Who Will Bid for Leading U.S. Auto Supplier's Electronics Unit -- the Chinese?

After a day of swirling rumors that drove a nice gain in its stock price, Johnson Controls (NYSE: JCI  ) set the record straight late on Wednesday with a terse press release: The company is not putting its sizable automotive interiors business up for sale.

Instead, it's putting its automotive electronics business up for sale. And it could get a billion dollars or more for the unit.

What is Johnson Controls selling?
Let's start with a bit of background. Among its other businesses, Johnson Controls, or JCI, is a big-time automotive supplier, a maker of parts and sub-assemblies for major automakers around the world. The clients of JCI's "Automotive Experience" division include Ford (NYSE: F  ) , Toyota (NYSE: TM  ) , Volkswagen (NASDAQOTH: VLKAY  ) , General Motors (NYSE: GM  ) , and nearly every other automaker you've ever heard of (and maybe a few that you haven't).

The company says that it supplied parts for more than 50 million cars last year, or about five out of every six cars built in the whole world. By itself or via joint ventures, it operates about 240 different factories in 33 different countries, including a big and growing presence in China.

This is a big operation, in other words. It accounted for 51 percent of JCI's $42 billion in revenue in fiscal 2012. (JCI's other two divisions are Power Solutions, which makes car batteries, and Building Efficiency, which makes systems for managing big buildings' climate and security.)

JCI's Automotive Experience division is broken into three separate units: Seating, Interiors, and Electronics. Seating makes ... well, it makes car seats, a business JCI has been in for more than 80 years. The Interiors unit makes things like dashboard parts, the trim panels that go on the inside of car doors, headliners (the soft cloth panel on the "ceiling" of your car's interior), and so forth.

And then there's the Electronics unit, which is the one that is now up for sale.

A closer look at the Electronics unit
Following the theme of JCI's other units, Electronics makes several different kinds of electronic systems that might be found in a car's interior, everything from instrument panels, to "infotainment" systems, to parts for automatic door locks and tire pressure sensors.

It's not a small business. Electronics accounted for about $1.4 billion of JCI's revenue in fiscal 2012. JCI says that it has "over 1,000 engineers, electronics specialists, and designers at seven Research and Development Centers in Europe, North America, and Asia who develop innovative electronics solutions for Driver Information, Infotainment, Connectivity, Body Electronics and HomeLink®"

So, why is JCI looking to sell? It's unclear, but reports have suggested that Electronics is less profitable than the other parts of JCI's Automotive Experience division, and JCI would rather have the money it could get for the unit to reinvest in its other auto-interior businesses.

Like other auto suppliers, JCI has faced significant pressure on margins from cost-conscious automakers, as well as ongoing pressure from the economic downturn in Europe, which has left auto sales near two-decade lows. JCI may also be facing increasing pressure on some parts of its business from local competitors in China, where it has invested heavily with an eye toward future growth.

JCI has hired JPMorgan Chase to advise on the sale, so they're serious about getting a deal done. Who might step up to buy?

Who might buy this division?
Aside from JCI's big-name competitors in the auto-parts space – Magna International and Lear (NYSE: LEA  ) , to name two – it seems likely that interest will come mainly from China. The more sophisticated domestic Chinese automakers (and the better local companies that supply them) are increasingly interested in finding a route into the global auto business, one that leads to big-name clients like Toyota and Ford.

Buying an established company (or in this case, part of one) is a way to make that happen. It's likely that one or more well-financed Chinese firms will kick the tires on Johnson Controls' Electronics unit in coming weeks. Will that lead to a sale? Stay tuned.

Johnson Controls is a big-league provider of parts and services to companies like Ford and Toyota, and is very well-positioned to grow with China's economy. The company is perhaps best known among investors as a maker of batteries for cars, including the lithium-ion battery packs used in electric cars and the most advanced hybrids. This space has gathered a lot of investor interest, but is JCI the best way to play it? The Motley Fool answers this question and more in our most in-depth Johnson Controls research available for smart investors like you. Thousands have already claimed their own premium ticker coverage, and you can gain instant access to your own by clicking here now.


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