Aptiv PLC (APTV) Earnings Call Transcript & Summary

Welcome back, everyone. We're really happy to now welcome Aptiv, and Glen De Vos, Senior VP and CTO since March 2017. A scholar and a gentleman always, and long-time favorite at these mobility forms in the past. And of course, accompanied by the one and only, Elena Rosman, Head of HR. So a little bit of background. Glen's charged with leading active innovation, strategies and development as well as global engineering. He's also the President of Aptiv's Mobility and Services Group. We have thanked Glen many times over the years for teaching a non-car guy like myself, the ins and outs of auto tech in basic layman's terms. Now when I just look at overall Aptiv, for those who are a little bit new to the story, Aptiv is one of the only Tier 1 suppliers who are in both schools of autonomous thought. Taking an evolutionary approach to autonomous robotaxis through their motional JV with Honda, Hyundai, and while also a leading player in production car, ADAS. Aptiv's ADAS revenue today is around $1.3 billion to $1.4 billion, and we forecast it to be one of the fastest growers to $4 billion-plus ADAS, plus level 3, plus motional rev by 2025, on the back of their leading position as mobilized main Tier 1 and increasing content per vehicle in Level 2+. Aptiv's ability to remain on the leading edge in both fields is backed by a very deep mobility bench that they've developed over the years, which is course led by our guests today, Glen, as well as Carl, the CEO of Motional, who has been a mobility form guests in the past and comes from acquisition of nuTonomy in years past. So first, welcome, Glen, back. And with that, I'll pass it over to you for just a couple of introductory comments.

Yes. Thanks, Chris, and it's great to be back with you virtually this year to talk about the latest developments. I think there will be some consistent themes with what we've talked about before in terms of safe, green and connected and how that relates to ADAS, electrification and data. But a lot has happened since we really talked last, and it's really been an exciting time for us. So looking forward to the discussions and the Q&A.

Excellent. So why don't we start at the base, again, with ADAS. And we've been talking a lot today about the pace of Level 2+ adoption, because we really see it as one of the most exciting areas within advanced ADAS. In the past, you've spoken about very high retake rates, 90%-plus, where customers, basically, were demanding progressively better features and are not willing to revert once they've had these features in the car. So I guess my first question, where are you seeing ADAS take rates globally today? And then the second question, we'd love to hear about what you see as the future value-add of the industry, particularly from a Tier 1 perspective, given Aptiv's lead as it relates to more advanced levels of ADAS, such as Level 2++?

Yes. Sure. I'll start out, and Elena, obviously, feel free to chime in with any additional comments. But…

Sure.

Relative to take rates, what we talked about before, that 90% is really, in fact, stronger than that. And what we're finding is as the end consumer becomes more educated about active safety features, as those features become better overall and easier to use, that those rebuy rates are just strengthening. And on top of that, consumers are moving up the content curve going from level -- basically entry-level through 1 to 2. And so that trend we see continuing. And for all the reasons we talked about before, it's -- first of all, they're very important features from a safety standpoint. They help avoid accidents and fatalities. But also they're a great margin option and a differentiator for OEM. So we're really seeing a strong push from the OEM side as well. And then as I mentioned, the consumer awareness. Once you've been in a vehicle, or you've driven a vehicle with Aptiv safety features, you really don't want to step back away from that. And so those 3 things combined are leading to those really significant rebuy rates. And then, broadly speaking, within the industry, as I mentioned, we're continuing to see this move up the -- basically, the active safety curve. And as we've talked, we always see active safety on this continuum, ultimately leading to automated mobility. But for now, really focusing on Levels 1 and 2, we see a tremendous amount of value being played out there. And so for us, our focus has been with our satellite architecture to really be able to provide a cost-effective solution that scales up through Level 2 and 2+ to our OEM customers, and allow really that mission of democratizing, if you will, active safety to make it less and less expensive. And so for us, kind of thinking about your question around what value do we add as a Tier 1? The first is to be able to provide a scalable architecture. That's what we call our satellite architecture. And in essence, we're right in the middle now of a whole series of launches. There's about 5 major launches for us within the next, really, 12 months. And that's that first generation of scalable architecture solution, where we've centralized the compute. We've simplified the sensors so that we're able to achieve a lower cost, simpler deployment for the OEM and then a really unified software package that they can maintain over time. And it's through that, really through that satellite architecture approach that we're able to solve the Level 1 applications, and then scaling that up to Level 2 and 2+. And for Aptiv to go maybe into a little bit of specifics around what that means, what we provide, it really depends on the OEM. And we have to have the flexibility in our approach so that OEMs can provide features that sit on top. They can use specific sensors that they want to use, whether that's LiDAR or different cameras or whatever. And it really -- our approach adapts to their specific needs very easily without having to reengineer or develop it as a one-off active safety solution. And so it's that -- from a Tier 1 role, as we think about it, what we do is we provide that flexible open platform that they can build on top of. And then we provide the -- basically the systems integration and validation of those systems. So all the services attached to that. So making sure that the system is working properly, making sure that the features are performing properly and that everything is validated and ready to go for launch. And so the period we're in right now with these major launches that have started earlier this year in Asia and moving out throughout the course of next year, those are the launches that have been in development the last 2, 3 years. Really an exciting time for us. But now it means, okay, we have to be planning for that next generation of product in the '24, '25 time frame. And so that's where we're really focused in on. How do we build on that strength of our incumbency with that customer group and that scale? And then how do we continue to drive value? So add additional features, improve the overall future performance, but doing it all at a much lower cost. And so that's where the focus is for Aptiv relative to active safety. That's where our focus is now. It's really completing those launches, getting those launches underway, and then being able to follow those up with that next generation of platform, our Gen 2 platform, that will be coming out in the '24, '25 time frame. Elena, I don't know if you have any other comments you wanted to add on top?

No. I think just building on the question, Chris, that you asked relative to -- we talked about rebuy rates on a take rate basis. I mean you look at active safety penetration today, it's somewhere, globally, in the 40% to 45% range is our best estimate. Obviously, that's based on information that OEMs provide into various reporting bodies. But it's where we're seeing now going forward over the next, call it, 5-year horizon, the fastest area of growth within active safety is really coming now from the growth in Level 2 and Level 2+. And so we think that these 8 -- or sorry, the $8 billion of lifetime bookings we have with these 5 OEMs are going to really help to see the market with 10 million vehicles on this Gen 1 platform, which gives us, I think, a very strong position going into, call it, the next round of Gen 2, which Glen referenced starting in 2024 or 2025.

Elena and Glen, that's perfect because that was where my second question was -- or the follow-up question was going to go. I mean you laid out some numbers. We hosted a teaching last year to follow on some of your ADAS penetration goals. With many people seeing the industry grow, let's call it, production volumes aside, at a something like a 20% to 25% CAGR over the next 5 years, I guess one of the questions that people will have is, given everything that's happened with COVID. I mean if we could sort of encapsulate the last 12 months, are you guys both encouraged about what we're hearing from the OEMs about this idea of maybe going quicker or more advanced systems on the Level 2+ side? Do you think we're tracking well to kind of that industry's previous really positive view of, let's call it, a 25% CAGR over the next couple of years?

Yes. I'll just -- I'll start. I think we continue to see significant demand, and Glen referenced that earlier. And it's something that not only helps OEMs sell vehicles, consumers have demonstrated a willingness to pay for these features. And quite frankly, right, they don't want any less active safety on their next vehicle purchase than they had on their previous. In fact, they oftentimes want more. So we're seeing that playing out, and it's obviously incremental margins for OEMs as well, which has helped to drive more of this expansion and proliferation across vehicle platforms.

Yes. The one item I would add, Chris, is if you think about the COVID impact, obviously, as an OEM, they have to be very thoughtful about their resources and capital investments and where they put their money, basically. And L3, when you think about those systems, those are more complex, they're more expensive to develop as well as the impact on the vehicle cost. And so what makes a lot of sense is when you think about what can I do with an L2 service? How can I continue to enhance the functionality of the Cell 2+, Cell 2++, but not necessarily incurring the additional costs that are associated with an L3, or driver out of the loop system. And so there's a lot of room to explore there. And what we're seeing is really strong interest from the OEMs to build on top of what we've already done basically, take advantage of that investment, enhance those systems, add additional features that they think will be exciting for their end consumer. And then -- but do so in a very cost-effective way that allows them to basically avoid having to make massive new investments, but still offer fresh product and fresh features. And so this, again, is -- it's one of the benefits of incumbency from the standpoint of having that Gen 1 platform, we can then just continue to layer on enhancements to that with these L2+ systems. And I think we're going to see additional acceleration there and additional focus there for at least in the near term. I think OEMs, in general, are still very committed to level 3. They see that as a, I think, a really -- a valuable set of features that they want to offer, but in terms of maybe a little bit on a longer-term basis. And near term, there's a lot more runway that they can get out of an L2, L2++ system that we're helping them explore.

Glen, that's a perfect question. And I know the industry is starting to hate a little bit of the wordsmith around this Level 2++ versus Level 3. But I guess it is important because it's the idea of liability to the OEM. And also there's this content for vehicle with redundancies. Tier 1s have talked about it could be 10x, right, for Level 3 because of redundancy versus maybe 3 to 4x for Level 2+. At one point, I think you guys talked about $500 million revenue opportunity, which is, obviously, a teeny amount of vehicles from Level 3 in 2025. Do you -- I mean from the comments you just made, do you think that's still sort of the case that we can see Level 3 on the road? Obviously, if we don't, it would be replaced with larger amounts of units on Level 2++. But if you could just kind of clarify that you still see that commitment for Level 3 from a handful of OEMs?

Yes. I would say, from my perspective -- I'll let Elena speak to the numbers. But I would tell you, there's definitely the commitment there from a number of OEMs. We would still view, again, thinking about the levels as kind of that journey ultimately to automated driving and, ultimately, to the most safe car management. And so Level 3 is still out there as a priority. And I think it's just a matter of timing. And if you think about where we are today in '20, a number of systems were originally planned for like '21 time frame, and that's moved around a little bit. But you are starting to see some launch announcements and some plans for the '21 time frame, '22 time frame. And I think that will continue. I think, ultimately, a Level 3 vehicle will be a really powerful option for the future for the OEMs to offer in a differentiating feature. So I think you're still seeing that focus there. Now right now, it's really more associated with the premium groups or with premium platforms, because the costs associated with those systems, both for development of non-cost, means you have to have a vehicle that has the price tag that can absorb that. And so you are seeing that still targeted very much in the premium markets. But ultimately, as our industry does, what comes in the premium areas, it eventually works its way down. And the rate at which it does that is a function of cost. And so it will start at the premiums. I think you'll see that before the '25 time frame, certainly. And then you'll see it accelerating down through the remaining segments, but over time. But right now, with the macro environment that we're in, it -- Level 2+ gives them a near-term value, which we're happy to be a part of.

And Glen, I would just add that even pre-COVID, we -- the market assumptions for penetration on Level 3 systems, even in 2025, is very low, right? So as things have been pushed out 1 year, 1.5 years, it really hasn't moved the needle in terms of how big the market is going to be in 2025.

Not dramatically. That's right.

Right. That makes sense. And then just for everyone listening, a reminder, you can ask a question in the question box there. But speaking about these more advanced architectures, maybe a good time to segue into the most advanced architecture offering, which is Aptiv's SVA, or their smart vehicle architecture, where Aptiv is trying to condense the ECUs in the car by sixfold. Glen, can you give us a little bit of an update on SVA progress during COVID?

Sure. Yes. This is one of the bright spots because ultimately, where SVA originated, at least within Aptiv, was when we were confronted with the complexities of a Level 4 system, and we said, "Oh, my gosh, you just can't solve that with the existing architectural approach. You have to consolidate, you have to do these things." As time went on, what we've realized though is there were other factors that, like wiring harness complexity, software complexity, just reuse of technology, and there are a number of other factors that really drove us to conclude SVA. While certainly, the pain points for the most intensive, the premium of the high-contented vehicle level, it really applies to all vehicle segments because it's about driving down costs and reducing complexity and enabling a lot of the things that we've seen Tesla do with respect to the software on the vehicle and centralization of compute. So it's been interesting, over the past months, how much we've heard from OEMs talking about vehicle architecture. I mean it really started picking up steam at CES. And then since that, a number of announcements and a number of disclosures around, hey, moving in this direction and trying to simplify the architecture, trying to enable better management of the software in the vehicle. And so for us, we see that as kind of an industry validation that, yes, this is the right direction. Now specifically, we've had a number of advanced projects with engineers -- with the OEMs, rather. And the purpose of those programs was to essentially validate the value prop. The hypothesis that, yes, this does save money. Yes, it's simpler and it can work. So when you consolidate all these things, whether it's a zonal controller or a central controller compute, it actually technically is feasible. And so the good news here is as we've completed those, or about to complete a number of those, that's -- our work with the OEMs has validated the general hypothesis that by going to a zonal architecture, or by going to more and higher levels of centralized compute, you save money, you reduce complexity on both the wiring harness aside, the electrical architecture side as well as the compute and the controller side. So having validated that, we're really now at the point with those same OEMs that are now pivoting towards targeting production program implementation. And the exciting piece there, it isn't in all cases it's just looking at a premium vehicle. It's really looking at how do we move to an architecture that can scale across all of those vehicles? So from -- yes, certainly, for the premiums, but also down to the value segments. The value segment vehicles where the volume really sits. And so what we're seeing is not just interest accelerating here, now moving into the point where we're ready to start targeting production applications. So for us, that's the sourcing phase. And then doing so across a broad segment -- a broad class of vehicle segments. So it's in volume. It's also in premium. It's across the board. And for us, again, just kind of stepping back, it helps make sure that we, one, we kind of validate the approach. And then two, what's important for Aptiv is that we really take advantage of the opportunity now and leverage our strength on the wiring harness side, the electrical architecture side as well as our compute and systems architecture side. And so that's kind of the exciting part where we are today. And again, like as I mentioned, you're really starting to hear the OEM community talk more about this, the change that they need to make. And this is one of these areas where there's a real synergy with the architecture and then the move towards electrification, because as more and more electrified platforms get announced, that's the real breakpoint for the OEM to put in a new architecture. And so you're getting a nice complementary or a tailwind there, if you will, from the broader trends towards BEV as well.