Dinesh Paliwal, Executive Chairman of Marelli, outlines details of the company's ambitious plans for growth along with a renewed focus on the company’s core technologies.
What is the current position with regard to restructuring, debt and other financial challenges. What is the way forward?
Marelli went through a very challenging time. But I'm here to report that we very successfully completed the financial restructuring in August. That means additional investment from KKR and a reduction in our bank debt. It is very important. You can install the world's best CEO to run a company, but if you do not give them a strong balance sheet, you literally undermine their capability. So that was my commitment to the new CEO, David Slump, who I brought in on January 1. David is laser-focused on making Marelli competitive and innovative.
Marelli is now in a strong financial position to take on innovation and invest. In addition, KKR reinvesting again and again is testament to our exciting potential. In parallel, I can also tell you that I’ve learned that if you're not a cost leader in the auto industry, you can never be an innovation and profit leader. So we have already pushed last year, a permanent cost reduction program that will deliver annual recurring cost savings of $500 million and almost two-thirds of that is done. And finally executing we have a massive $60 billion order backlog to execute, which shows the trust global automakers have placed in us.
With fresh investment infused in Marelli what are going to be your focus areas. Will it be lighting and sensing which is the largest part of your businesses?
The automotive industry is going through the most disruptive change in 100 years and the shift is towards electrification, which is enabling, literally, the re-imagination of vehicle design and architecture. It’s also allowing us to focus on personalisation, the way users interact with the vehicle and new servicesoriented business models enabled by software. We will help our customers differentiate their vehicles of the future based on the three things that come to my mind when you talk about technology. Software Defined cars, Integrated Cockpit, Displays and cybersecurity. We know connected cars are what everyone wants, but you cannot have a connected car and use it to the fullest unless you have a cyber secured car, and in our portfolio, we have numerous cybersecurity solutions.
Marelli’s Integrated Cockpit Domain Control Unit with proprietary DynaPro four displays integration.
Getting into the portfolio of Marelli, lighting and sensing technology is the largest part of our business and I have spent a lot of time in Reutlingen, Germany, where this business is headquartered. I also have had the chance to do the “night drive”, Germany, which is a test that represents a very reliable proof of all our lighting and sensing technology – involving LiDAR, radar, infrared and ultrasonic cameras. We've invested heavily in e-motors, e-axles and power management and have a very well defined thermal solution for electric vehicles.
Marelli’s Innovative Horizon HUD (Head Up Display) with reflective technology.
Also heads-up displays (HUD) are getting quite popular. In fact, they are a necessity I think every regulatory environment should mandate. I actually drive my cars with HUD all the time, because that's my line of sight. So the reflective technology is paving the way for the horizon HUD to grow in importance in the near future.
But today screens are only getting bigger. Do you think customers will want to move away from screens altogether?
You're bringing up a very good point. I think it’s a question of practice and mental preparedness. I think this has to be mandated. Once we can absolutely provide the proof that HUDs are as safe and as robust as any analog or digital cluster, that’s when you're going to have a regulatory environment allowing you to do that. So I think in the near midterm, we'll have coexistence of the HUD and digital cluster, even at the expense of too much information.
Coming to India, I want to come specifically to the importance of the Indian market and your plans for expansion here.
First of all, India is extremely significant. And frankly, everybody's saying that, and rightly so. If any CEO or chairman of any global company does not look at India very seriously, they're missing out. India is core not only as an end market, but it is also an incredible R&D innovation centre for us. People talk about high cost countries and best cost countries and think we go to India for cost. I say no, we don't go to India for cost arbitrage, we go to India for brain arbitrage. We go to India for speed arbitrage. We go to India for hunger arbitrage. We go to India for the combination of these – the humility, hunger, the innovation, the speed – which is hard to find in many parts of the world. We have four successful joint ventures in India, two for lighting, one for powertrain with Maruti Suzuki and one for electronic systems.
Marelli India's Bengaluru tech centre ready for growth plan execution.
Recognising this, we have recently recruited the brilliant Ravi Tallapragada as head of Marelli in India and also the president of our electronic software systems globally. In addition to our established engineering centre in Gurugram, we’re very excited about inaugurating our new R&D centre in Bengaluru in the next few weeks, leveraging the talent pool in southern India, especially in software related to cockpit, cluster and AMT solutions. We are working in India on some breakthrough technology solutions, particularly in electronics, related to next generation cockpit and body DCU platforms, and you can expect a lot of collaboration between Japan, Italy, China and India. But most software development work would be done in India and the test market would be targeting global launches. The AMT business is core to us and we plan to expand this in a big way. So all this is happening.
AMT is a very traditional technology which India has taken to in a big way. Do you think India has contributed to the revival of AMTs?
Yes, India has played a key role in this. I would not say it is a revival, but I think AMT will be alive and thriving. I believe until 2035, AMT has a huge future. The product is getting better and better. Recently, we developed the “hybrid AMT”, coupling the electro-hydraulic automated gearbox with an electric engine, which is giving further 20% fuel savings and making the drive smoother. A lot of flex fuel adjustment can be done in AMT. So that's one part that's why segment A and segment B cars are turning more and more towards AMT.
That’s a pretty positive forecast for AMTs, don't you think?
Correct, as long as you've got an internal combustion powertrain, which I believe until 2035 is not going anywhere. By 2035 we will be fortunate if 50% of the cars on the road are electric. That means, you know, cars launched today have a 10-12 years of lifecycle as well. Look, I'm an EV guy and I would like to see more EVs coming in, but at the same time we have to be realistic. So, to answer your question, AMT is alive with a particular focus on segment A segment B. Also, to come back to India, India is a huge market, it’s 70% of Marelli's AMT business globally, and in India almost 85% market share of AMTs is with Marelli. All Automation solutions in India were only 1% in 2014, while today, with the push of AMT they are 35% of all passenger vehicles, so you can see how rapidly it has grown.
But clearly, demand will taper down as electrification picks up pace?
So demand potential won’t grow as rapidly as EVs. That is very clear. But I saw some statistics which say 4 million vehicles will be produced with AMT by 2035. So there is growth, but it's not exponential growth. It's still a big market, but very few players are in the space who have a solution. And we are the market leader. So we want to maintain that market position, generate a lot of cash and create profitable business so that we can fund electronic architecture, lighting and sensing technology, bespoke interiors, as well as cybersecurity connectivity and display units.
Also in the OEM and Tier 1 business, you do not make drastic overnight changes, because the industry doesn't want you to, it doesn't allow you to. So I think there is a journey of a good 15 years in the transition to electric powertrains. Also, we are developing AMTs for hybrids. So you could have an electric motor, as well as the AMT and you've got a hybrid still reducing the fuel consumption. So there'll be a market for this transition as well, hybrids are part of that transition as well, because all car buyers are not going to switch straight to EV.
What about other areas like lighting. Do you think that's becoming a bit commoditised. Or is there innovation possible in that area as well?
So there will be standard lights, they will be commoditised to compete in a cost race and that's something I don't personally believe in. We need to innovate and we are innovating LED headlamps with millions pixel projection capability with the best illumination and resolution grade available, and processing in real time. These next generation smart lights will give us the precision and vision processing capability and will be integrated in our lighting module as part of the ADAS package cars offer.
I think these innovations are essential before you can think of level three and level four autonomy. So lighting is where we need to do a lot more innovation and also look at the acquisition of some start-ups who have the technology but don’t have the scale which we can bring. We will also give standard applications to car companies, that's what will differentiate Marelli lighting. Now, this is a cost game too. We have to have scale, give or take we are number one or number two depending on which car company you talk to. We are very fortunate that we are supplying very high end technologies to the best premium brands of the world. But also need scale our business to midlevel cars that can also take advantage of our lights, but also our smart electronics and software.
Talking about costs, is India one of the toughest markets from a cost and margins perspective?
Yes, India is one of the toughest markets from a cost perspective and believe me, you cannot take India out of me! I understand the cost, I know people in India are the most savvy buyers, they are going to say if I'm paying an extra one lakh or five lakhs, what am I getting for it? And they are very digitally savvy, too. They have a complete research done on which car is being sold in which market be it China, Europe or America and what that feature functionality is. Also, I know we have artificial pricing inflation because of the import duties.
That's why localisation is extremely important. So we need to use Indian ingenuity, we need to design to cost. We intend to do share lots of existing technology from Italy, Japan, the United States and Germany into India and work on taking out costs. You can call it reverse engineering. But I have no fear of saying that. Reverse Engineering is smart engineering. Right? If that gives me a cost advantage without losing my feature functionality, I love it! And by the way, I can then apply that solution worldwide. The teams in India are working very closely with Italian, Japanese, German American colleagues, to analyse technology and simplify things to see where cost can be taken out and at the same time add more feature functionality. I
'm not talking bells and whistles. I'm talking about real features, software defined features. So a lot of work will happen today, we have almost 400 R&D people in the Delhi area (Gurugram) and, with the opening of Bangalore, we will ramp up to 1,600 R&D people. In addition, we are working with partners like LTTS, Wipro and Tech Mahindra because they have a lot of competencies that can actually help us move faster.
The semiconductor crisis has dominated conversations in the auto industry so it would be good to have your perspective on it.
I think in the near term, we have different things to talk about like when are we going to have a supply chain sufficient for what we need? That problem I don't think is solved yet. A lot of capacity has been planned across the board. But, talking purely about automotive and that’s without talking about smart appliances, mobiles or even crypto mining which has sucked up a lot of demand, but purely for automotive, the automotive industry is not using the most modern seven nanometer or nine nanometer chips but a lot of microcontrollers.
So I think we will be well into the end of first quarter 2023 before we can say we don't have a problem. The other thing is an inflection point, where semiconductor and memory suppliers are looking at how they can play a bigger role in new electronic architecture, which will eliminate 70-80 nodes in a car into maybe a dozen or so nodes which are very powerful, can multi-task and have a multi modular approach. Client and cloud computing will also play a bigger role, which means large cloud based data centres, which do a lot of processing, and which will minimize the number of chips, if you have a decent distribution. So I think we need to have a distributed architecture in the car, which will allow us to have three or four strong, very powerful processors to do the bulk of the work and a lot of handshaking with the cloud. That will be part of the new electronic architecture.
And finally, semiconductor suppliers have learned a lot, historically they never paid specific attention to automotive needs. They actually always said take what we have and run with it. Now I think there's a lot of development happening among semiconductors suppliers to really satisfy the future needs of the car industry.
Electrification has captured the automotive industry. Is this going to be the future for Marelli. Is this a race you have to be in to survive?
We have invested in electric motors, e-axles, in power management and we are working very closely with car companies, as well as battery manufacturers. It's no secret that there are 20 core suppliers in the field of electrification. Do you think all twenty will survive? I doubt it. Is Marelli going to be in one of the top three in electrification? I'm not so sure whether I really want that. I would rather have flexibility and put our money into making all our products and solutions agnostic, so whether you have an EV or ICE, it doesn't matter.
Having smart lighting and sensing technology, smart software, electronic architecture, ECUs and telematics and clusters and body domain controllers of the next generation and having bespoke interiors, are very important core technologies we want to focus on. Again, as an Indian mindset person, I would rather invest my billions in the areas where I can profitably grow the company and also grow the market share.