Aptiv PLC (APTV) Earnings Call Transcript & Summary

Okay. Great. I think we are live, ready to kick off our next session with Aptiv. We are really, really pleased to have Aptiv back with us at the Citi Global Technology Conference. I'm Itay Michaeli, Citi's U.S. auto analyst, and I want to welcome you to our session here this afternoon. From Aptiv, we are delighted to have Glen De Vos, Senior Vice President and Chief Technology Officer; as well as Elena Rosman, VP of Investor Relations. Glen, Elena, thank you so much for being here. We look forward to our discussion this afternoon. Just want to keep it pretty informal to a typical fireside chat. If you'd like to ask questions during the session, feel free to e-mail me at itay.michaeli@citi.com. You'll see me stare at my screen a bunch of times throughout the session. And I'll be happy to ask any questions that you have. So with that, it's my pleasure to welcome Aptiv to the conference. Glen, Elena, thank you so much for being here.

Thank you for having us.

Great to be here. Thanks, Itay.

Great. So I thought I would kick things off with a couple of questions on a market update. In fact, you had a number of companies at the conference talk about automotive end markets. So I'd love to -- we'll do an update and then we'll get into a lot of really interesting tech discussions. So perhaps maybe first question, just any update you have on just global macro trends, production observations and how things are kind of progressing?

Sure, Itay. And I'll start, if that's all right. We just -- we really don't typically provide mid-quarter updates. But I think it's important to keep in mind that we did provide second half outlook for vehicle production based on our customer schedules as we saw them. And I think some things that are sort of a little interesting upon reopening, starting in June, in every region, right, there was a big push by all of our OEM customers to really fix the supply, both in terms of total inventory as well as in the mix. And so we obviously saw that example here in North America, a lot of emphasis on truck and SUV when production restarted. So I'd say OEMs have been and continue to be somewhat reliable in terms of their focus on making sure they've got their best sellers, some of their higher-margin vehicles on the dealer lots. And as the sort of recovery is taking hold, I would say that we're seeing some customers, starting in China, now in Europe, do a little bit more of a pause, some of the wait and see to see while they fix the supply issue. And actually, we've seen some inventory creep in the system. They're waiting to see what really happens with end market demand. So I think as a result, schedules are a bit more fluid and subject to some shorter-term variations and certainly what we've seen historically.

Great. That's helpful. And then maybe at a high level, I know the other trend that a lot of suppliers have been expecting, putting Aptiv as a pickup in customer booking and quoting activity. And just sticking to a high level, I was hoping an update on what you're seeing there in terms of how that's progressing thus far in the second half.

Yes. And maybe I could start, and then I would hand it over to Glen for some more qualitative commentary. So the first half of this year, just to remind everyone, right, with shutdowns, restarts, safe operating procedures going into effect, it's a massive effort, right, to move to work from home and do that quickly and efficiently. And so while the industry I think broadly really did well, there -- one of the consequences, right, some of the commercial award activity slowed. So it's a logical pause. We certainly have not seen any significant cancellations or pushouts. But we have seen some shorter-term sourcing decisions get shifted to the right, call it, 3 to 6 months. So the second half pipeline consists of some of these pretty significant incumbent projects for us. And so we expect to be in the second half more on a normalized run rate in terms of new business awards, typically what we would normally see. So for us, a typical bookings quarter could be in the range of $4 billion to $5 billion, and we continue to expect that in Q3 and Q4. And Glen, I don't know if you want to talk a little bit more specifically about some of the booking trends in some of our key technology areas.

Yes. I would say, as Elena was saying, similar to launch, things just kind of got indexed out a little bit due to the COVID impact and slowing things down, things are now normalizing again. I think 2 areas that really are in sharp focus right now, though, are -- one is around high-voltage and mainly on the SPS side of the house for the wiring and connection systems where we're seeing, and based on response to acceleration of the electrification market, a strong interest in those bookings and those awards going forward to support those program -- those programs. And what's been exciting for us, high-voltage has been really an area of focus for us because we see that combination of our connection systems along with our high-voltage wiring and power distribution really being a good combination and being able to lower the total system cost. So when we -- with one of our awards earlier this year, we're kind of -- we were able to take the, what I would call, current state of the art do some real innovations from a high-voltage interconnect and distribution standpoint and drive the weight of the system down by about 40% of that part of the system, reduce the cable lengths, reduce cable diameter, eliminate -- reduce splices by almost half to simplify the system and really have an important win for us in that high-voltage electronics. So that's one area that's been, I would say, a real bright spot. The other area that is really proceeding on and, as Elena mentioned, we've got these really 5 big satellite architecture ADAS system launches coming up really in the next 12 months. And when you think about the life cycle of those programs, which is typically 4 years or so, that means that those next-generation sourcing are really coming on the heels of that. And so what we're doing now is really looking at how do we position ourselves to take advantage of our incumbency. So the position we have with those programs and those OEMs to really solidify that, go into that next-generation Aptiv safety platform with lower total system costs but higher performance, and then use that platform to actually go attack other markets and other OEMs with that same approach.

Absolutely. That's very helpful. And maybe we can kind of go into that discussion a bit further. Obviously, it's been -- a lot of things have happened in 2020. And very recently, we've seen the emergence of new EV OEMs, and we've seen what happened to EV OEM valuations, including, of course, Tesla. And I'm curious whether that's created accelerated activity, maybe not bookings yet, but accelerated customer discussions that might have been suggesting that some of your OEM customers are going to accelerate adoption of next-gen technology, whether it's L2+, SVA. Just curious kind of what you're seeing in the last few months, as we've seen, at least the capital markets certainly go in one direction.

Yes. It's interesting because I mean Tesla has been a really good disruptor for our industry. I mean -- and this is what I would tell you. And I think what's happened recently in terms of their valuation is a reflection of the market's recognizing that their approach really has strength and really has a lot of credibility to it. And not just the markets recognizing that, but other OEMs. I mean think about Diess' comments from VW, talking about how Tesla is doing things and how they're 2 years behind and then the end. And so to me, it's more -- what we're seeing is a widespread acceptance, actually, after many years of kind of I think maybe hoping it would go -- Tesla would go away and finally accepting that what -- the approach that they've taken, generally speaking, has been very powerful, very successful in that whether it's vehicle architecture or electrification, putting electrifying a really nice car, not a tiny little box, but a really nice performance car, I mean these things are really game-changing and bring value to the end consumer in a way that current approaches do not. And so for us, what we see now happening with the broader OEM community is a couple of things. One is, as we mentioned, Tesla is kind of that validation of the consumer pull of electrification. They're not buying electric cars just because they're electric or because they can get into the HOV lanes, they're buying them because they're great trucks they're happy to be with. And now -- so you see that consumer pull happening. The other thing, and so you're seeing really the OEMs accelerating and broadening their electrification offerings not just to meet emissions mandates, but to meet consumer demand, which is really exciting. The other thing you're seeing around electrification is now investment coming into that space in many different levels not just for the OEMS but for us, investing in high-voltage, interconnect and power management systems, so you can -- you lightweight the vehicle and move power around the vehicle more efficiently. It's investment into battery technologies, solid-state lithium, also investment into silicon carbide for more improved rectification of power management, power conversion. So you're seeing a lot of that now coming into the constituent technology space, which, for us, as this move towards electrification really has legs. It has momentum and it's real. It's not just it's here because of government subsidies or it's here because of incentive programs, it's here because it's a better vehicle and it has consumer value. So that's really great. But the other piece at the Telsa phenomenon is more or less really kind of focused the industry on broadly, is there a press to a software-defined vehicle. And so they started from that perspective as opposed to kind of a legacy fragmented distributor design where we are today. And so for us, we've been talking about smart vehicle architecture and the abstraction of software from hardware and consolidating compute. And everything we've been doing has kind of been pushing down that path. What we're excited about is with a broader recognition, that is what you need to do to manage software in your vehicle. And the moves that are being made, we think that provides us with a -- we're now swimming with the current. And OEMs are very open to understanding, well, how do we do this, what help can we be as Aptiv to them in getting that done and how can they make that journey as quickly as possible to be more efficient, more capable relative to software in the vehicle. And so that's been really exciting.

Glen, you mentioned taking that journey as quickly as possible. How important is it for Aptiv that your OEM customers need to get to that end point faster than they thought before? Does that mean they have to rely on you even for more content, maybe it's software that they would have done otherwise? Does that mean your market share can go higher potentially?

Yes. For speed, there's -- and you saw this with Tesla as well. And to move quickly, it means that you have to pick and choose where you do things internally or organically and where you partner or potentially acquire. But generally speaking, it means you're really got to be smart about how you deploy your capital and your resources. And doing it all yourself right out of the box is a massive undertaking. And you saw Tesla didn't do that. They had partners like NVIDIA, like Mobileye, like ourselves, like other tiers providing complements to them to get to market quickly and to get there very efficiently. Well, okay, now you've seen over time, they've been very strategic about, well, which pieces of that do they bring inside. So for the rest of the market, to your point, it's -- as they want to move quickly, then they need to leverage work that we've already done that can help them do that. And so when we think about the tier community, what we used to think about as Tier 1s, there are only a few, very few that can actually provide that kind of capability to them. It's ourselves, it's the Bosches, it's some of these other -- the larger tiers. And that means we can help them with that. We can help them move that. And then ultimately, they have to decide, okay, what part of the vehicle and software platform do they want to own top to bottom, what part do they want to leverage and partner with. And I always argue, let us provide the things that we do better and that are non-differentiating to their end consumers. The OEM should focus on how their -- the features that their end consumers touch, the features, whether it's infotainment or ADAS or whatever. And so that -- that's an area. That's a line that we have flexibility around, and we just want to enable the OEMs to find that sweet spot for their desired mission.

Absolutely. And so one question we got in a few minutes ago and kind of related to this discussion is, maybe if you can talk about Aptiv's content in a Tesla EV versus a non-Tesla EVs out there. Maybe to that also, just what your level of interaction of business where some of these kind of upstart EVs that we're seeing, not the OEMs that we're seeing.

Yes. Maybe I'll start, Elena, with just talking about our interaction in that model, and then you can speak directly to the content question. So relative to -- and so we started out initially as a low-voltage supplier basically into Tesla. And now that's growing into high-voltage as well. And I mentioned earlier about the in-sourcing, outsourcing, those types of things. One of the areas that we know that we can provide tremendous support and capability in is wiring harnesses because building these harnesses, it takes -- there's a certain manufacturing capability that isn't always obvious to people to be able to construct harnesses on a just-in-time basis for every one of those models. And it's something that our EDS team really, really does well. And so that's been an area that we've enjoyed really a long term and growing relationship with Telsa. Similarly, if there's one area that even with the other new EV players, the -- that they've looked to go outside immediately, it's been in the electrical distribution systems and the wiring for that. And we've been very fortunate in that we've had good relations with a number of those companies to be able to provide those solutions to them. And kind of like Tesla, we view that as -- those are small volume or, at this point, no volume. And -- but we view those as important investments because it positions us to then grow with them. So as they become successful, whether it's in China or here in the U.S., and it helps us fill out our high-voltage and our electrified portfolio. And it really provides us with a great opportunity. Having that Tesla experience and having that high-voltage experience is a key to that, though. We were able to provide that to them very efficiently and effectively. But we think they're an important community in our market to be able to support their -- today, small with -- in Tesla's side, they're relatively small. But tomorrow, we know they're doing things very much aligned with what we think you have to do to be successful.

So Glen, maybe just picking up on that example of a tough love. By utilizing Aptiv's integrated approach to vehicle architecture, we were able to deliver some very optimized solutions that have created more value for them. And as a result, that's allowed us to increase our share of wallet. So I think many of you have heard me say before that our total addressable market for a battery electric vehicle is in that range of $900 to $1,000. We started with Tesla, very little content on the Model S, so less than 10% of that TAM. And now with Model 3 and now Model Y. And I think as Glen referenced, is they've grown regionally. We've continued to grow our content with them. So our share of wallet with Tesla now is greater than 50%, almost approaching 60%. So it's been a great customer to grow. When you look at the volume for high-voltage vehicles that are coming over the next number of years, that's certainly one of the players that are worth -- that are going to be relevant from a volume perspective. And so you can equate that, call it, share of wallet to roughly, call it, $500 to $600 of content per vehicle with Tesla today.

Yes. One last comment, Itay, is one of the really benefits of working with a company like a Tesla is they move incredibly fast. So they set a direction, they'll adjust, they'll course correct in a very, very aggressive pace compared to the broader automotive industry. And it forced us -- it's really forced us to look at our own systems and how do we become as -- how do we meet that response time requirement. And for those companies that can't, they get weeded out. I mean -- and so that's been one of the things that's been really beneficial to Aptiv more broadly is understanding okay, how do you get to where you can respond and work on the Tesla time frame and -- as opposed to the traditional industry time frame? So that's been really exciting. And I can tell you the new EV companies, they're operating in the same mindset.

That's super helpful. So maybe when we think about another step within this discussion of moving faster, trying to -- we talked about EVs and high-voltage. It also seems like some of the automakers are trying to differentiate from Tesla and some of the others with more expansive L2+ suite corner radars. We're seeing LIDAR enter the L2+ market. So curious kind of what you're seeing there. Maybe talk about the satellite architecture wins and your competitive position there. We could start there and then maybe move into a few more.

Yes. And one thing -- and we always talk with OEMs and the thing I was trying to reinforce is, it's important that every OEM is a little bit different. I mean they have different strengths, different capabilities, different market -- target markets. And it's important that their ADAS and their feature set strategy isn't just wrapped around NCAP. That may be their strategy, what does it take to get to 3- or 5-star NCAP, but it's around what's the value prop they want to have for ADAS for their customers. And it's clear, ADAS is an area that is now -- it's a really sticky product. So if you bought a car with an ADAS suite on it, feature suite on it, you're not -- your next car is you don't want it to have less, you want it to have more. And so it's -- you can see the OEMs looking for that right balance of features, customer value and margin performance for them. So what we're seeing is a very aggressive push towards 2+ kind of walking up to a Level 3, but not going over that line and incurring all of the costs associated with driver out of the -- staying kind of on the left side of the curve. And what I would -- and the reality is where Tesla has probably been the most impactful is they -- clearly, they've been very aggressive about their feature performance in some of their claims and what they've been able to do with the feature set that they have. You could argue, okay, do they have enough sensors or not enough, whatever, the traditional OEMs tend to put more sensors on the car to do those things and maybe more radar centric and camera centric. And as a result, we're just -- we're kind of agnostic to it. We look at it and say, look, put as many sensors as you want. Our satellite architecture approach is to take -- simplify those sensors as much as possible so that they're as cheap and as small and easy to package and then bring all that compute and processing into a central controller. So centralize all of that. So you have 1 software stack or 1 software package that controls all of those features. You can plug or unplug sensors as you need. You can go to -- from a 3 radar to a 5 radar, from 1 camera to a 6 camera, whatever you want as an OEM, but you have -- fundamentally, you have a software platform that can accommodate that. And so that was the basic thinking behind our satellite architecture, simplify the software architecture. And as a result, it's been very -- that's been very successful. Its sweet spot is right at Level 2 and Level 2+ and going into 3. It's where it really plays strong. But that's where we have the market coming to. We see by '25, everything -- in my opinion, everything will be there. It's not going to be down. You're going to see level -- you have very -- a lot of fewer cars at Level 01. The majority will be in Level 2, 2+ moving into Level 3. So that was the approach that we took. And today, that's been very successful. It's allowed us to really have a platform that we can now reapply across OEMs and can be very efficiently deployed within an OEM. Now that said, it's all about -- for us, it's all about democratizing active safety. How do we make it? How do we bring more value but at a lower total system cost? And that's what we're really pushing on now with our next-generation platform. And like I said earlier, with these launches now happening, we're turning -- that's where we're turning our attention. What's that -- when and what is that next-generation system? How do we significantly take costs down, improve overall operational design domain and future capability? But doing so, that's -- it's exciting, increasing capability model to model.

Interesting, but I'll ask one more on that. So as you think about the next generation, how are you balancing, for example, the need for more sensors? And maybe you could talk about Aptiv's role with LiDAR in general on consumer vehicles versus, to your point, really trying to keep the system cost low, which then maybe means you need to invest more in maybe kind of radar fusion to try to not require as many sensors. How do you kind of balance those 2 dynamics?

Yes. It's really about -- first, what you have to solve for is what's that end feature that I'm trying to deliver. And it's not just AB or Aptiv ACC with [indiscernible] highway assist. It's how -- when can I use it? Can I use it all the time? Or is it just on certain roads? Can I use it in any condition, light, night, day, weather start -- that -- you have to look at those dimensions and say, what's that right value prop for the end consumer that they're going to be willing to pay for. And then you have to design the cost essentially inside of that operational envelope. And what we try to do is extract as much performance out of the sensors we currently have. So get as much as you can out of what you have. So with radar, it's now using machine learning and AI to really improve object detection and classification. With cameras, it's more mega pixels, but similarly working with Mobileye on their next-generation feature set. What we're seeing is we can extract with surround radar and with that high-performance forward camera. In radar, you can really -- you can deliver Level 2+ features and really deliver a rich set of features. Now LiDAR brings with it some unique capabilities, both in terms of localization as well as free space detection, redundancy, et cetera. And it has a strength to a greater degree than either radar or camera does. But you have to say, well, what use cases does that unlock? And does the unlocking of those use cases is at a good value prop for the cost that brings into the system and the complexity that brings in. And so that's -- those are the discussions we're having now in those Level 3 systems. Now ultimately, as LiDAR costs comes down, I'm a firm believer in I want to use more sensors. I want to have the richest environmental model I can because that's what determines your future performance. The more accurate your environmental model and your perception system and your sensor fusion, your feature set, they're just much better. And so for us, that's where, as I mentioned earlier, we're spending a lot of time on that sensor fusion layer. How do you build an environmental model? How do you do it with the least amount of sensors but with the highest capability, and then let the OEM play with a feature set on top because that's ultimately what matters to their end customers. And so that's how we've -- that's how we're architecting our system where it's an open platform, OEMs can control and have their hands on what they want to control. We can enable that with a really strong environmental model. But then that's all of the sensor capability basically is what determines that.

Absolutely. That's super helpful. So one question actually I had, but we also had one coming in on similar kind of line of thought is on -- it's a broad question on the competitive environment. On one hand, we talked about some of your customers needing to get to the end point faster, which might be helping you, but also may attract additional competition from traditional tech companies. We've seen some OEMs launched partnerships with companies directly this year. We've seen some M&A in a Level 4 field. How would you balance those 2 out and kind of characterize the competitive environment for Aptiv as a whole today? Or are there some spots that maybe looking better than others? How do you guys square those developments?

Yes. The -- it's interesting because in my observation with the OEMs forming a partnership with a SoC supplier like Mercedes-Benz and NVIDIA, that deal. And prior to that was BMW with Intel and Mobileye back in 2000 -- July of 2016. So the SoC plays a really important role in the overall architecture. And given that some OEMs, I would say, like Mercedes, like BMW, they have very strong engineering departments. They're going to be looking at what is my silicon architecture. And so that to us is perfectly normal. Now NVIDIA is -- they're a great partner for us as well. They bring a great processor, they also bring a nice tool chain. So -- and those are not things that we're going to bring, to be honest. So when we look at the value we provide, it's -- one, it's at that systems integration, we can bring together the domain controller, the high compute platform. It's that systems integration of the hardware with the hardware abstraction layer, the big software, middleware, integrating operating systems. And as I said, the sensor fusion layer, that's just kind of on top of that. But we also know that every OEM has a bit of a different philosophy on what they want to do, what they want to control versus what they want somebody in the outside to do. And so we know working with a BMW or working with a Daimler, they're going to be much more involved with the feature development. And in some cases, down into fusion layer with a Volvo, for instance. Whereas your FCAs and your others, they're going to be more of a turnkey system where they'll look at -- they'll be in the features, but nothing below that. And really, you provide the whole thing. So the challenge for Aptiv and us is to understand, okay, we can provide the entire system, but we have to be flexible enough to say, look, we'll do whichever parts of it makes sense for an Aptiv to do and where we can bring in 500, 600 engineers to help with systems integration, vehicle testing, all of those types of things, which an NVIDIA is not positioned to do. They just simply can't do it or even a Mobileye, for instance. And the OEM, they're not positioned to do that. So there is still -- in that entire stack, there's still plenty of opportunities for value creation. You got to pick your spots and then really understand how do -- how does our platform then dovetail nicely with what their strategies of what they want to do versus partners?

Absolutely. That's super helpful, Glen. Maybe I switch a little bit into Motional. So congrats on the name. I saw the website's up and running. Any update there? And we talked a little about it back in May, how is development going? How is customer discussions going? And is there -- what we've written about the potential as a rideshare companies look to get the profitability and cut costs in light of the crisis, that maybe that opens up opportunities for third-party players at the Level 4. Curious, anything new on that line of thought as well?

Yes. Well, first of all, as you were saying, they just announced the name, I think it was a couple of weeks ago now. The close of the JV back in March. Having been part of the Aptiv naming activity, I can tell you, finding a new name is actually not easy. Congratulations to them for getting it done. And they're really now executing the plan of record that they have. In terms of getting driver out the vehicle here, I think it is, yes, this year, first generation launch in '22, really the -- and fully embedded system in '25. So they're -- they continue to be on track. I think the biggest -- there's a couple of really strong benefits relative to that JV, namely -- I mean there was obviously the $1.6 billion of cash. But then there was also -- which is as important, the roughly $400 million of vehicle integration and vehicle engineering work that go into that as well. And that was a critical piece because you cannot -- my belief is you cannot develop an automated driving system independent of the vehicle. So those 2 are so intertwined that you have to -- and really, at this point, you're co-developing those. And so having that vehicle partner title through JV is absolutely fantastic. Now with that, I think their mission remains very much on track, which is the JV delivers that tech into Hyundai, in this case, but can sell it to anybody else and can work with other OEMS, but Hyundai obviously was going to pay the vehicle platform of their first choice and really targeting that robotaxi and the commercial -- that commercial automated delivery market. Now what's been interesting with COVID, there's probably been a lot more acceleration of Tesla's logistics. And so that's interesting. And that same technology can actually be applied to logistics as well. It's a little bit easier than that in the sense that on the one hand, you have to figure out how to get the package to the right spot at the destination. So that's a little trickier than just letting somebody off at the curb. But you don't have to worry about ride quality, making the package feel unhappy about the ride quality. So there's also some significant simplification as well. So they have now I think a couple of different options to look at in terms of that automated delivery systems. The last comment I would make, and this is what's been great, is our strategy even when automated mobility was part of my organization inside of Aptiv, the thing we're always looking at is how can I take their advanced technology, imaging radar, localization, policy and planning, functional safety, how do I take that and apply it to my next generation of ADAS. And so that -- I'm happy to say that piece of it is moving forward as we intended. And it's a great opportunity for them to monetize now versus waiting until the robotaxi market develops fully. So there's still risk with that. To the extent that they can take technology, monetize it through Aptiv or, quite frankly, others, today, into the ADAS market, that's a tremendous advantage for them. So we're really working closely with them on those opportunities.