What does the strategic plan mean for the company, what are its rationales, and, what will be its implications?
By Jean-Dominique Bonnet, Principal Consultant – Intelligent Mobility
Path of Transformation
CNH Industrial is going through a transformation; a major one. Following the death of Sergio Marchionne in July 2018, Suzanne Heywood, who was the Managing Director of Exor since 2016, stepped in as the Chairperson of CNH Industrial. Exor N.V. is the largest shareholder in CNH Industrial, with a 26.89% stake and 41.68% voting rights. Hubertus M. Mühlhäuser, a veteran from the agriculture and construction sector, joined as the Chief Executive Officer (CEO) in September 2018.
CNH Industrial was created in 2013 by merging CNH Global and Fiat Industrial. Now, the company has announced its intention to separate its off-highway and on-highway businesses by 2021. CNH Industrial has also announced that it will be investing $250 million in Nikola Motor Company as part of the Series-D funding. The firms will share expertise and form a partnership to industrialize fuel-cell and battery-based electric heavy-duty trucks for North America and Europe.
These announcements are, in fact, part of the company’s 5-year strategic plan (2020-2024) that it communicated on September 3, during the Capital Markets Day and Investor Day event held in New York. The plan is called ‘Transform 2 Win’, a name chosen to reflect CNH Industrial’s ambitions and the transformation process it will undergo with regards to performance and structure, to empower all of its operating segments to achieve their full potential.
The objectives of the plan are both ambitious and simple:
- Secure 5% CAGR in sales.
- More than double the EBIT and net income from current levels – targeting 18% CAGR in earnings per share.
To deliver these results, the plan counts on acting on three pillars and leveraging them:
- One, implement a relatively classic operational excellence program, aimed at improving efficiency, simplification, and cost restructuring, while also improving the revenue and margin with an increased focus on the aftermarket.
- Two, selectively and strategically leverage innovation to anticipate and better serve customers’ needs.
- Finally, the planned separation of the off-highway (agriculture, construction, and specialty segments) and on-highway (commercial vehicles and powertrains) businesses, with a spin-off expected to be completed in early 2021.
The main point of attention is, obviously, the ’spin-off’ element.
Drivers and “virtuous” mechanisms
While looking at the elements that call for such transformation – beyond the ever-present need for improvement and optimal financial results –CNH Industrial is quick in acknowledging the high level of impact that mega trends such as digitalization, automation, servitization, and low or zero emissions will have on the industry. We fully agree with that.
From this point of convergence on the importance of mega trends, CNH Industrial’s analysis evolves to express that on-highway and off-highway businesses have, however, diverging regulatory and customer requirements, and are impacted differently by these mega trends.
That apart, CNH Industrial generally perceives a high degree of synergy at the internal level, within the off-highway and on-highway businesses. On the other hand, synergies between the two businesses are limited. Therefore, it’s not rational to keep both off-highway and on-highway businesses together. Rather, separating them would help maximize the management focus, foster flexibility, and help align priorities to better tackle specific challenges and address or meet specific needs and objectives of each of these segments.
Further, the breadth of options and magnitude of undertakings to reach a specific level are linked to the current strategic position of each business and the competitive dynamics that they will face .In this area, large differences exist between the off-highway and on-highway businesses.
On the off-highway side, CNH Industrial is the second-largest manufacturer of agricultural equipment. On the on-highway side, CNH Industrial’s IVECO is effectively the market leader in alternative fuels for commercial vehicles in Europe; but being limited to Europe – with the corresponding volume implications – in addition to facing a need to reposition its heavy-duty product line, is certainly a handicap.
An additional risk exposure may also be assessed for the on-highway business, considering how CNH Industrial approaches the topic of low or zero emissions. While in its communication, the company made multiple references to alternative fuels, the word ‘electrification’ was conspicuously absent in the whole strategic plan, with the exception that the word electric is used in bus applications to qualify the company’s position of leadership in this area, and the reference made regarding the development of EV models in the light-duty segment, as well as short haul and distribution in the medium and heavy-duty segments; giving us a glimpse of CNH Industrial’s views regarding BEVs in commercial vehicles.
This could become a challenge if ’deeper pocketed‘ competitors such as Daimler or Volvo – or even Tesla, if it comes to Europe –crank up a broad offer of BEVs, unless CNH Industrial finds a smart and effective way around it.
Last but not least, an element that CNH Industrial itself acknowledges is that capital markets probably have a preference for pure-plays involving focused business model, implying that a discount of the sum-of-the-parts is affecting CNH Industrial valuation in the current structure, and that there is a significant potential to step up valuation through creation of two focused enterprises.
After all, this is exactly what happened to Ferrari after it was spun-off by Fiat-Chrysler in 2015; companies that we may remember are owned respectively to the level of 22.91% and 28.67% of shares by Exor; and Exor’s level of control expanding to 34.54% and 41.76% in terms of voting right.
If we were to attribute weights to the different factors contributing to CNH Industrial’s decision to proceed with a spin-off, Frost & Sullivan would qualify the managerial aspects of sharper focus and the greater freedom to seize opportunities for partnership as the underlying virtuous mechanisms, which themselves engage the equally important process of improved market valuation; the argument of non-commonality of impacts of megatrends between off-highway and on-highway would on the other hand appear to be softer, and to even pertain to the domain of risk control to ensure no major harm is done.
Partnership opportunities may be particularly crucial for the on-highway business, to navigate safely toward 2030 in the context of connected, autonomous, shared, and electric commercial vehicles – CASE.CASE is a clear illustration of a situation in which the convergence of all elements, not just their sum as posited when valuing a company, is the catalyst of non-linear changes and disruption.
Using granularity to better assess potential and define preferred path
Looking “under the hood” will help better understand the strengths and challenges in the new structure envisioned by CNH Industrial in its strategy for stakeholder value creation.
Off-Highway
The envisioned off-highway activities would capture revenues close to $16 billion, as per the 2018 metrics. Of this, a vast majority, 75%, would come from the agriculture segment – from Case IH, New Holland Agriculture and STEYR brands – followed by the construction segment — Case Construction Equipment, New Holland Construction, and ASTRA brands – and specialty vehicles. These activities would deliver adjusted EBIT of $1 billion.
At a finer level, the agriculture segment benefits from a strong position in all regions, being equally weighted between Europe, North America, and South America, and offering advancements in products such as methane-powered tractors and digital farming. The construction business is in comparison smaller and more centered in North America (50%), but synergies exist between the 2 segments as they complement each other, particularly in the areas of distribution and vehicle architecture.
Boosted by the developments in agriculture, sales of off-highway business will progress at a healthy pace of about 6% per annum, requiring a total investment of close to $7 billion, and delivering an EBIT margin in excess of 12% by 2024 and ROA of30%.In summary, it’s quite the picture of a poster child.
On-Highway
The on-highway business, with revenues in excess of $13 billion, would be a slightly smaller entity as per 2018 metrics, and owe more than 2/3 of its revenues to commercial vehicles under the brands IVECO, IVECO BUS, and Heuliez Bus. The balance revenues are linked to the powertrain business, which, despite the spin-off, remains a key supplier to the off-highway business due to a long-term agreement. The on-highway business would deliver adjusted EBIT of $0.5 billion, performance certainly not as positive as off-highway.
The on-highway business is very Euro-centric, with 84% of commercial vehicle sales and 71% of powertrain revenues coming from the continent. Catering to relatively saturated markets, sales are expected to grow at a limited 2-3% per annum, dragged by slow progression in the commercial vehicles area, which, despite needing investments close to $6 billion per year, is likely to grow only at a rate of 1%.
The on-highway business will deliver an EBIT margin of 8% in 2024, associated to 20% ROA – a performance less stellar than in the case of off-highway.
As a result, CNH Industrial lucidly understands that the sustainability and results of the on-highway business would – and should – be greatly improved through the ability to materialize significant opportunities, ranging from geographical expansion, synergies, scale effect, and moreover, access to game-changing technologies, leading to an active and agile mindset of partnering.
And the first of these partnerships is the one with Nikola, that CNH Industrial announced will disrupt the industry; with IVECO and FPT Industrial bringing in industrial expertise –engineering and manufacturing– as well as a strong European distribution network, while Nikola contributes its well-advanced fuel cell truck technology and its innovative business model, including own or associated hydrogen-filling infrastructure.
More precisely, the partnership involves the industrialization of Nikola TWO fuel cell-powered Class 8 truck for the North American market, and the integration of IVECO S-Way truck technology into the battery-electric powered Nikola TRE cab-over for North American and European markets; evolution to a Europe-based joint to cover both technologies would follow in the longer term. Nikola will also be working with partners to develop the hydrogen refueling infrastructure in both continents.
It is also to note that in this partnership, the joining of efforts and minds from very different backgrounds, experiences, vision, and resources, should be extremely energizing, beyond the challenges this may contain.
The conclusion at this stage is that after the spin-off, we will have 2 entities of very different nature, armed with intrinsically different capabilities and potential. There will be a higher need for the on-highway business to accelerate, be nimbler in its strategic thinking, and possibly, to actively participate in industry consolidation.
Changes are a reflection of a very dynamic environment
In the wake of the transformation that CASE – connected, autonomous, shared, electric – will drive in the automotive and transportation industry, we have seen giants changing their operating structure to allow for better flexibility, sharper focus, and greater entrepreneurial freedom, to get in a better position to unlock “hidden value” and eventually, to have access to additional capital.
As such, the Daimler Group has already taken steps to restructure into three legal companies: Mercedes-Benz AG (cars and vans), Daimler Truck AG (trucks and buses), and Daimler Mobility AG. Volkswagen AG has even proceeded – arguably with mild success – with an IPO of its commercial vehicles entity Traton in June this year.
Years ago, activist and major shareholder in Volvo AB, Christer Gardell strongly advocated spinning-off several activities of the Group, in particular separating the construction equipment activity from the truck activity; but faced strong resistance and finally called it quits, selling his stake to Geely in 2017..As size and capabilities matter, CNH Industrial decision to separate business activities makes sense – and, at the same time, highlights the dependence on partnerships of its on-highway business.
This also stresses the potential exposure, if not fragility of an on-highway business that can expect no mercy. To illustrate the tension that exists in the market, it suffices to look at examples such as the all-recent attempt by an European NGO favorable to EVs to discredit the green benefits of natural gas and biogas – a move that could have had dire consequences on IVECO, given its leadership position in this area in Europe, if claims had been confirmed. However, they were not confirmed.
Conversely, while we can see the partnership of CNH Industrial with Nikola as a stroke of genius– by allowing CNH Industrial avoid most of the hefty entry ticket price of BEVs and quantum-leaping into FCEVs– many unknowns remain. Future will tell if technology, timeframe, market acceptance, or even partner and compatibility with partner were appropriate.
Although unlikely, we could also have a surprise before 2021: Magneti Marelli, the high-tech components developer and manufacturer, once subsidiary of Fiat and pioneer of the common rail injection system, was abruptly sold by FCA to Calsonic Kanseiin 2018. In the present case, however, the announcement by CNH Industrial about its spin-off plan to be enforced by 2021, and the preparatory work underway such as shaping up the on-highway business with partnerships such as Nikola, would not augur such a fate for now.
Conclusion
Frost & Sullivan assessment of CNH Industrial’s “Transform 2 Win” strategic plan is in conclusion positive.
Looking at the off-highway business, the targets of growth in the agriculture and construction segments appear quite aggressive, but the overall success of the plan is far from being solely hinged on these elements. Evolution of the global and regional economic conditions, which appear to be at best stagnant in the mid-term, may further affect these results. This is an exogenous parameter that does affect the validity and pertinence of the actions considered, and the off-highway business seems to be well positioned as a stand-alone entity.
Regarding the on-highway business, we consider the spin-off a positive element, but for different reasons, essentially linked to the increased partnership opportunities that the setup offers. However, this comes at the price of relatively high risks if these opportunities do not develop as expected and the on-highway business either remains too dependent on Europe, does not progress fast enough beyond natural gas for propulsion, and does not catch the wave of autonomous vehicles before it accelerates.
A dynamic environment holds both threats and opportunities. The first element to recognize is that one’s competition is moving, likely planning to move at a pace equal or faster to the pace that we consider, eroding some of the competitive advantage gain that was anticipated.
Another element to consider is that a 5-year window has become an extremely long time for many aspects of a business, with myriads of possible changes affecting the environment and requiring a change in the course of actions. Therefore, a 5-year plan in the automotive sector, nowadays, is akin to a blueprint to pursue and manage short- and long-term orientation, supporting a vision anchored in the long term. One of the possible factors of success resides in the ability to be alert and agile to develop or identify and integrate on the go incremental opportunities. We believe that such ability will be preserved in the “Transform 2 Win” plan.
For more information, please contact: Jean-Dominique Bonnet at jean-dominique.bonnet@frost.com
