Johnson Controls access to Asia’s No. 1 efficiency product manufacturer and its 2014 acquisition of air distribution and ventilation product distributor Air Distribution Technologies gave the company access to the full replacement market in HVAC for the first time, which is an attractively steady revenue stream, said Nicholas Heymann, co-group head, global industrial infrastructure at William Blair & Co. LLC. “This gives them now access to what is the most consistent part of the HVAC market in North America,” he said. “It’s going to increase their opportunity for market share gains, but also allows them to participate in replacing their original equipment that they previously have had very little opportunity to participate in.” One of Molinaroli’s main goals is to accelerate the company’s growth in China, where he aims to be the No. 1 or 2 company. Johnson Controls is building a second global headquarters in Shanghai, which is scheduled to open in 2017, and has been increasingly investing in its Chinese manufacturing plants. “If you want to be successful, you can’t underestimate the importance of China,” he said. “We have no choice now – none – absolutely no choice. It’s a question of us making it a priority.” The transformation of Johnson Controls hasn’t come without a cost. As a result of cost consolidation measures and divestments, Johnson Controls’ employment has gone from 172,000 just a few months ago to 130,000 today, Molinaroli said in October. Many of the layoffs that have occurred have been corporate jobs, most of which are in Glendale, Whiston said. Earlier this month, Johnson Controls announced it will close its Milwaukee business center in Glendale and lay off 277 employees. The company also broke its 64-year streak of increased annual sales, but Molinaroli plans to “start a new streak.” That may not be in 2016, as Molinaroli has hinted that the costs of spinning off the automotive segment will be significant next year.
BACK TO BASICS The split will spin off the Automotive Experience division of Johnson Controls into its own entity, leaving the Building Efficiency and Power Solutions divisions in the legacy company. 18
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Solar panels at the Johnson Controls’ headquarters campus in Glendale.
“By taking and transforming the company into the HVAC and the Power Solutions, or battery business, the battery business is going to have a much stronger mix as you go forward,” Heymann said. “You end up with a nice mix shift in their most profitable business and you end up with a much stronger growth profile for their HVAC business.” Upcoming emissions deadlines in almost every country and the growing use of start-stop batteries to meet those standards will drive growth for the Power Solutions segment, he said. Combined, the automotive segment was competing with other divisions of the company for the same resources and capital, Molinari said. “There’s three disparate businesses,” Heymann said. “They were operating as three separate silos. As you go forward, you’re going to have a lot better crossleveraging.” Post-split, the remaining Johnson Controls will look a bit like it did when it was founded to make thermostats in 1885. “It’s not so much moving back, it’s changing,” Heymann said. “All these companies that have got their heads screwed on right are de-conglomerating. They’re becoming a true diversified company, as opposed to an automotive company that made some other stuff.” Johnson Controls isn’t a research and development-focused, bleeding edge inventor of new technology, Molinaroli said. It’s an applied product manufacturer – a developer of proven mass market solutions. The Building Efficiency division will shift to less of a project focus and more of a product sale and distribution model, Molinaroli said in the company’s fourth B i zT i m e s M i l w a u k e e
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quarter earnings call in October. When it comes to building monitoring technology, the segment is positioned well in the emerging Internet of Things space, he said in his RSM speech. “We didn’t invent the Internet of Things – we just happen to have all the things,” he said. “We are the sensors and we are the actuators and we are the controllers. We save more energy for buildings than any other company in the world.” The company’s other main offering will be its automotive batteries, of which it makes about 150 million per year for its customers’ brands. From Walmart to Audi, Johnson Controls makes a significant portion of U.S. car batteries. Its only challenge now has been expanding startstop battery manufacturing capacity to keep up with demand. The battery business was already No. 1 in traditional lead-acid batteries, and now it has cornered 75 to 80 percent of the market share in start-stop battery production, making it No. 1 in that space as well, Whiston said. “Their battery business is just fantastic – I would say it’s the crown jewel of the company,” he said. Batteries are a less cyclical segment than its Automotive Experience division was, since they need to be replaced with regularity in existing cars, and the market isn’t impacted as much as vehicle interiors was by new car production ebbs and flows. “The remaining operations are going to ultimately have better financial flexibility,” Heymann said, so much so that it could make $3 billion in acquisitions and still hold onto its current debt rating. A rumored acquisition target has been Reading, Penn.-based EnerSys, which
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makes batteries used in industrial equipment, Heymann said.
AUTOMOTIVE EXPERIENCE The Automotive Experience division reported $22 billion in 2014 revenue, and Johnson Controls has touted its well-established position in the marketplace and in growth locations like China. Molinaroli describes the spinoff as the final piece of the puzzle he has been solving for the last couple of years. “It will allow our automotive company to define its future,” he said. “Also, because of some of the capital requirements and capital structure requirements, we weren’t able to invest in some of our other businesses the way we wanted to.” He confirmed in his October speech that both companies will remain headquartered in the Milwaukee area after the split. The new automotive company being formed does not yet have a name. Bruce McDonald, vice chairman and executive vice president of Johnson Controls, will serve as chairman and chief executive officer of the new company. Beda Bolzenius, president of the Automotive Experience division, will serve as president and chief operating officer. The interiors business joint venture with Yanfeng formed the largest automotive interiors company in the world. “If it was a separate U.S.-based company, it would be the largest automotive supplier in the U.S.,” Molinaroli said, making onethird of the automotive seats worldwide. Johnson Controls executives will do a road show to explain to shareholders the process of splitting the company and assigning stock. Molinaroli expects a little stock volatility while