Why Visteon Corporation Will Be a Winner in the Changing Automotive Landscape

Consumers want connected cars to give them the ability to navigate directions, entertain themselves, and communicate with others. Governments are trying to solve the air pollution problem by reducing fuel emissions. How will Visteon benefit from these demands?

Apr 14, 2014 at 7:45PM
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Source: Visteon

Government regulations and consumer preferences are the key factors driving the future of the automotive industry. One trend that stems from this is the increased regulatory scrutiny of vehicle emissions. Another trend is that of the connected car, or a car equipped with Internet access, being touted as the "next big thing" in consumers' lives. 

Visteon (NYSE:VC), a supplier of climate and electronics products for automobiles, is poised to be one of the biggest beneficiaries of such changes. Its larger automotive supplier peers, BorgWarner (NYSE:BWA) and Delphi Automotive (NYSE:DLPH), are also leveraging on these trends for greater profitability.

Fuel emissions and climate control
Emissions standards are tightening across the world, driving demand for automotive supplies whose products contribute to lowering emissions. In February of this year, the European parliament set a new 2021 target for emissions of 95 grams  of carbon dioxide per kilometer, a 27% reduction compared to the 2015 target of 130 grams of carbon dioxide per kilometer.

Automotive climate control, which refers to the maintenance of a steady temperature within the passenger compartment of a vehicle, plays a big part in a car's eco-friendliness. Visteon is the second-largest player in climate control globally, with a 13% market share, and it boasts a global manufacturing footprint of 35 manufacturing facilities and four technical centers.

In addition, Visteon is only one of two companies in the space providing the full spectrum of climate control systems including (but not limited to) control heads, heating, ventilation and air conditioning (HVAC) units, compressors, and cooling modules. One example of Visteon's climate control products is its IHX Sub-Cooled Water Cooled Condenser, which reduces compressor power consumption by one-fifth.

Similarly, BorgWarner, a global supplier of drivetrain and engine applications, offers turbochargers and engine technologies that help automakers meet enhanced efficiency and emission targets.

BorgWarner's eBooster technology enables the development of smaller and more efficient turbocharged engines, which result in a lower level of emissions compared with larger engines. BorgWarner's commitment to innovation ensures that it will always have a pipeline of newer and better products to meet customers' demands. It has reinvested about 9% of its revenues in R&D for the past three years.

This hasn't gone unnoticed -- BorgWarner has received more than 10 Automotive News PACE Awards in the past decade. The PACE Awards are widely recognized as the industry standard for product innovation. Visteon also won a PACE Award in 2013 for a metal seal fitting product and currently has two products nominated as finalists for the upcoming 2014 PACE Awards.

While there are many competitors in the automotive climate control market, and many automotive suppliers promise that their products lower emissions, Visteon has two key competitive advantages over its peers.

Firstly, auto companies prefer to consolidate their automotive supply purchases from as few suppliers as possible for the sake of convenience and efficiency. This suggests that Visteon has an edge over its competitors as only one of two full-line climate control systems providers.

Secondly, close to three-quarters of Visteon's manufacturing output comes from emerging markets such as China, South Asia, Eastern Europe, and South America. This puts the company in a good position to gain a larger share of the growing auto markets.

Connected car and cockpit electronics
Based on Visteon's internal estimates and industry research, the vehicle cockpit electronics market is expected to grow at a 2014-2017 CAGR of 10%, reaching a market value of $50 billion by 2020. Following the January 2014 acquisition of the electronics division from Johnson Controls, Visteon is now the second-largest company in the cockpit electronics industry, with a 10% market share.

Within the entire cockpit electronics market, Visteon's strengths are in the displays and instrument clusters segments. New innovative products from Visteon include LightScape, an in-vehicle display with HDTV resolution of 1,920 by 720 pixels, and HMeye, a cockpit interface controllable by drivers' eye gaze and head direction data.

Another automotive supplier seeking to capitalize on the increased consumer demand for connected cars is Delphi. Delphi has placed its emphasis on the infotainment and connectivity segment within the cockpit electronics market. Its own research indicates that the infotainment market is valued at $14 billion and growing at 25% a year.

Delphi has set a target of growing its revenue contribution from infotainment by $0.4 billion between 2013 and 2016. Its vehicle connectivity product called "Delphi Connect" has been available for sale to U.S. Cellular customers since November 2013. With Delphi Connect, car owners can log trip details, track car location, check on the health status of their vehicles, and use their smartphone as a key fob.

Although there are different market segments with the overall cockpit electronics market (such as driver information and infotainment and connectivity), Visteon's leadership in segments such as display (31% market share), driver information (22% market share), and instrument clusters (19% market share) should give it an edge over peers which are less dominant in the more competitive segments that they operate in.

Foolish final thoughts
Regulators want reduced fuel emissions, and drivers want to have dream cars that boast cutting-edge technology and fuel-efficiency. Automotive suppliers like Visteon that can meet both of these targets stand to do very well down the road.  

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Mark Lin has no position in any stocks mentioned. The Motley Fool recommends BorgWarner. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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