Magna International Inc. (MG) Earnings Call Transcript & Summary

Okay. We're getting towards the home stretch here, 52 companies. There's only 4 left. Thanks for helping hit us home with a big one, Magna International. I'm Ryan Brinkman, U.S. automotive equity research analyst at JPMorgan. Very happy to have with us Pat McCann, Executive Vice President and Chief Financial Officer; as well as Louis Tonelli, Vice President of Investor Relations. Pat, I don't know if you have any opening remarks or you just willing to be fired upon with questions?

Give it to me. Louis has taken them all today.

We're asking each of the companies at the conference to comment on some broad industry themes. And the first one is one of the biggest changes that's been taking place in the industry, which is the significant reset of expectations with regard to battery electric vehicles, right? So for so long, we just keep chasing the forecast up. It felt like it could only go in one direction. More recently, though, there's been a big reversal. And at the start of the year, S&P Global Mobility was looking for a 32% increase in 2024 battery production. And I looked at it just a couple of weeks ago, they were looking for 14%. They came out with new forecast. Now they're looking for 10%. So what do you think accounts for this, just really significant reset and expectations? Has the slower growth near term caused you to think any differently about the medium or long term? And I think on your earnings call, you did give some indication about 2026, we'll call that medium term. So yes, maybe give that -- complete the thought with the long term? And what do you think the ultimate implications are for your company?

Yes, I think -- and Luis jump in. I think right now we're relative to where we expected, it's -- we're really seeing a slowdown. We're seeing the same data you're seeing, but it's really focused in North America. So if we think about China, I would say it's relatively on track from where we expected even going back a few years. Europe, it's off a couple of points, not significantly, but the real gap is in North America, where we're seeing these significant declines, whether it's -- we're seeing from program delays, lower volumes straight out to cancellations in our world. And I think it's a combination of a bunch. Obviously, affordability is an issue and range anxiety is the second, and then you get into infrastructure and whatnot. All that being said, there's a lot of negativity right now, but EVs are coming. We're still seeing growth on a year-over-year basis, you're saying positive 10%. People would be excited for a regular 10% increase, right? So I think it's coming. We're seeing a near-term degradation. But from relative to where we were in 2030, we're still seeing getting pushing back up into those numbers. To your point, all that being said was we did update our outlook in '26 to reflect primarily EV reductions. And in North America specifically.

In terms of implications, if you look at our portfolio, we're about -- 85% of our business is agnostic to the powertrain propulsion system. I mean, you can tell from the update to our outlook that we provided last week that we have a lot of content on EVs and that's obviously impacted our business. But if you look at what we're doing, we're going to need them for -- you need seats, body in white, latches or mirrors, you need that on any vehicle. So a lot of what we do isn't impacted. About 15% that's left, most of that is our 4-wheel drive, all-wheel drive and transmission. It's our driveline business, and that driveline business is supporting ICE vehicles, hybrid vehicles and electric vehicles.

Another trend in the industry that I'd say is changing just as rapidly is this tremendous rise in the competitiveness and the sales and production volumes of the domestic Chinese automakers. They're quick to embrace electrification, which hasn't really reset in China, like it has in other regions, the quality and design, demonstrably better coming out with vehicles twice as fast as the global peers. BYD has gone from 13th to first in just 4 or 5 years. Collectively, since the start of the pandemic, they've gone the domestics from 35% to 55% or even higher percent share of the market, still small outside of China, but with some ambitions to export and even build vehicles outside. How do you see this trend evolving? What are the implications for Magna? Most of the companies we cover are still underexposed to the domestic Chinese. What's your exposure to them. I actually met with Pat in China during the quarter. So I know the answer to some of these questions, including that you're the largest supplier of seats to the domestic. You made the strategic decision to get in the Xiaomi SU7, which is like a $30,000 Porsche Panamera, Tesla Model S combo. And what are you doing to maybe further benefit from this trend?

I think -- and we love hosting you. It was fun. It was a metals group, though, so it wasn't that exciting, I would say. But big picture when you think about Magna, we have about $5 billion of our $42 billion of sales in China consolidated. So just under 10%. We have another $2 billion unconsolidated. So of the $7 billion, it's about 50% with COEMs, 50% with international players, which is really drastically different if you went back 10 years, our growth of the COEM is huge. I think everything you raised is bang on. It's such an evolving industry right now in China, 18 months from design to launch, like it's really, really quick. I think from our point of view, when you think about -- number one, it's picking the right players. So when you're in North America or Europe, you're thinking about picking the right platforms, you have to take a step back and trying to say [Indiscernible] the right players. So our COEMs are the big ones, BYD, Geely, Chery, Great Wall, right? So you're really -- so of that $3.5 billion, it's fairly concentrated. But our view is, a, pick the winners. But if you think about -- BYD is the most vocal about becoming more of an international player. So how do we leverage our relationships that we have in China with BYD when they want to move into Hungary. So I think their business model that they vertically integrated, a lot about employment in China. When they move into Hungary, I think it's a different expectation.

I think you get a lot of credit for targeting BYD in particular. I wonder if you were a little bit lucky because obviously, Adient, previously, Yanfeng, Johnson Controls, basically just dominated that market for so long because of Huayu and Yanfeng's affiliation with SAIC, which was affiliated with GM and VW, so they gave them that business. And by the time you add around to China because, first, you're focused on some other markets [Indiscernible] China skeptic at one point, right? And it's by the time you got there, these JV relationships are so coveted -- they were already taken. And so you had to settle with the domestic Chinese turned out to be the winning ticket.

Yes. A lot of our business is actually greenfield, brownfield in China. So I think our JV structure is primarily in the seating space and powertrain. So if you think about our BS segment, it's basically all of our metals and plastics is 100% owned. Powertrain, we have 2 big JVs and in seating, they're much smaller. So I think -- and when you think about that $3.5 billion of sales, it's across the board. So it's not really -- we are waiting for an opportunity on the JV side. I think we're really good, and we're -- what makes Magna great company is how quick we can adapt and pivot, and we have a JV partner that really slows us down. So I think maybe we were held back, whether it was because of Frank or whatnot, but it was also just the ability to operate in the country the way we want to operate.

And I think there's some opportunity, too, because some challenges working with the domestics. [Frank O'Brien] sorry -- couple of years, they don't always pay on time. Another thing is when they do pay you, they might pay you in IOU, bank draft. Chery -- no receivables or something like that -- and then they want the productivity all upfront, and they can dictate these terms because they're so attractive to be levered to because of the growth. But -- and then also, they're very vertically integrated, which eliminates some opportunity. But I've heard you mentioned before, I love to hear an update in terms of as they start to export to Europe, they're going to need to up the game in terms of the seeding quality or the sheet metal. You got the relationship with them now. How do you see that maybe evolving as they start to build vehicles overseas, export vehicles overseas.

Yes. We were in a facility that builds body in white type parts. And one of the questions from an investor was can they do it for 10,000 or 25% cheaper. And my answer was always just make sure the spec is the same. So as you move to homologate a vehicle from China to Europe to North America, homologation standards do change, right? So the safety standards come up, the insurance ratings. So I think they're going to have to up that spec [Indiscernible] that helps us because we're not as Magna -- we don't want to be the company that's operating at a really low commodity me-too-type products. So in that facility, the focus is on castings, who can do castings, who can do hot forming, who can do advanced welding type techniques. So that's just the metals piece of it. You would see that even in the ADAS space. So right now, we're seeing a push towards China for China solutions, primarily in e-drives and also in the ADAS space. But more broadly, the other 80% of our portfolio, we thrive on doing more complex things, like we want to do things that are hard to do. That's where we bring our expertise.

I wanted to ask a question on the outlook for suppliers from the expected interplay between new vehicle prices and the quantity that's been demanded or produced. And we saw during the pandemic that the automakers can do very well in a low volume, high price environment because while they're hurt by the lower volume, they're helped by the higher price, whereas the suppliers, unfortunately, just levered to the lower volume without that leverage to the higher price. And note that vehicle sales are still about 8% lower in the U.S. than where they were pre-pandemic, hurt by vehicle prices that have outpaced CPI by about 8 or 9 points makes sense. Automakers say they're going to remain disciplined and hold on to those relative pricing gains. And alternatively, some, including, I think, you at the conference last year, thought they might revert back to old practices and discount more and build inventories, which would be good for the suppliers levered to the production. We have gotten back, like you anticipated were back to the pre-chip-shortage levels of inventory. We're not back to the pre-COVID. I mean there's -- to what extent do you think there's some structural change there, some structurally higher priced, some structurally lower volume, which could potentially be negative for suppliers.

It's hard for us to have much opinion because we don't influence any levers. But I think as we said last year, it's a pretty competitive market. It's a very competitive market, and it only takes 1 or 2 OEMs to put on the incentives for everyone else to have to follow suit. So I think we're just going to wait and see how that unfolds. But it's still -- I think the same thing we said last year would apply -- would continue to apply.

Great. And by the way, you're the only supplier who said that last year, and I haven't hosted all the supplier sessions this year, but so far, it's more balanced this year. I think as the inventory has gone from 1.8 to 2.6 or so million. Next, I wanted to ask on your complete vehicle assembly business in Europe. After a couple of changes there recently. Firstly, there was the Fisker bankruptcy resulting you no longer building the ocean for them. And now more recently, you've got the cancellation of the planned Ineos Fusilier. So where does that leave Graz from a capacity utilization or profitability perspective? Are there other programs that you're looking at, which could potentially backfill that volume? And prior to Fisker, I think you mostly built vehicles in Europe for established automakers, including sound German luxury and whatnot. Does the experience with Fisker and Ineos maybe caused you to think any differently about with whom you partner in Europe? And what does the process look like when it comes to taking calculated risks with some of these more start-up manufacturers?

I'll just start with what we're currently on. So we're launching right now with the Mercedes-Benz G Wagon both in the ICE version and an all-new electric version. And that's a vehicle that we've produced for more than 40 years. We're producing the Jaguar I-Pace, which is an electric vehicle and the E-Pace, which is an ICE version, both on the same line. We're producing the BMW Z4 and Toyota Supra. We're going to launch -- we're going to produce that all the way into 2026. So we have got -- let's say, we're -- we've typically been kind of 110,000, 120,000 units. I think this year, we're going to be about 75,000 units. We've done some restructuring to rightsize the business, and we're going to continue to do restructuring there. We continue to talk to different OEMs about opportunities, and we're confident that we're going to be able to continue to win business.

Maybe sticking with complete vehicle assembly, but switching to China, it would be great to get an update there, starting with the existing Arcfox product. I think they've got off to a little bit of a slower start, but also been hearing that it's recently been gaining more steam. And then also, like with Fisker and Ineos in Europe, there are a lot of startup manufacturers in China, it would have been great to get the Xiaomi [Indiscernible]. But you don't know which is going to be, Xiaomi, which is going to be Fisker, right? How do you go through the process in China of deciding of who you're going to deal with and not deal with? And I guess it doesn't even relate to just complete vehicle assembly even in traditional supply relationship.

Yes. Maybe I'll start with -- when we think about -- to your point, whether it's Steyr or whether it's system components group, we have basically a two-pronged approach to looking at do we want to do work with the company XYZ. One is, we would deal with our sales and marketing team and say, okay, at the end of the day, the product has to sell. That is the #1 priority. Is it a good product, and is it going to sell. So if we check that box, then we get into a financial analysis of it. So when you think about the financial analysis, it's basically a credit rating review of the partner. You raised some great points in China. The payment terms in China, they just pass around bank note. You're talking up to 180 days before you get your cash. So you build that into your quote models. Now the flip side is we push them downstream as well into our supply base. So it's not as horrible as you would think. But I think -- so once you have that check of the product and you look at the credit rating, it's commercially what are we doing? So you brought up Fisker, for example, Fisker has a bad outcome. It's in bankruptcy protection right now. We'll see where it ends up. But proactively, all those contracts we would have had over the last 20, 25 years with Mercedes or BMW would have been done on a gross basis. So we'd buy an engine block, take possession of it, put it in our inventory and build the customer for it. So we went in with -- to derisk as much as we could with Fisker, we did on a pass-through. So everything was on consignment. We weren't interested in going out to CATL, purchasing the battery on their behalf and then hoping to be paid. So it was a direct payment. So we look at derisking that way. We look at cash upfront, you look at, is there an opportunity to get corporate guarantees where we're derisking as much as possible. And that's not China, that's just across the globe. And the funny part is if you would have went back before I came back to corporate, people would have said you're not doing enough work with all these new entrants, right? You should be really leaning into this and taking advantage of it because of the speed to market that Steyr brought to it. But I think hindsight, there's lessons learned. But I think -- it's about doing the right things and sticking to the path. I'm not sure if you want to add on China just but...

With ArcFox, we've launched the Alpha-S, the Alpha-T, more recently, the Alpha-T5 and the S5. I think initially, the volumes were a bit disappointing. But I think more recently, they've started to come up a little bit. They put more effort into the distribution and to the marketing side. So it's starting to make some progress.

Okay. Now regarding the recent changes to the 2026 outlook that we're communicating on the 2Q call, I don't think they should have come as too huge of a surprise, given the evolution in the S&P Global Mobility forecast over the past year, including the BEV numbers we're just talking about. And after some other suppliers earlier in the earnings season, for example, Aptiv and BorgWarner also like took down their revenue estimates for this year, will actually kind of take it up the margin. And because talking about -- not necessarily talking about margin in Aptiv's case, but there's an offset. There's a partial offset in terms of like reduced spending associated with the megatrends and reduced capital spending too. We saw that with [Dana], too. So a few questions around this. First of all, can you just kind of clean it up, like the revenue came down at the midpoint by 10%. And that's scared a lot of people, I think investors and obviously, but it's impacted by the complete vehicle assembly. So if you strip complete vehicle assembly outlook, what's the kind of underlying change, adjusted for that? And then secondly, talk about the headwinds, but also maybe the opportunities in terms of the ability to cut spending and capital outlay.

Yes. So maybe I'll just write set everybody. You're right, it is a shocking number, but -- so it is about 10% at the midpoint. So roughly $5 billion, right? So we have a $5 billion reduction. Of the $5 billion, $2.2 billion relates to our CVA business, and that reflects Fisker, where we assume the program is canceled -- so Fisker was about 6.25%. And Ineos was slightly above that as well. That's been canceled-ish, I would say, based on what we're being told. And then the third category was we have -- we're launching a new version of the G. So there's an ICE version and an EV version and the bill of materials just keeps bumping up and down. So I was explaining how we just take buy an engine, by an e-drive whatever it is, they're just floating up and down, but at 0 margin. So when you look through that $2.2 billion, it actually improves our margin at the Magna consolidated level. It's a very, very low margin percent -- So the next category would be our ADAS spend. So that's bucket 2. And this is where we had already talked about having -- we talked about China, China for China. We had some in-sourcing. We had some program sourcing delays, whatnot, that was about 600. Then the last category is a combination of 2. We have revenue reduction to reflect our latest estimates on EV penetration rates. So in the case of Magna, it's a little bit different and we have program delays, lower volumes. But in the case of Magna, we also had some cancellations that impacted us. One in particular is Oakville. So Magna as a Canadian company, we have a pretty significant footprint in the Toronto area. And whether that was ICE or EV, there was a hole in the facility, and they were going to be down for 2025, back up in '26. They've now delayed it. And the other side of it is what we've done is we brought the ICE up. So the net of those ICE up, EV down is another $2 billion, $2.2 billion. That gives you a perspective of all the moving pieces, Ryan. I think on the opportunity side, -- so I agree with you. It's not a shocking when you think -- I think the ADAS piece was known and -- complete vehicle. I wouldn't say Steyr, should always say complete vehicles. But the complete vehicles number is it's lower margin. So it's understanding that EV down, but it's still going to come. So the flip side to all that was we are taking out capital up to about $600 million over the 3-year period. We're going to reduce our gross engineering spend by up to 500. And I think as far as the opportunities, the one opportunity that's not included that's very clear is the Super Duty going at Oakville. So what's that opportunity. But the opportunity comes at a cost, too. Do we have to put capital in. For example, we're not the incumbent seat supplier on the Super Duty, but we were the incumbent seat supplier for Ford Oakville. So how is that going to play out? We just don't know. I think the opportunities are higher content as we continue to see opportunities, primarily on ICE, including extensions. And then the other piece is how do we navigate opportunities to squeeze capital and to further reduce engineering spend. But all that being said, if there's an opportunity that's going to create value in '27, '28. We have to review that at the same time.

There was some illusion to opportunities to even the '26 outlook. Swamy referred to -- on the 2Q call he said, I want to assure you that we're continuing to explore opportunities that are not included in our revised outlook. So I don't know if you can talk about things that you're not talking about. But basically, what could these relate to? Like, for example, do they relate more to just like digging even deeper into the spending associated with the megatrends -- do they -- is it realizing maybe higher pricing from OEMs to offset volume shortfalls. We talked a little bit about that earlier too or like Ford compensating you with something else. Was it supposed to be a 3-row crossover going in there. Now it's going to be a Super Duty, but you can get some content. Is it restructuring or becoming more efficient in areas of the business just completely unrelated to megatrends? Where generally do you think is there at least like the most potential to generate some upside to the revised '26 outlook?

I'm just going to go back to the last question. I just want to clarify one thing specifically. Of that EV, ICE delta change, the majority of the down was actually not in megatrend. The majority down was just in our agnostic parts, whether it's body in white, whether it's seats. So I think I just want to [Indiscernible]. So we did a top-level analysis showing how this all worked out. So when Swamy's talking about other opportunities, this wasn't bottoms up. So we're coming up with a balanced expectation of our '26 to be where we push internally to be versus where we're giving an outlook or different things. So Swamy's talking about opportunities to squeeze capital, squeeze on the commercial side. I don't think really there's probably like a footprint restructuring is probably outside. It's more, to your point, digging deeper, all those little blocking and tackling.

You mentioned when talking about this that on the call that ordinarily, you wouldn't be updating this soon. You just introduced it was in February. And maybe if you'd given yourselves until next February, you could have had some more time to identify some of these and not frightened the market...

Yes. Listen, when I -- your reaction was our reaction. You're down 10%. So now we have public information out there that says the '26 outlook that we gave is out there in the public domain. I think I have a moral obligation to tell people that, hey, you can't rely on that information. Even if it's a top-level adjustment, bring your expectations down so that you're making the right decisions. So I don't think it's fair to everybody here in the room that we're leaving information that's stale, and there's -- and we should be updating it, and I think it's just the right thing to do.

That's fair.

I think, one thing if it's -- the changes are minor or there's a different volume assumption, you can easily bake that in yourself [Indiscernible] volumes. If I just have volumes down in '26 by 10% -- we are, you can do that math yourself. But there's some specific things related to the industry related to Magna that made more sense to make clear in the marketplace.

Yes. No, that's fair. Maybe your updated thoughts on capital allocation. Obviously, you're holding [Indiscernible] here with the debt deleverage. But historically, there had been a very strong focus on return of capital to shareholders. Of course, you want to get in your 1 to 1.5x range, anticipated some point in '25. So just questions around that. First of all, why is 1 to 1.5 the optimal range. A couple of other investment-grade suppliers, including Aptiv [Indiscernible], this quarter announced increases in the level of leverage that they'd be comfortable operating with at least for a time. And then secondly, how should we think about your priorities for allocating excess capital when you do get into the target range, if you do keep that targeted range, should we think about M&A being less of a focus, given that -- first of all, it's harder for M&A now to compete against share repurchases, right? For allocation capital, given the shares are cheaper than in the past. And then with Veoneer and LG Electronics pieces in place, I'd be pretty much satisfied whatever strategic needs that you thought that needed to be accomplished or could be accomplished from an M&A perspective?

And maybe I'll start with a couple of buckets. So there's the leverage ratio. So I think the first question you had was how do we come up with the 1% to 1.5%. So basically, you're working with the credit rating agencies, and we basically followed the Moody's model. And if you want to be 2 or 3 notches above investment grade, that's the requirement. So that's how we back into this 1.5%. So it's structured. Why do we want to be there? I think we want to be there as we're in a cyclical industry, and we've lived -- Louis and I have lived through the financial crisis and people have short memories and the financial crisis, if you weren't -- as soon as the financial crisis hits, you get 1 or 2 notches down. As soon as you drop below investment grade, your opportunities to raise funds are 0. We fast forward to COVID, same thing hit to the system. We maintain our rating. We actually are going to [raise 750], so we're financially strong. It's an insurance policy, I would say. Why aren't we -- so why do we not move above that leverage ratio? I think that's the basis of could we move up one notch. You mentioned [Indiscernible] Aptiv. I'm not close enough to it, but they might be within their range currently. Don't forget, we're operating above our 1% to 1.5%. We're at 1.9. So for us, take on more debt, we'd probably be going 2 or 3 notches delta. So -- and then the third thing you mentioned was they're comfortable doing it for a period of time. So we've been operating outside of our 1% to 1.5% for a period of time currently. So we are restricted in our ability to move even further. All that being said, they're great questions. We talk about this, Ryan, is we're targeting -- with what we see, even if it's top level with what we see, we're still getting back into our targeted leverage ratio in 2025. So then it becomes what do we do with the excess funds. When you look at the excess funds, say we get to target ratio in midyear, we would look at doing an NCIB, you file your notice -- sorry, the normal course issuer bid, you'd make all your [Indiscernible] exchange -- yes, exactly. You do your TSX approvals, your New York Stock Exchange approvals, and then you'd be able to go and buy 10% of your stock or whatever you're comfortable doing. So I think that's the process of what's happened. But our capital allocation strategy hasn't changed. I think what's changed is our share prices come down. And at the same time, we're outside of our leverage ratio despite -- and we've got to reflect all this noise with the 2026 guidance. So I think our strategy hasn't changed. So it's continued to grow. And just on the M&A, if you want to...

I think you're right. We've certainly taken care of some of the gaps that we've had in our portfolio. I mean, the tuck-ins are always something that we're going to consider. We did a very small acquisition recently. But I mean, I think we've got a strong position in -- based on the technologies that we have and the M&A transactions that we've done over the last little while.

And when you do allocate capital towards M&A, when you return to that, I'm curious if you might think differently about it in the future versus how you have -- in recent years, it's been about shoring up the leverage to the megatrend areas, ADAS, Veoneer, electrification, with LG Electronics JV. But does the slower growth in the megatrend areas or cause you to maybe change that calculus at all with maybe being incrementally more willing to consider a high return on investment opportunities, not cash-on-cash returns, in slower growth areas. For example, when Don Walker, Louis Tonelli couldn't stop him from saying at the Detroit Auto Show that maybe he'd buy Adient, which is the opposite of Veoneer, right? Just curious whether you still -- I mean, investors have tried to pressure you into disposing of certain things, you say, "Oh, that's low margin, like seating, but it's great returns." Would you return to being more economic animals as opposed to addressing up and optimizing leverage to this area of the market and that or what?

And I think it's our guidance, we started the year at 2.5% of capital. And I think M&A to us is my personal preference is to do organic growth first. And I think we have a very successful track record of starting from like a small facility like the one you saw in Shanghai. It starts small, and you grow within and you grow with the market. And maybe it's not what people want to hear, but it's a safer route and you can grow as you show success and you just become more profitable. So I would always rank personally M&A as a second option. So usually, we look at M&A, do we accelerate into technology or customers or region. I think we're so well represented now in our product portfolio with our customers, with our regions. I think we can take a step back. The majority of our spend in CapEx is non-megatrend. That's the one, I think, misconception people have. When you look at the 26 sales reduction, most of it was not megatrend. The majority of it was just our 85% agnostic business. And we don't differentiate between, oh, this is something high tech, so we should expect a lower return. And this is old, ugly, body in white and we should expect a lower return. Cash is cash. Cash is blind. And the one differential is, you don't want to invest in a melting ice cube. So that -- when we talk about megatrends, this is where there's continuing growth in CPV in the vehicle. But as far as the body in white and as Luis was saying earlier, when you look at the quotes we're receiving from all of our customers, they weren't for ICE. They're for EV. So you're in a situation of, do I quote the RFQ, whether it's megatrend or not, on EV? Or do I not quote. Your decision is basically quote or not quote. I think we have an obligation, if you think about our capital allocation is to continue to grow, continue to grow cash flows. So we're quoting on the EVs. The bulk of it was outside of the megatrends. So I'm not sure if that helps the question.

No, it's helpful. I wanted to ask on switching gears a bit on fully autonomous opportunity, Robotaxis, hearing less of this. We do have [AutoX] taking the stage after you and Luminar, but just been a continual push out, right of the timing there. And just given the strong exposure you have to radars and 4D radar and the partnerships you've got with a number of the LiDAR suppliers. I'd be curious what the conversations what customers might look like in terms of the timing on full self-driving and what the opportunity could be for Magna, even if a little longer term? And then maybe specific to Waymo because you used to hear about that, a lot about that. I haven't heard about the -- I think you put $100 million in there, right? Just remind us? And could you review what you did or continue to do for them from an integration or other perspective? Obviously, you're making the I-Pace that they're driving around, but aren't you retrofitting and give us any kind of update you can there.

So different people are going to have different views on kind of L4, L5 and what the volumes look like. In our view, and it's been for a few years now, our expectation is that it's going to be a long time before we see meaningful volumes in that area. We certainly have technologies that can support in that area. But really, our focus is on L2, L2+. I think that's the sweet spot. That's where even though there's been some pull back, there's still a fair amount of growth there, and we're growing alongside that. So that's really our focus. Waymo, you're right, we do have an investment there. They're certainly a strong player in that whole higher levels of autonomy. So -- and what we've been doing with Waymo is basically taking the vehicle -- their vehicles and upfitting with the Waymo driver and we continue to do that.

Any questions in the audience for Magna? I'll ask one. You referred in China to the company's cost plus journey, and I just wanted to check in on what your current raw material pass-through looks like and obviously, it's a big corporation you blend it together, it's kind of hard to do. But now relative to -- prior to the chip shortage inflation, pandemic, et cetera. And then also when it comes to the noncommodity supply chain because I think you're always pretty well protected on most parts of the raw material buy. But on the non-commodity side, electricity in Germany, natural gas, ocean shipping, that kind of stuff. And also like what the right balance is because I've asked companies how much progress have you made? And sometimes the response we don't want to get too much passive because that means we're not going to get as good pricing in the rest of the time. Just where are you -- I mean, certainly, I think you need to reduce the risk of what happened to margins of the business in the event that inflation [Indiscernible] higher again. So what is the right balance? And how are you tracking relative to the right balance?

I think there's customer programs where there's indexing you can do. So if we deal with the customer, steel, 80%, our biggest buy 80% is indexed to customers. So you're derisked. When we did -- there was a big uproar 20-plus years ago when this program from the customers are coming up. And it was the same argument. We win on the way down. We lose on the way up. Net-net, basically, we're here to manufacture, focus on manufacturing and do a good job on it. Resin is about 20%, much harder to hedge resins because there's so many combinations. But what we have done and tried to push into the chain is a little bit more on the indexing for energy, for example, haven't been as successful there as we were on steel because it's hard for the -- the customer has a win in that they bulk buy. So if they're not able to do that, they're not really willing to do it. So we pivot and we say, okay, well, we can't get a customer to do it. Why don't we -- so we've expanded into a financial hedging system for energy in Europe, whether it's nat gas or electricity. So historically, you do a physical delivery contract, those are limited up to 12 months. So now what we're looking in 24 months, 36 months and 48 is financial hedges to offset. So there's -- you work with your customer where you can't, we have an obligation to derisk. And then the last thing we do is with our quotes on the longer lead, more capital intensive, we'll say, we're resetting economics on SOP. So those are a few of the levers we're working with to basically derisk and then focus on manufacturing. Is there anything? No.

Okay. Great. Well, we are over time. So please join me in thanking Pat and Louis for all the great color.