You can probably count on one hand the number of computers you've used so far today. But if you've also driven a recently built car, keep counting all the way up to 50 -- the number of computer modules found in today's vehicles, according to Johnson Controls (NYSE:JCI).
To meet the power needs of these computer modules and the 150 or so electrified devices also found in today's vehicles, Johnson Controls is investing heavily -- about $780 million from 2015 through 2020 -- in absorbent glass mat (AGM) battery manufacturing capacity.
Stop and go
In addition to powering computers, Johnson Controls believes that automakers will increasingly rely on start-stop technology -- which increases fuel efficiency by 5% -- to meet stricter environmental regulations. Shutting off when the engine is idle, a start-stop system maintains power to other systems until the driver releases the brake or engages the clutch.
Johnson Controls expects the global AGM battery market to grow substantially in the next few years, from 25 million vehicles in 2016 to 65 million vehicles in 2020 throughout North America, China, and Europe. The company isn't alone in thinking that there's a long runway for start-stop vehicles. Last year, Navigant Research reported that it expects stop-start vehicles will account for 55% of all light-duty vehicles sold by 2024 -- an increase from 22% in 2015.
Looking to maintain its position -- about 70% market share -- as a global leader in the AGM market, Johnson Controls is investing $245 million from 2016 through 2020 to double manufacturing capacity in North America. By 2020, the company expects 50% of cars built in North America will have stop-start systems.
Building upon a well-established presence in China, Johnson Controls is forming a joint venture with Binzhou Bohai Piston Co., Ltd. to build a fourth automotive battery plant in the country, which is expected to produce about 7.5 million batteries per year.
Construction of the $200 million facility is expected to begin in 2017, and it should open for operations in 2019 -- about one year after a new, $200 million plant in Shenyang, China is expected to come online.
Staying charged up
As Johnson Controls pivots away from automotive interiors, it will increasingly rely on growth in its power solutions business. And to this end, AGM is a growth opportunity that will continue to play an important role. For example, although net sales in the power solutions segment decreased in the second quarter of 2016 due to unfavorable foreign exchange and lead prices, the increase in AGM sales -- 18% year-over-year -- mitigated the damage.
Should exchange rates and commodity prices continue to adversely affect the company's earnings, AGM sales may once again be heralded as a savior. During an investor presentation last December, management suggested that AGM sales in FY 2016 would be 22% higher than the previous year.
With such a commanding position in the market, Johnson Controls retains pricing power in its AGM offerings -- pricing power which translates to strong margins. In the same presentation, management suggested that AGM sales would be a main driver in the power solutions segment margin -- estimated to be 17% -- for FY 2016. Should this be realized, it would nearly double the 8.8% margin which the building efficiency segment reported in 2015.
Management contends that growing AGM sales will continue to benefit the company for at least several more years. Contributing to a better product mix, AGM sales should help to expand the segment margin to between 18.5% and 19% by FY 2020.
Usually, it's hybrids and electric vehicles that grab the lion's share of attention when discussing innovation in powering vehicles. The reality, however, is that traditional internal combustion engines are not going away anytime soon, although they will need some refinement amid more stringent environmental standards. But it's not just improved fuel efficiency spurring demand for AGM batteries, it's our desire for greater comfort and convenience, afforded by an ever-growing presence of power-hungry computer modules and electrified devices.
Recognizing the growing place that start-stop systems will occupy in powering vehicles, Johnson Controls is wisely carving out its niche as a leader in AGM technology, and its commitment to increasing its AGM production capacity should prove worthwhile in time.
Moving forward, investors can look for comments from management during conference calls to assess how well the market is developing. They may also focus on the power solution segment margin to see if it meets management's guidance of 18.5% to 19% by 2020. Failure to do so may indicate that start-stop vehicles are not gaining the wide market acceptance that management expects. It may also suggest that other manufacturers are making a greater push into the market and exerting pricing pressure on Johnson Controls.