Johnson Controls to Spin Off Auto-Interiors Business Unit to Be Put in Venture With an SAIC Subsidiary
Johnson Controls Inc. JCI +0.34% plans to spin off its automotive-interiors business into a new company majority-owned by a Chinese partner, in a major step for Chief Executive Alex Molinaroli's effort to refocus the company on higher-margin nonauto businesses.
JCI, based in Milwaukee, will create a new company, co-owned with a Chinese supplier, Yanfeng Automotive Trim Systems Co.
The U.S. company will retain a 30% interest in the new company, which will become the world's largest producer of things like instrument and door panels and other plastic and wood parts that equip the inside of cars. The business now generates $3 billion a year in revenue.
Already, Johnson Controls has sold its automotive-electronics business, a solid set of operations that nonetheless tied it too closely to the capital-intensive, up-and-down auto-supply sector. At the same time, it is in the midst of acquiring Air Distribution Technologies Inc. to bolster its building-efficiency business that makes heating, cooling, security and other systems for residential and commercial buildings.
"We had a business that was struggling to be profitable, struggling to grow. Now we have a partner that is profitable and is growing, and the joint venture will be profitable and growing," said Mr. Molinaroli.
Johnson Controls will retain its automotive-seating business. It is the world's largest seat maker, and Mr. Molinaroli considers the business a "core" asset. Margins for seating are better than for interiors.
"Our top line may shrink, but our bottom line will grow. When you dial forward five years, you will see a company that is more profitable, with higher margins and more balanced," Mr. Molinaroli said.
Mr. Molinaroli's goal is for investors to put Johnson Controls in the same category as diversified industrial companies such as Honeywell Inc., which tend to have higher valuations.
While the interiors of cars and sport-utility vehicles have steadily become more luxurious, the business of making many of the decorative parts that trim a car's passenger compartment offers stubbornly narrow profit margins.
Auto makers threw Johnson Controls and other interiors suppliers for a loop when they started bringing the engineering for the parts in-house and bidding for parts on an individual basis rather than as complete systems designed by the supplier.
The trend made it difficult for big companies to find any significant advantage over smaller competitors and had them fighting over piece-work contracts for everything from glare visors to door handles.
The one place in the world where auto makers purchase interiors as a system is China, where the new company will be dominant.
"It will be the largest, most profitable and fastest growing," Mr. Molinaroli said.
The new venture will be formed with a noncash contribution of 95% of Johnson Controls' interiors business--more than 20,000 employees--along with operations owned by Yanfeng, a parts subsidiary of Shanghai Automotive Industry Corp. (SAIC). SAIC also builds in cars in China in partnership with General Motors Co. GM -1.05% and Volkswagen AG VOW3.XE +0.21% .
Once it is formed, the operation will report only unconsolidated equity investment profit to Johnson Controls.
The spinoff comes only weeks after Visteon said it would sell its interiors business to an affiliate of Cerberus Capital Management LP, the private-equity investment group that once owned Chrysler LLC.
Visteon essentially gave the business to Cerberus and agreed to contribute $95 million toward it, additionally.
The Johnson Controls-Yanfeng venture will compete with French supplier, Faurecia SA, EO.FR -2.60% and International Automotive Components, Magna International Inc. and a host of smaller suppliers.
Mr. Molinaroli said the new company, which hasn't been named, would have 15% global market share.