees expressed concerns that digitalization and automation could endanger their jobs. That is a completely natural reaction during the kind of transformation that we are going through right now – whether it involves their view of robotics or the transition from combustion engines to electric mobility. These phases always stir things up. They pose risks even as they offer opportunities, as we just saw in the fuel cell business. A company like ours has to bring people along. Naturally, the basic question of the impact on employment is absolutely justified. And yes, it has an impact. In this case, the effect is positive. That’s because many processes will be organized differently in the future. That is precisely where new opportunities for our employees lie.
FST has also placed a strategic focus on the pharmaceutical as well as the health and safety segment. Is this due to the pandemic?
No, it’s not. Perhaps the coronavirus has clarified our view that these segments are important in the long run, but the decision is also tied to demographic change. This megatrend in itself, along with the world’s fast-growing population, necessarily leads to increased demand in a range of areas: food and beverage, health and safety, and pharmaceuticals. We have always found these segments to be interesting but we weren’t putting as strong a focus on them. Now we would like to generate more growth in these areas.
One goal of the new FST strategy is to cut 30 percent of the CO2 produced in our business processes by 2025. How do we plan to achieve this?
The overarching goal of the Freudenberg Group is a 25 percent reduction. Since other business groups have greater energy needs then we have, we need to cut our CO2 by 30 percent. From our current perspective, that is the right number and it is doable.
Finally, please complete the following sentence: The last eighteen months …
… were very demanding and tough on all of our employees. Whether on the plant floor or in the office, you have achieved great things under difficult conditions, and I would like to express my sincere thanks to you on behalf of my colleagues at the executive level. I wish you and your families a Merry Christmas, excellent health and all the best in the new year.
