Although Times are Tough for the Big Three and Automotive Tier One's, Johnson Controls is Positioned Better Than Most

Implications: With the downturn in US sales volumes and a rapid switch from SUV and light truck to smaller, more fuel efficient cars the Big Three are taking some of the Tier One suppliers down with them. Those that are diversifed in terms of product, geography, and model mix are the most well positioned to ride out the storm. Johnson Controls is one of those companies positioned well to maintain and to grow in the current, difficult market.

Analysis: With the reduction in volumes, the shuttering of factories, and the monumental tasks of changing model mix and right sizing the companies, GM, Ford, and Chrysler are creating a painful ride for many Tier One suppliers. And those Tier One who receive a majority of their sales exclusively from the US assembly fctories are in for a word of pain in the next few years. Examples, beyond the recent debacle, are American Axle, with 75% of sales derived from GM. another example, Lear receives approximately 45% of revenue from GM and Ford sales. Both of these companies also do nothing other than automotive Tier One components. There are many other examples of Tier One companies with the lion share of their business linked to domestic factories and to the Big Three. Beyond the Big Three link, the domestic production, and the lack of corporate product diversification is the rapidly increasing costs of commodities that are no longer so readily absorbed as a 100% pass through by the OEM's.

On the other hand, Johnson Controls looks to be in a position to weather the storm quite nicely. Johnson Controls has three primarily businesses - Business Environmental Controls, Automotive Interiors, and Energy Technology or Batteries.

The Business Controls division should continue to benefit from the "lean to green", the CO2 reduction strategies, and the desire to produce more energy efficient buildings globally. Expect this division to make up the largest portion of Johnson Controls revenue in the future.

The Energy or Battery business is also well positioned. Johnson Controls is already a dominant player in the OE battery and Retail battery markets. So the company has two distinct methods for deriving battery sales globally. In addition, Johnson Controls is becoming a strong participant in the move towards hybrid and mild hybrid technology with cooperative research, development, and manufacturing of hybrid battery technology in Europe, the US, and in Asia.

As for Automotive Interiors, Johnson Controls made a deliberate moved years ago to diversify the customer base for interior systems. A full 2/3 of sales is derived from automotive assembly facilities outside of the United States. And some estimates indicate that Johnson Controls may have less than 15% of interior sales from Big Three US factories, with the remainder of US factory sales coming from the Asian and European transplants.

Johnson Controls seems to be well positioned to ride out the automotive storm. Although they will be impacted by the decline and shift of production at the domestic Big Three, it will be to far less of a degree than many of their Tier One counterparts. And what they lose in Interior Systems, should more than be offset by Building Controls and Battery business.