Summary

  • Aptiv is a leading innovator and provider of technology and software related to Electric Vehicles.
  • The company has turned around from a clunky legacy auto supplier to a leading innovator and indispensable player in the EV revolution.
  • The company’s sprawling legacy assets and colossal production capacity mixed with the leading Autonomous Vehicle firm NuTonomy (which it acquired) has proven a virtuous union.
  • This company’s traditional auto assets, factories, and pre-existing relationships are being leveraged and augmented with its new technological focus and strategic vision.
  • Recent consumer trends in the United States suggest EV adoption is accelerating faster than consensus anticipated. Aptiv is one of the most diversified names in the space, having relationships with over 20 leading OEMs.

“If the twentieth century was about cars giving us independence, the twenty-first will be about giving us independence from cars.”

 -Justin Erlich, Former Head of Policy for Autonomous Vehicles at Uber

There are only two major global auto manufacturers that have never gone bankrupt. Those two are Ford and Tesla. Arguably, the reason why Ford didn’t go bankrupt when GM did is that the Ford family’s genuine care for and personal connection with their workers, and perhaps the company’s legacy of welfare capitalism, ingratiated them to the United Auto Workers, which was ,at the time, headed by Ron Gettelfinger. Apparently, the trust Gettelfinger developed for Bill Ford after he visited injured workers at a plant accident saved one of America’s and capitalism’s most influential and significant companies. It, like our subject, is now a leader in EV, and they both have uncanny similarities. Aptiv is a more diversified play that we believe will succeed as long as EV does, no matter which brand or brands come to gain the most market share.

The Oracle of Aptiv ($APTV)

Source: IEA

One thing is clear though, while Electric Cars may have initially had problems attracting consumers, especially in the American auto market, this is definitely no longer the case. The rise of Electric Vehicles may have some medium-term constraints. Still, it is evident that this area is high-growth and one where experience and relationships have a uniquely high premium. The court of Detroit was always an elusive place for many, and the new push for Electric at old companies still happens in the shadow of the storied grandeur of the glory days. The problems with normal auto manufacturing are heightened with Electric Vehicles.

BEVs are Good Alone, But Once Again, Better With ICE

We highlighted Ford in one of our Signal From Noise columns at the beginning of this year. In this write-up, we mentioned we thought Ford actually has an immense advantage having an extensive and desirable ICE lineup to complement their advanced and considerable EV efforts. You see, EV efforts are more likely to succeed when done in conjunction with a considerable ICE portfolio because if you are all Electric you’re simply going to have higher costs and sensitivity to commodities, which exacerbates the plethora of problems facing existing auto manufacturers.

Let’s take, for example, the recent spike in copper prices, which is a crucial commodity in both Internal Combustion Engine (ICE) and Battery Electric Vehicles (BEVs).  A traditional car will have about 55 kilograms of copper in it, whereas a battery electric vehicle has approximately 65-70 kilograms. Negligible right? The total cost of commodity increases would only be about $100 added to production cost given copper’s rise. You see, here is where the trickiness of the auto industry gets exposed. A mere $100 is about 5% to 10% of the total operating profit of the $1,000-$2,000 that Ford makes on its vehicles, depending on the model.

The Oracle of Aptiv ($APTV)

Source: Company Reports

Aptiv is a unique combination of the Detroit old guard, with all the benefits that it conveys (and many downsides left behind in bankruptcy) and the sprawling, diverse portfolio of global manufacturing capacity, primarily in low-cost countries. It is so particularly well-suited to meet the demands of the major global OEMs because it was literally once an integral part of General Motors.

However, being in the old guard isn’t all bad, as you can see. Try finding a new electric vehicle company with the type of diverse revenue footprint to support the growth, innovation, and centrality of focus needed to succeed in what our Head of Research, Tom Lee, believes will be one of the most important themes affecting the economy in markets of the next decade.  

The Oracle of Aptiv ($APTV)

Source: Company Reports

A True Phoenix From The Ashes Story

There’s a reason for bankruptcy being a fate so common to auto manufacturers. Auto manufacturing is notoriously one of the most challenging and fickle businesses around. It’s pretty easy to go from hero to zero quickly in the ticking watch of complexity that is the modern auto industry. It can often be difficult even to tell what time it is, so to speak. The complicated and “last-minute” nature of automobile production makes this industry particularly susceptible to the type of unmitigated supply-chain chaos that is occurring as a result of the pandemic. This is even more visible when critical chokepoints are compromised like with the Renasus fire, which dramatically complicated already creaky supply-lines that have a substantial required lead time.

While Aptiv currently enjoys an industry-leading reputation for some of the most advanced and crucial EV technology, its legacy is quite a different story. Speaking of auto-bankruptcy, while not the sole cause of GM’s downfall, it was that massive straw that broke the camel’s back. It was spun off from GM in 1999 and couldn’t stand on its own. The firm’s out-of-control labor and pension costs eventually breaking was the first domino that fell and culminated in the bankruptcy of General Motors. The attempts at aggressive restructuring all failed, and the company went into a messy and extended bankruptcy process. A series of prescient and consistent acquisitions toward strategic relevance revolutionized the company. In 2017, this transition culminated with the creation of Aptiv.

The Oracle of Aptiv ($APTV)

Source: Company Reports

This legacy of a high-profile failure, however, also has a silver lining. We sometimes notice companies that have emerged from bankruptcy, with new shareholder-oriented management teams, have something to prove regarding balance sheet health and cost-efficiency. The actions of the company’s management since its 2017 face-lift are more than just a cosmetic name change. Where waste and inefficiency once reigned supreme, a new attitude of aggressive cost-cutting matched with industry-leading innovation and a software-driven business model has turned this company into one of the more successful pivot stories of the recent 21st century.

The Oracle of Aptiv ($APTV)

Source: Company Reports

So how does not only a member of the Old Guard but the albatross that broke the old guard’s back turn around to become one of the most innovative and technologically advanced companies in the industry? The revamped company emerged from bankruptcy, and Delphi made the necessary 2017 purchase of  NuTonomy, along with many other strategically sound decisions on acquisitions and spinoffs, that steadily built the foundation of the technological leader rapidly gaining market share that we see today.

The Oracle of Aptiv ($APTV)

Source: Company Reports

These types of results would have been unimaginable from the vantage point of 2011 when Delphi was undergoing a messy split from its recently disgraced parent. At that time, the company was about as synonymous with innovation and technological prowess as a vinyl record or rotary phone, if not worse. The company was known for the exact opposite; insurmountable and company-breaking silos and runaway labor costs that doomed its spinoff from day one. Not a bad turnaround in a decade, and again, we’d call it one of the more successful and genuine recent pivots of a firm of this size and importance. That the company has nearly 20,000 engineers shouldn’t be a surprise, but that over a third of them are software engineers may surprise you.

Watch The Great Automakers Battle For Success: Aptiv Benefits Regardless of The Victor

Sometimes technological revolutions happen quietly and make their impact known before they are even noticed. The massive trends in the fundamental area of transportation and automobiles are changing faster than analysts can keep up with. We all remember the bedazzlement of consumers as TSLA came on the scene and redefined how consumers view electric vehicles. Next, old guard auto companies like Ford used legacy brands to get consumers interested in desirable electric cars. People have been smelling the trend for a while, and all the king’s horses and all the king’s men (in terms of the most capable companies in the industry) seem to be going full-speed ahead on electric. Even the world’s largest company, Apple, has promisingly thrown its hat into the fray. What is one thing all these gladiators need? The parts, software, and technology that Aptiv provides.  The key to understanding why all serious EV manufacturers will go to Aptiv is because, through their Smart Vehicle Architecture (SVA), they reduce the level mentioned above of copper needed in a BEV to less than the current level required in an ICE. These guys are making themselves the indispensable player.

The Oracle of Aptiv ($APTV)

Source: Company Reports

The progress to full-scale autonomous vehicles is moving along faster. There is some credibility to the argument that some Electric Vehicle companies or adjacent companies have sky-high valuations and no assets. This is not the case with Aptiv; its mix of the old guard and new guard assets gives it a unique profile in the industry that ensures it will be one of the leaders in the coming EV revolution, regardless of which OEMs get the secret sauce right with consumers.  

Risks And Where We Could Be Wrong

The most considerable risk is something we addressed pretty thoroughly in this article: the continued prevalence of supply-chain disruptions. Semiconductors are particularly important to the various technological solutions the company provides. However, Aptiv in particular, due to the location of many of its factories (concentrated in low-income countries with low vaccine prevalence), the resurgence of COVID-19 is a significant concern.

Another sustained wave of COVID-19 or even a more damaging variant coming about in the emerging world, could prove to be a severe setback. A positive side to this risk, which should give our readers some comfort, is that despite the COVID-19 containment measures, productivity in most locations has now eclipsed 2019 levels. This demonstrates a culture of innovation and excellence  being deployed internationally, an achievement for any global company.

Commodity price volatility   is always a risk for manufacturers. The company was able to pass through about 80% of commodity rises through contracts and hedged the rest. This is a great example of where that time-tested experience pays off. However, the CFO cautioned that a replenishment cycle, that was expected later in the year, partially bolstered earnings earlier than expected.

As far as the semi-conductor shortage goes, the company’s CFO spoke at a recent investor event hosted by Deutsche Bank. He expects the impact of the current shortages (which include the Renasus fire and Texas weather interruptions) are close to climaxing if they haven’t already. However, he cautions that the uncertainty here is high.   The company and industry are working to re-establish more robust supply chains with the help of an attentive US Government whose ear the industry currently holds. The CFO also noted that ‘air pockets’ in supply are different from enduring shortages. Some confuse semi-shortages at the vanguard of technological achievement with the auto semi shortage, which is inaccurate. Most auto applications use older generation chips, although the advanced autonomous driving platforms do use the more sophisticated end of the supply chain .

The Oracle of Aptiv ($APTV)

Source: SeekingAlpha.com

Reputational damage, like in the event of an accident, or competitive pressures in one of the fastest moving innovation environments on the planet, are always a risk. Some may point out that compared to peers, certain valuation metrics seem elevated. Still, we’d alsolike to  point out that this company has industry-leading EPS, which can partially account for the difference. The company is also a clear industry leader in other metrics of valuation like EV/Sales.

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