Aptiv PLC (APTV) Earnings Call Transcript & Summary

Good afternoon. I am Ryan Brinkman, the U.S. Autos Analyst at JPMorgan. Very happy to get going with our next presentation, which is Aptiv, and happy to have with us, from Aptiv, Glen De Vos, their Senior Vice President and Chief Technology Officer; as well as Elena Rosman, Vice President of Investor Relations. Aptiv posted their own presentation yesterday. And to recap some of that, we've got a quick video to start with. I'm going to get going with that now. [Presentation]

Great. Thanks. Getting going with the Q&A here, maybe just one place to start is, Aptiv is one of those companies that is historically made news around CES, and you did have some announcements yesterday, including 2 different press releases: one about next-generation electrical architecture and another about next-generation cost-effective ADAS systems. Love to hear just a quick recap of what you think are the most important things or messages that Aptiv had to say at CES this year.

Sure. And Ryan, it's great to be here with you and your guests again today. Last CES, we talked about smart vehicle architecture really in a holistic sense of how we saw that evolve. If you think about this CES, it's really about putting that into motion. And what we mean by that, the 2 announcements that we've made: the first was on our next-generation ADAS, which really embodies the continuation of centralization of compute, the abstraction of software from hardware, really key elements to smart vehicle architecture; the other announcement, which was really around zonal controllers, is one of the other really significant developments for vehicle architecture. And we saw a lot of traction on that in 2020 which was really breaking the car into zones, into more manageable areas of the vehicle where we can simplify the vehicle architecture, consolidate, compute and abstract software. So those are really the 2 main themes for us this year. And again, it's really about putting SVA into action.

Okay. Great. And Glen, it's always been interesting to get your perspective over the years in terms of how you see light-vehicle propulsion playing out. And I know you don't have Delphi Powertrain anymore but, at the same time, what businesses you do have, including electrical architecture, it's very important how you think internal combustion versus hybrid versus plug-in hybrid is going to play out. And maybe just a comment, too, on what happened in 2020. It seems like BEV has really taken center stage, both in the industry and in investor perception. I'd be interested to -- if you could touch on the lesser degrees of electrification as well.

Yes. 2020 was really kind of a pivotal year for electrification, we saw it really accelerate. And when you think about the OEM announcements around their platforms, the expansion of the number of electrified vehicles that they would be introducing, it really validated and really validated the acceleration of that. And for us, we saw a significant increase in opportunities in terms of the new business opportunities. And then the other thing that really was exciting is, with this move towards full electrification, you also saw a very strong move towards new architectures on the vehicle. There's a real close tie in there because when you go to BEV, it really gives you, as the OEM, an opportunity to start with a clean sheet in terms of how you're thinking about your architecture. And with that, and with the market pressure, particularly from Tesla, they're setting the bar in terms of the content that needs to go on those vehicles, we saw a dramatic acceleration of moves towards more advanced architectures on the car with what we call Smart Vehicle Architecture. And so that -- when I think -- when I reflect on 2020, that was probably one of the most significant developments. And as you mentioned, Ryan, we're really well positioned with respect to our portfolio. When you think about our high-voltage business and the growth there and the added wins that we have there, it really was a great year for us. And maybe, Elena, you can talk a little bit more about the market specifics in particular. But I would say, just reflecting on 2020, that was probably one of the most significant developments.

Yes, Glen. Yes, I mean I think from a market penetration perspective, we've certainly seen an acceleration over the last 9 months, both in terms of high-voltage vehicles for both battery electric vehicles, plug-in hybrids, we now expect high-voltage penetration to be roughly 25% by 2025. That's about 5 points higher than what we had forecasted going back about 1.5 years ago at our 2019 Investor Day. And that compares to penetration levels, again, high voltage, including battery electric, plug-in hybrid and full hybrid of about 10% today. So I think that divergence in growth between EV production versus internal combustion engine vehicles materially widened over the course of 2020.

That's very interesting to hear. Thank you. And if we could just kind of bring back that outlook and that changing outlook in terms of 2025, et cetera, in terms of what is it bereft of, what can you tell us about the revenue growth rate or content per vehicle or even margin implications of this change in mix of propulsion types?

Sure. I'll start and then, Glen, feel free to chime in. But our bookings, obviously, have continued strong on the high-voltage side. The opportunities that we quoted just a couple of years ago were roughly 15 a year. And in 2020, we quoted, I think, over 40. We have the win rate just north of 70%. Now we are very focused on where we're allocating and dedicating resources to ensure that we're positioned with the OEMs who are going to drive the volume in the future. That obviously plays to our value proposition, which, Glen, you can talk a little bit more about. But just to level set, high-voltage, our fastest-growing product line with roughly $500 million in revenues in 2020, it's expected to grow at about a 40% CAGR through 2022. And that translates into about $1 billion of revenue in that time frame, and it's margin accretive to our Signal and Power Solutions segment, so already at segment margins today and accretive by the time it scales to the roughly $1 billion mark in 2022. From a content-per-vehicle standpoint, it's roughly double the addressable market for us on low-voltage vehicles, so think about a low-voltage TAM for a mid-sized passenger vehicle of roughly $500 growing on a full battery electric vehicle or a plug-in hybrid vehicle to roughly $1,000 of content. And that includes the high-voltage wiring, the high-voltage connectors, the bus bars, and we also do some onboard charging, and that's net of any deducts as it relates to what you disconnect from an engine harness perspective.

Yes. I think what I would add, Ryan, is what's really exciting about those extended opportunities is we're really pretty early into BEV, high-voltage architectures. When you think about it, many of the OEMs are really launching, in earnest, their first-generation platforms in that space, whether that's new entrants or legacy or traditional OEMs. And as a result, what we see is a tremendous opportunity to provide value in terms of looking at those high-voltage architectures, optimizing those using advanced technologies for splicing power distribution or bus bars and alternative conductors and optimizing that. And that's been a really strong value prop for Aptiv over the last year where we've been able to come in, provide a solution as requested but then basically work with the OEM to optimize their architectures and dramatically reduce cost, 30% to 40% over what they thought they would be, which is a big part of why you're seeing that win rate that Elena referenced. As strong as it is, it really -- the stage is set for us to apply our full systems capability in that space, and that's been a real winning formula for us.

Interesting. Thank you. Maybe some questions around what you call Smart Vehicle Architecture. Last year at CES, you talked about how the increasing demand being placed on electrical architecture for light vehicles, just given all the complexification stemming from not just powertrain electrification but also safety devices, increased computing power, et cetera, how that might require kind of a complete rethink or redesign of existing systems. Would be great to get an update there in terms of what are your conversations like with automakers around this, what is the outlook for electrical architecture content per vehicle for Aptiv as a result of that trend. And great if you could comment, too, on the competitive environment in light of that trend. Smaller or less sophisticated players, more regional players, they may find it more difficult to compete in that area amidst the transition to next-gen systems. And as much as investors may appreciate that, what about the big players, too, the Yazakis and Sumitomos? Is there any reason to think that maybe Aptiv could have an advantage of even -- ahead of even some of the more established players as well?

Sure. So let me first talk about kind of what's happened over the past years since we talked last CES, really, 2 things, 2 major trends along the SVA path. And the first is that continuing centralization of compute and, along with it, the abstraction of software from hardware, so the separation of software from the underlying hardware so that developers like Aptiv or the OEMs can manage that software more as a platform. So that's continued. And as I mentioned earlier, our next-generation ADAS platform really is an extension of that theme. But I think we saw, over the course of the year, a lot of announcements from OEMs, from other suppliers, from silicon providers reinforcing that, moving towards more centralized compute, more higher performance compute, abstracted software and all of that. And I think that trend continues. It started a number of years ago, particularly with Aptiv and the Audi zFAS back in '17, that trend continues. Along with that, though, what really broke out last year was really the OEMs focusing in on breaking the car into zones or a zonal approach to the, what we call, everything around the mechatronic rim or the edge of the vehicle, so sensors, actuators, controllers that are all over the vehicle, not your infotainment, not your ADAS, not your propulsion, but rather all those other functions that are in the vehicle that make up those -- that 100 electronic control units around the car that drives such complexity to the wiring harnesses and the architecture. So what we saw last year was the OEMs looking to break the car into zones, and we refer to that as the zonal architecture. And that trend really has now solidified to the point where we see now our predevelopment work more or less completed, with the OEMs validating the fact that when I cut the car into 2, 4 or 6 zones, I can simplify the wiring and the architecture in that zone. I can then up-integrate it and consolidate the electronics, and I can simplify the software. And by doing that, I drive things like [ 22% ] reduction in wiring harness length, 25% reduction in the volume for electronics and meaningful savings that are in line with those types of reductions in that zone. So we validated that. And now what we're seeing is actually putting that into action with plans for launching those zonal controllers and those types of architectures in the '25 -- in the '24, '25 time frame, so a real acceleration move towards zonal architectures. And that's -- for us, we think that's a really important step along that path to SVA. Now I'll let Elena maybe talk [ a little about ] content implications. But what I would say for the competitive landscape, really, on the electronics, the compute and the software side, it really separates the market into partners like Aptiv that can provide full systems capability and systems integration services to our OEM customers. And then away from that, you get component providers, so people that are providing pieces of that but not the full system. And so we would look at that and say, it's Aptiv, it's the Boschs, it's the Contis that kind of fit into that category whereas others certainly moved now towards more of a component supplier. As it relates to the electrical architecture, the harnessing piece of it, there's no question that by virtue of having the full system or thinking of the vehicle holistically, that gives us a tremendous advantage in terms of optimization of that harness and really being able to bring that solution to the OEM at lower cost. And that's, as I mentioned earlier, that's one of the reasons why that 40% reduction in cost, in total cost, for the high-voltage side and optimizing that and the win rates, it really reflects that. So I think it gives us a significant advantage moving into that space, especially as we think about next-generation high-voltage architectures. And so those are, I would say, really the important points that have happened relative to SVA. Maybe, Elena, you can comment on the content implications.

Yes. And I appreciate it's still early. So for us, the way we've talked about the value for Aptiv is really along the lines of what, Glen, you mentioned. It increases our addressable content, both in hardware and in software value, and we also think in market share for the reasons that you mentioned from a competitive perspective. So I'll touch on a little bit. It also brings efficiency through more automation and improved reuse. And then lastly, I'd say, it unlocks some new functionality that we think will enable new and more accretive business models for us and, more importantly, also for our customers. That abstraction of software, I think, from the underlying hardware, it adds to our portfolio through some additional software integration and test services, plus the opportunity to sell software-related IP content and support some of the life cycle management aspects. So again, as Glen referenced, it's really, we think, a positive overall. It's going to have a bigger impact, call it, 2025 and beyond, being at that point of aggregation with some new hardware that would be in and around zone control. We have our first zone control launch in 2022. We will -- we do expect to see some additional bookings and commercial activity over the course of the next year, 1.5 years. We think that the zone control market probably grows to be a market that's $15 billion to $20 billion by 2030. And again, where we don't have significant market share in body control and ECUs, we think that can be not only content accretive with this new content but also market share accretive from that perspective. We also -- we think in terms of the engineered components content, right, that will drive higher value revenue opportunities for our Signal and Power Solutions segment. And our position in domain controller, certainly -- yes, the leading position we have in domain controllers for the active safety domain, in addition to user experience, is a great launching pad as we work on the next generation of these applications with our customers in the '24, '25 launch period.

Great. Thanks. I thought to get your take on -- there's been a great many new automakers formed in the recent past, certainly relative to history, including several of which have recently IPO-ed or gone public through mergers with SPACs or contemplating doing so in China, the U.K., of course, here in the U.S. Can you talk about what your strategy is for supplying or potentially supplying these companies? One thing they all have in common is every one of them is focused on electric powertrains, which we know is positive for you. Many have also expressed interest in autonomous technologies as well. And I'd be curious to -- I don't know, what you're at liberty to say on -- any thoughts on the potential for an Apple Car, what role Aptiv could have in that? How are you thinking about this opportunity?

Sure. Maybe I can start. With respect to the new entrants, that's been an exciting space for us because these are typically electrified platforms and really looking at the vehicle as a software-defined platform and, as such, thinking of it from day 1 in terms of more advanced architectures, which is exactly what we're trying to do with Smart Vehicle Architecture. And so they tend to line up very much with our approach in terms of how to architect the vehicle, how to distribute and allocate compute [ as well as possible ]. So from that standpoint, it's been great alignment. And I think that, combined with, what I would call, our flexible business model in terms of how we provide tech to our OEM customers -- one of the things that we do with all of our platforms is we architect in a way that allows the customer to adapt and to really develop what they want to develop, the content that they want to control and develop on top of our underlying platform. And so from that standpoint, it's been a good fit for the new entrants. And I would say it's exciting for us because it helps us kind of accelerate what we're doing with SVA. They serve as great proof points and then as well, they really were able to take those learnings and then apply it to the broader, more traditional legacy markets. And so I'm very excited about the success we've had there and the experiences that we're developing there. And maybe Elena, you can add your thoughts on that.

No. I think the other thing I would add, Glen, as we sort of mentioned earlier, right, is we have been really focused on our high-voltage pursuits with OEMs who are prioritizing EVs with high-volume platforms. So simply put, our goal is to win with the winners. And I think that those that have had a consistent electrification strategy have obviously been prioritized as they tend to launch with higher volumes, and that tends to -- they benefit, obviously, from the value proposition that Aptiv brings by optimizing the total system solution.

Great. Thanks. I wanted to ask -- we've got a lot of semiconductor companies at this conference, and some of them have been addressing today this shortage of capacity allocated toward the auto industry. I thought to ask you in particular because not only could you face indirect impact so, like, for example, the [ Escape ] is going down for a week or so here but also you buy a lot of chips yourselves for infotainment systems and other purposes. Are you seeing any direct impact?

Yes. I'll have that one off, if you don't mind. So we did talk on our Q3 earnings call about supply chain disruptions, challenges, specifically mentioned the bottlenecks in and around chips, semiconductors and electrical components in the tiers. Now obviously, we've seen several OEMs have confirmed. Other than that, Ryan, we are in a quiet period, and we plan to give a broader update on our Q4 earnings call when we give our outlook for 2021.

Really, Ryan, from a technology perspective, what that highlights, though, is something that -- what we've been talking quite a bit about over the past years. And that is, to the extent that you can architect your system such that they're somewhat agnostic to the underlying compute, so that you're effectively commoditizing that compute and you can have multiple solutions for compute, you really desensitize yourself to that overall phenomena. And that's been really a central theme. You've heard us talk about being silicon-agnostic. And really, as we move towards Smart Vehicle Architecture, one of the key tenets and one of the key benefits of abstracting software from the underlying hardware is the fact that you can drive that to more standard compute. You can then really commoditize that, which lowers cost, increases availability of supply and, in fact, desensitizes you to some of the things that we're seeing and we're hearing about today.

I've gotten a couple of questions admitted over our conference website here from investors. I'm going to ask those now. The first one is, can the Advanced Safety and User Experience business have a fundamentally different margin profile 5 or 10 years from now as it gets larger and more software-focused?

I think that's in line with what we've talked about in the Advanced Safety and User Experience segment. So we obviously had an investment in 2019 -- sorry, from Q4 2019 into 2020 as it relates to some of the heavy launch cycle for some of our new satellite architecture launches in advanced safety. So that was a roughly $95 million incremental investment from that over that annualized period. We've lapped that. And as we've talked about before, that ASUX segment is similar to Signal and Power Solutions, very well positioned to continue to expand margins off of, obviously, a reduced base coming out of 2020 in light of the pandemic and the shutdowns that occurred in the second quarter.

And another investor asks, she says, this morning, Conti mentioned that the chip guys, including NVIDIA, don't have a full software stack, and OEMs don't want to integrate. So Conti is a bit of a systems integrator. Is that something that you see persisting for decades? Or does someone bring a full system software stack to market?

No, we still think -- there -- if you think about it, at the very base of the system, and this is really on the compute side when you think about companies like NVIDIA, Qualcomm, any of those suppliers, so that's the base compute platform. And on top of that sits all the software, the middleware, the application code in all of the vehicle interfaces, all of the software that has to interface and operate in conjunction with the vehicle. And then you have to put it all into the vehicle and validate that. When you think about that amount of engineering and development that goes into launching new systems, there's roles to be played by everybody in that. Now the systems integration role, which is part of the role that we do as well, is really bringing that software together, getting into the controller, the high-performance compute and then working with the OEMs. And I do think that, in the -- for the foreseeable future, there's a strong role for the Contis, for the Aptivs to play in that space because of the technical expertise and the experience that, that requires and the resources, quite frankly, to do that on a global scale. It's not something OEMs do today. It's not something silicon providers are really positioned to do. And so that's part of the need that we fill. And that won't be going away. That will be ahead of us for the foreseeable future. So -- and as Elena was mentioning, that systems integration and the engineering services associated with it, that's done well. That's a value that we really provide to the OEMs.

Great. Next, I'd like to check in with regards to the Motional JV with Hyundai. What is the latest there in terms of discussions with OEMs, if not awards? How would you say the relationship is progressing with Hyundai? And how are you thinking about time to commercialization of Level 4, Level 5 autonomous technology or driver policy software? Do you have any updated view on the time line for the rollout of robotaxis?

Yes. The -- so first of all, the -- back in March, they formed the JV and then announced it officially Motional in October. That integration has gone really well as we expected. Hyundai bringing the vehicle systems and the vehicle engineering piece of it, Motional bringing really all the technology that comes into the car to enable automated driving. So that integration has gone very well. They continue on to their path. They started driverless testing in 2020. I think you may have seen some of the announcements of Nevada giving them the permission to do that now on public roads, so that will be starting shortly. They've announced a number of continued expansion of their current engagement with Lyft in terms of additional cities in which to launch pilot service as well as with Via. And so that piece of it, which is commercializing the tech through that vehicle, in this case, what will be a Hyundai vehicle, in -- beginning in the '22 time frame and really launching in scale in '25, that continues per the original plan. So from that standpoint, I couldn't be more excited for them. They're really delivering on the plan that they laid out when they formed the JV.

Great. I think one technology that's often seen as key to facilitating truly autonomous driving is LiDAR, which has gained a lot of awareness in the investment community over the past year as some of the LiDAR companies have gone public. Often, the cost, though, is cited as a gating factor. Where do you think we are in terms of progressing down along that cost curve in order for it to be economically feasible? Maybe you could update us, too, with regards to your work with Innoviz, LeddarTech and Quanergy, with whom you've partnered. They seem to be in the headlines, maybe still a little bit less than Velodyne and Luminar. Is that just maybe because they're not yet public? How would you rate their technological or commercial progress relative to some of the others?

Yes. I think there's -- maybe I'll start with just in terms of LiDAR. We still see LiDAR as being absolutely critical for Level 4. For Level 3, it's not so black and white. There are Level 3 lower speed applications where we think that you can actually deliver Level 3 performance with the combination of radar and infused vision. Whereas when you get to higher speed at Level 3, we think you really need LiDAR for far object detection and detecting road and the debris. So that -- the data, I guess, approach really hasn't changed yet. And now with regard to some of the more recent publicity around LiDAR, we are seeing, especially as it relates to Level 4 LiDAR suppliers, like you saw the announcement with Motional and Velodyne, we see the announcements with Mobileye and Luminar, so that's got a lot more attention. Again, that's on the Level 4 side around the automated mobility side. As it relates to Level 3, really, were the LeddarTechs, the Innoviz play. That's more of a solid state, long term, lower cost. Now that's the issue. How do you get to not just sub-$1,000 a sensor but sub-$200 a sensor? That's really the work that has to be done to bring it into that Level 3 ADAS application on a volume basis. And that's still a ways out.

Great. It does look like we're out of time. So Glen and Elena, we really appreciate it. Thanks for joining us again this year.

Great to be here, Ryan.

Thanks, Ryan.

Thanks, everyone.

Take care.