Aptiv PLC (APTV) Earnings Call Transcript & Summary

Okay. Great. Thanks, everybody. I guess we're going to be kicking this whole tech conference off here, but starting with the strongest management team in the whole lineup, so all downhill from here. We've got Joe Massaro, CFO of Aptiv; along with Elena Rosman. A lot of folks who are listening in are probably familiar with the Aptiv story. Long-tenured and very well respected company and management team today. So only 25 minutes here, so I'll jump right in.

There's one question actually, Joe, that I've been wanting to talk to you about since I last saw you, which was a couple of years ago, we were doing these [ things ] in person. We were in Singapore, and you said something to me that has sort of stuck with me ever since, and it was that automakers in this current environment are sort of struggling to determine what they define as hope, right? What you want to do yourself versus what you want others to do. In the 20th century, they understood how to answer that question. They understood what it was that they did. But now with things changing, this -- these mega trends that you're always talking about, it seems like that calculus is changing the [indiscernible] thing. I wanted to know if you still think that they're struggling with that to the same degree that they were a couple of years ago. Yes, that's -- so that's the first question. I'm interested in hearing whether your thoughts of lockdown are [indiscernible].

Yes, that's an interesting place to start, actually, because it does drive, I think, a lot of the opportunities for us. And at this point, struggling may be too strong a word. I would say they're constantly evaluating, right? And there's so much change going on in the industry that you're right, 10 years ago, if you were a performance OE out of Germany, it was horsepower, it was performance, you knew what to focus on, you knew what your consumers wanted. Fast forward and you've got Tesla out there being a very capable disruptor in the space on a lot of fronts, not just on electrification, but also on software and technology in the vehicle. And I think our customers are evaluating and maybe working hard to evaluate, maybe that's the sort of the struggle working. There's a lot of effort being put to how best to determine where they play and what they should focus on. And I think it remains the case that, at least from our perspective, they try to focus on what they view as important to the brand, their individual brand. How to maintain, how to continue to improve upon that brand really by platform. And there's been a couple of big developments probably since we talked in Singapore. One, obviously, electrification. Electrification has happened quickly in the industry. It's going -- it's a trend that we've talked about. OEs really globally now really rounded the corner on having a meaningful percent of their vehicle production fully electrified by 2030, certainly by 2035. And that's really forced the industry to take another good look at what is best done where. What are the Tier 1s really good at, what are the OEs good at, what's important to the vehicle brand. And you've seen some of those decisions may play out already, right, where, clearly, on things like electrical architecture, high-voltage systems that connect effectively the power plant to the motors, with stops along the way for the electrified powertrain and things like inverter converters, that seems to be clearly with the tiers. As you -- as it relates to batteries and motors, you've seen a lot of OEs take a either a very direct interest in that or a strong indirect, in partnerships, joint ventures, those types of things. So that's really how we've seen it play out over the last couple of years with electrification. The other one that I think is very important and will continue to be important for the long term is really software. And how best to leverage the OE tier structure to get the best software into vehicles the most quickly. And you've seen a lot of OEs make large investments, large commitments to in-house software organizations. That's ultimately important because the OE is the one that owns the entire software architecture within a vehicle, right? Your tiers can provide -- like us, provide very complex, very sophisticated systems like a Level 2+ active safety system and such. But really that software comes all together only in one place, in the final vehicle. And the OEs understanding that and having really good capabilities and software actually allow you to go faster with things like large Level 2 systems, things like OTA, continue to put more software, more tech into the cockpit. So -- that's really where you see it sort of balancing out. I still think the opportunities, and you've heard Kevin talk about it as recently as our last earnings call, the opportunities for Aptiv as well as other very tech savvy Tier 1s are significant. Even in this environment, even where you are, maybe splitting the pie up a little bit differently than you did from an internal combustion vehicle perspective 10 years ago. But I think it's a constant work stream is probably the better way to -- as I think a couple of years further along the road, it's probably just a continuous work stream that the OEs and ourselves go through, to understand where best to do things.

Yes. One of the things, too, that I'm curious about, and this is also -- this has been an ongoing discussion, the need for the likelihood of consolidation in the automotive industry is a topic that people have talked about a lot for a long time, even prior to all this disruption. But the thinking is that -- I can't remember the clause, safe, green and connected, right? So these basically themes that are converging and forcing the automakers to rethink their sort of place in the world. Do you think that ends up driving consolidation in a meaningful sense, right? Does your Rolodex of customers get smaller as some of these maybe less capable companies that don't have the R&D firepower or the human capital to develop their own in-house software, sort of, fall by the wayside? Is that something that you think is realistic? Or is it just sort of a fun academic thing to talk about in settings like this, but not something that will actually happen?

Yes. No, listen, I think it's probably a little bit of both, right? You had a couple of comments there. One, I actually think it's a broad consolidation would be less impactful to Aptiv in some ways because we've actually, to some extent, already consolidated, really, amongst the sort of the top 20 global OEs, the tech savvy OEs, right? And that's just driven by the nature of our content, right? If you look at what we make, if you look at what we're really good at, we tend to be on the leading edge of technology deployment, technology implementation of the industry, which pushes us to the more sophisticated OEs. And you could see you obviously [indiscernible] formed within the past year, right, you could see some consolidation within that space over time. Areas like China, for instance, where by some towns, they're still north of 90 or 100 OEs, you would expect much like the automotive markets matured in other regions over the past 100 years, you will see some consolidation there. You'll see some OEs no longer be. And I think part of that is, just to your point, the cost of developing new technology. I also think there within China, I do think that's -- at least in the past, has been articulated as part of the plan. Fewer OEs, but their broader economic plan, poor OEs and larger OEs that are capable of competing on a global scale from an export perspective.

Okay. So maybe one last question here on the OE landscape, and then we can talk a little bit more about Aptiv-specific stuff. [Operator Instructions] But -- so as you divide, you say maybe you've consolidated down to the 20 most capable, technologically forward thinking, even within that, presumably, there are ones that are more versus less, people who are relying on you more versus less. And so philosophically, the question that I'm wondering is, within that group of 20, do you focus on the companies that need the most help, and as a result, have the opportunity to maximize own content per vehicle because they're leaning on Aptiv more? Or do you root more, [ like for instance ] some trader companies, root more for the ones that are more self-reliant as it relates to [ software ]? I agree with everything you're saying on the electrical architecture, cabling and things like that. You're not going to do that stuff in-house but where it comes to delineating between what Aptiv does and what the OE does, especially on software side, do you root for the ones who need Aptiv more, or do you root for the ones who need Aptiv less?

No, listen, I think amongst our customers, the relationships are at a point where we derive benefit across the 20. And 20, we've actually got active safety content with about 20 OEs at this point or will have by the end of the year. And those relationships are similar in that we -- they really depend upon our overall skills, our overall know-how and things like electrification, things like active safety. How we often engage with the customers is different, right? And some customers do require more from their suppliers, more from Aptiv, from a full systems capability or maybe more from an advanced engineering development capability. Those are great customers to work with, right? For us, it becomes more of an economic question, what we're doing with our customer doesn't make economic sense for them and us. Are we bringing a really good value proposition to both, and depending -- within that customer set, we're often able to find that right balance, right? And if you had a customer that was very focused on certain -- developing certain parts of their active safety system themselves, which we have, the workload there, the types of things we do for them are a little bit different. We tend to be on the systems integration side. We'll still bring really strong perception, vision, radar capabilities to that discussion because, much like you don't have an OE vertically integrating to do their own electrical architecture systems, they're not trying to develop their own radar algorithms, right? They're not trying to do their own sensor fusion algorithms. They're at a bit of a higher level, vehicle-wide architecture, or a particular application that they feel is important to the brand. And what's important is if somebody wants to develop their own highway pilot system because they feel it's important to the brand, our role there becomes how do we make it easy for that customer to leverage our Level 2 active safety system to do some of the work of the highway pilot system they want. So the discussions become a little bit different, but they're really built around that same foundation of our strong technical capabilities and things like electrification, active safety software and how best to integrate and combine those with what the customer wants to do themselves.

Okay. Great. So definitely want to touch a little bit on Smart Vehicle Architecture. A lot of folks who are dialed in probably are familiar with it, but maybe some aren't. So maybe just a quick elevator pitch, what is SVA? And then some follow-up questions on that.

Sure. Sure. Let me start, and Elena can be very helpful here too, as we get into some of the details. So the elevator pitch on Smart Vehicle Architecture, Simple way to think about it, there's a lot of precedence in other industries around how to both simplify the network. Think of it as a physical network, a network that delivers power and signal. How to simplify it, while at the same time, increasing its capabilities and increasing its robustness, right? So a vehicle today, a twin internal combustion vehicle today, will have upwards of 100 small compute platforms in there, a separate compute platform for chassis control, a separate compute platform for engine control. They tend to be networked together -- I won't say not in a thoughtful way because the architectures aren't very thoughtful, but they're very complex and it tended to be -- the architectures today always tended to be developed in an additive way, right? You put your first compute platform in a vehicle in 1985, that had an architecture. Then you go from 1 to 100 and you've sort of accumulated these architectures on top of each other. They don't provide for a lot of redundancy. It does cause a lot of mass in a vehicle, which obviously is when you -- particularly with EVs, you're trying to lightweight vehicles, having that level of mass is not ideal. And really what SVA is, is a way to take those 100 compute platforms, bring them down into 2 or 3 larger computes within a vehicle and then build a more robust network, whether it's a zonal architecture or other form of architecture, where there are devices that are equivalent to routers in an enterprise network, where you've taken copper out of the vehicle, so you've helped reduce mass. You've replaced it with other types of conduit, whether it's ribbon cable, flex circuitry, that allow for a far better signal performance within a vehicle, because as these systems become more sophisticated, particularly if you think about Level 3 driving or Level 4, Level 5 automation, the resiliency and redundancy around signals going between the vehicles, control systems, become all that more important. And we, for a couple of years, have worked hard to develop our view of Smart Vehicle Architecture with a number of our customers, and Elena can touch upon those development agreements we have in place. But really how to think ahead so that the vehicles of 2025, 2026 and beyond, our architecture in a more optimized way. Quite honestly, the electrification, the rapid adoption of electrified vehicles has actually put more pressure to get there, because lightweighting becomes more important, electric vehicles tend to come with high levels of active safety, high levels of technology, and it's really sort of push the industry along that curve even faster. Elena, do you want to touch on some of the development agreements?

Yes, happy to. Overall, we have seen increased customer interest in SVA. And we started the year with just, I think, 4 Smart Vehicle Architecture advanced development programs. That's now expanded over the course of this year to 9. So we're in discussions with a few other OEMs as well about additional advanced development program opportunities. And in some cases, we have customers, like the case of Great Wall, who bypass the advanced development program and went straight to a commercial award. So the mix of advanced development programs really ranges between the full architecture optimization opportunities, and we can think about that electrification teach in that we did in June that encompasses all of our electrical distribution systems, connection systems, cable management teams that are really about re-architecting the vehicle in a much more optimized fashion. While at the same time, deploying into some of our other advanced development programs are focused on the re-architecting on the compute side as well. So Joe mentioned, zone control and those dynamic routers in addition to further up integration of compute into central vehicle controllers. So I think it's really important as all of these advanced development programs ultimately should translate into real commercial opportunities for us over the coming quarters.

Is that 9 different agreements with 9 different companies? Or is it a...

It's -- yes. It's a handful of different OEMs and there are 9 different development programs. So they may be focused -- one may be focused on zone control, while another is focused on complete architecture optimization.

Okay. So this is one of the -- obviously, there's maybe 2 follow-up questions I want to talk about with regard to SVA. I think generally speaking, qualitatively, most people would agree this sort of Franken-car approach where you start with an AVs level of compute and then you start packing things on. Clearly, it's heavy, it's cumbersome it's dumb. People agree like we have to modernize it. I don't think most people would push back on that. But -- looking forward, as you mentioned, 2024, '25, '26, when these things start coming out. Question number 1 is, presumably, this would have a nice financial impact for Aptiv, right? This would be a top of their tailwind. Historically, you guys have generally outgrown production, the global automotive production by [indiscernible]. It seems like -- and obviously, you don't have to put anything that you're not comfortable saying, but it seems like once this wave of smart vehicle architecture hits the market, you should get a boost in terms of growth over market. That's question number one. And I'll just shut up and let you comment on whether you think that's a reasonable way to think about things several years out or not.

Yes. No, listen, I think a couple of thoughts there that I think are really relevant to growth over market. One, just our philosophy has been to communicate a -- an expected growth over market range for multiple years, right? In 2019, we put out 6% to 8% over vehicle production for what we talked about as a multiyear period, call it, 3, 4 years. And we've achieved that. We've actually been at the higher end of that range. This year, we expect to be closer to 10%, just given the uptick in electrification of the strong -- really the strong vehicle mix we're seeing this year as automakers really tend to go for the trucks, the SUVs, the more contented vehicles as they're working through the chip shortage. We absolutely believe that 6% to 8% will continue over a long period of time. It's possible it goes higher. I'm often asked 6 months out, you're growing faster, what would it be? It would be around electrification, may be around quicker take in active safety. And then certainly, as you get beyond the next couple of years into 2025, we'd expect to continue to outgrow the market. We think SVA's importance -- is going to be an important part of that. Exact percentages are obviously hard to call at this point, but very comfortable with that 6 -- long-term 6% to 8% outgrowth so -- and part of what we try to do is to make sure there's a lot of other things that happened in this industry, right? Platforms models go away. We had -- a couple of years ago, we had a couple of large -- we had Chrysler at a time discontinue effectively all passenger cars in North America, but we're sort of able to grow through that. So we try to provide a range there, which takes into account all the other things that happen in the industry as well. But I think one of the more important longer-term points, and we don't often talk about this, but I think it's very relevant to the outgrowth story for Aptiv. We've worked very hard over the past 5 or 6 years from a product line and a portfolio perspective to really minimize our decremental content, right? And by that, I mean content that is all these technology waves coming into the industry, some tech is falling off, right? Some part of what's in a vehicle today won't be there tomorrow or a year from now or 3 years from now. And as part of our product road map, we've tried to make sure that we've steered away from those or proactively address those. So -- as you look at electrification, we have a massive content opportunity from a growth perspective over the next couple of years with electrification. Our decremental content from moving from a internal combustion engine to a battery electric vehicle is immaterial, it's less than $200 of wiring that connects an inch into the rest of the vehicle from an electrical perspective. If you think about SVA and all of this controller consolidation, we don't make small chassis controllers, suspension controllers, engine controllers, right? We tend to make -- our focus on compute tends to be around large domain controllers, big boxes for infotainment, big boxes for active safety. And those big boxes are the ones that are going to continue to get bigger and absorb all of the smaller boxes, right? So part of the confidence we get from a growth-over-market perspective is we're not in a situation where we've got a great tailwind on several product lines, but are fighting a headwind on a couple of others, right? We really do have an opportunity here to continue to outgrow the market with very minimum decremental content.

Yes, maybe a little bit of inside baseball here on my own coverage list. But I've done -- if you were to look at how my coverage looked 5, 7, 8, 10 years ago and look at how it looks now, we pulled decremental -- or decremental content, I guess, from our coverage list as well, but there's a reason that Aptiv is still on there. So maybe one last question. I'm sure you thought you were going to get out of here without talking about the chip, but you won't. So in the 2 minutes that we have left, if we're moving toward Smart Vehicle Architecture where, as you mentioned, everything is consolidated around big boxes, presumably, that means there are fewer chips right, per car. The chips themselves might have a lot more firepower. But if you put yourself in the shoes of a semiconductor company right now where you're selling into vehicles that are just swimming in semiconductors because of all this redundancy that you're -- that you had mentioned, but you know that 3, 5, 10 years down the line, you're moving toward an industry with fewer chips per car. Does it make sense for chip companies to be adding capacity now?

Listen, I think that's a complicated question on a couple of levels. One, SVA and those types of architectures are multiple years out, right? So there's going to be a market that's around for a while that needs to be surfaced -- serviced. I really think the better question is what or how -- and we're working very hard to do this, both with customers as well as our semiconductors Tier 2, Tier 3 suppliers, is how do we make sure the next generation of auto tech and certainly, the generation of auto tech after them, the next, next generation of auto tech starts to take advantage and utilize the newer technology in semiconductors, right? How do we get down from a size perspective? How do we make sure that automotive tech is within the mainstream of where semiconductor technology is going? So we should be going to where the capacity is being put in place, right? How do we leverage investments going in, whether it's 7-nanometer or whatever the right -- whatever the right tech is in the future, wherever that industry is going to invest, how do we make sure things like SVA are there and not relying on some of these legacy ASICs that have been around for years? And for understandable reasons, the semiconductor folks have consolidated manufacturing of these parts to fewer facilities or a single geography or have stopped investing capacity for larger wafer sizes because they are legacy basics that aren't going to have strong growth in the future, right? So I think the better approach for the industry -- and again, it's something that Glen De Vos, our CTO, has been working on, actually even before the chip prices just given some of the demands on that are going to be placed on these chips in the future, but certainly now with much more focus. How do we make sure we get on that sort of mainstream bus as it is relative to where semiconductors are going to be and avoid this type of constraint issue going forward. And that will take some time. But again, I think all 3 industries, our customers, ourselves and the semis have time to think through this and work through this and get there.

Okay. Perfect. We will leave it there. Joe, Elena, I know you've got a bunch of meetings here that you want to get to. I don't want to jam anything up. So I will cut you loose. But thank you very much to Joe and Elena from Aptiv. And if anybody has any questions, I'm sure, Joe, Elena and myself will be available for taking any Q&A you may have. Okay. Thanks, guys.

All right.

Thanks, Alex.

Thanks for having us. Take care, folks.

Bye-bye.