CTTAY Continental AG (PK)

By William Boston 

BERLIN -- Continental AG, one of the world's biggest auto suppliers, said it would reorganize its business and book a EUR2.5 billion ($2.8 billion) write-down in the latest evidence of how softening global car demand and the mass shift to electric vehicles are reshaping the economy of car manufacturing.

In a sign that it expects the industry's current travails to continue, Continental said it had shelved plans for a partial initial public offering of stock in its powertrain division -- home to most of its legacy, pre-electric technology -- choosing instead to spin off the unit to existing shareholders.

The business, Vitesco Technologies, which makes the parts that power fuel-powered vehicles, will become a potential vehicle for acquisitions or a merger in anticipation of a coming shakeout of global automotive-parts suppliers.

The decision indicates that a pure play centered on conventional car technology is no longer enticing enough to outside investors in a world where demand for traditional cars is cratering while governments and manufacturers -- if not buyers -- are pivoting to electric mobility.

So does the multibillion-euro write-down, which affects mainly assets acquired in the past decade and will hit the company's third-quarter results, reflecting the company's gloomy assessment of the car market's medium-term prospects.

After a meeting of the executive board and the decision to scrap Vitesco's IPO, Continental said sales for the three months to the end of September totaled EUR11 billion, down 3% from a year earlier. The company added that it expects to post a loss before adjustments for the full year.

Despite the grim news, Continental shares were up 4.1%, as investors cheered the decision to separate the powertrain business, a move that could accelerate consolidation in the supply industry, which is struggling in the current downturn.

Demand for cars has dropped simultaneously in China, the U.S. and Europe. Analysts predict that global auto sales could decline 4% to 6% this year, the second year of falling sales in a row. Last year, global new-car sales were down about 0.5%, the first decline since 2009.

"We do not anticipate that global production of passenger cars and light commercial vehicles will experience any material improvement in the next five years," Continental Chief Finance Officer Wolfgang Schäfer told reporters on Tuesday, explaining why the company adjusted its outlook and valuations of businesses.

Most of the charges against third-quarter earnings are the result of goodwill that the company has carried from acquisitions dating to 2008, Mr. Schäfer said. Goodwill is accrued through the cost of the acquisition minus the fair market value of the assets acquired.

The biggest share, about EUR1.54 billion, affects the company's business with auto interiors, which includes electronics and onboard navigation and entertainment systems. It totaled EUR724 million in the chassis and safety-components business, and EUR244 million in powertrain.

While the change won't occur immediately, analysts expect auto suppliers to be hit particularly hard as the industry shifts to producing electric cars and vehicles that are powered more by software than mechanical engineering.

In August, Continental said it would start phasing out production of components for internal-combustion engines because of a faster-than-expected fall in demand.

The news about the third-quarter write-downs also highlights the dilemma that suppliers find themselves in: As the business providing parts, services and technology for internal-combustion engines fades, electric-car sales are still too small to compensate for lost revenue.

"The business with electric vehicles is difficult, and it's going to remain so until we have more volume," Mr. Schäfer said.

Write to William Boston at william.boston@wsj.com

(END) Dow Jones Newswires

October 22, 2019 13:29 ET (17:29 GMT)

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