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1 Auto Parts Supplier Betting Heavily on China

By Rich Duprey - Sep 14, 2013 at 10:24AM

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Johnson Controls sees its greatest growth opportunities in China, while deemphasizing business here at home.

Johnson Controls (JCI -0.80%) -- the largest auto parts supplier in the U.S. and the sixth largest in the world -- derived two-thirds of its $42 billion in annual revenues from making auto parts. They also represent its most profitable business, providing 66% of its earnings. So you'd think that with the auto industry enjoying some of its best returns lately the parts maker would be investing heavily in the U.S. to expand with it. But you'd be wrong.

Johnson Controls sees China as its best growth opportunity, and it will be investing in 11 new factories there to meet the expected demand. Sales there last quarter surged 23% to $1.4 billion; in 2012, China generated $4.6 billion in revenues.

And why not invest there? GM (NYSE: GM) itself is selling cars in china at a record pace, notching an all-time high of 245,799 vehicles sold in August, and 2 million vehicles over the first eight months of the year. Similarly, Ford (NYSE: F) also set a monthly sales record for the fourth consecutive month, selling 71,183 units in August, an increase of 46%, and some 551,738 vehicles year to date, up 50% from the eight-month period in 2012. Overall car manufacturers saw an 11% increase in sales in the country for the month with 1.35 million passenger vehicles moving off dealer lots.

As good as the U.S. automakers' sales in China were, German manufacturers are doing even better; they have the largest share of the market with 21.7%. Japanese carmakers are second with a 15.2% share, but both Toyota (TM 0.85%) and Honda Motors (HMC 1.11%) recorded declines in sales, while Nissan was only able to generate a 1% increase.

Although Johnson Controls has invested money domestically in its advanced battery technology for alt-fuel vehicles, the auto parts maker is deemphasizing its U.S. auto parts business in favor of its building efficiency division.

Its incoming CEO has said" "People think of us as an automotive business that has a few other lines of businesses for hedging. Five years from now, I see us being a multi-industrial company that also has a great automotive business."

He notes they've pretty much neglected to do anything with the building efficiency business after acquiring York International in 2005. Last quarter, that segment experienced weakness both here at home and in Europe, with sales falling 2% to $3.7 billion and backlog 5% lower than last year. The auto parts maker is also selling off various business lines, including its automotive electronics business.

So despite a resurgence in the U.S. auto market, a particularly bright spot for an otherwise lackluster economy, Johnson Controls doesn't see the need to invest further in the markets here. Instead, it's sending its money to China where it already has 57 production plants in 27 cities. It will now increase that to 68 facilities over the next few years, while here at home, it'll pay more attention to an ailing HVAC system.

Investors in U.S. automakers might want to use that as a sort of crystal ball for how Johnson Controls sees the future.

Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. 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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Stocks Mentioned

Ford Motor Company Stock Quote
Ford Motor Company
$16.03 (-2.44%) $0.40
Toyota Motor Corporation Stock Quote
Toyota Motor Corporation
$160.77 (0.85%) $1.35
General Motors Company Stock Quote
General Motors Company
$38.40 (-1.51%) $0.59
Honda Motor Co., Ltd. Stock Quote
Honda Motor Co., Ltd.
$27.25 (1.11%) $0.30
Nissan Motor Co., Ltd. Stock Quote
Nissan Motor Co., Ltd.
$7.94 (0.38%) $0.03
Johnson Controls International plc Stock Quote
Johnson Controls International plc
$58.53 (-0.80%) $0.47

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