Continental AG

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Continental AG

Vahrenwalder Strasse 9
D-30165 Hanover
Germany
Telephone: +49-0511-938-01
Fax: +49-0511-938-81-770
Web site: http://www.conti-online.com

Public Company
Incorporated: 1871 as Continental-Caoutchouc und Gutta-Percha Compagnie
Employees: 64,379
Sales: $11.95 billion (2002)
Stock Exchanges: Hanover OTC
Ticker Symbols: CON; CTTAY (ADR)
NAIC: 326211 Motor Vehicle Tires Manufacturing; 336322 Other Motor Vehicle Electrical and Electronic Equipment Manufacturing

Long established as the leading tire producer in Germany, Continental AG attained international prominence through a series of major acquisitions in Europe and in the United States starting in 1979. By 1991 Continental was the fourth largest tire producer in the world. After weathering considerable economic pressures in the early 1990s, the company began making significant strides to secure a competitive position in the more lucrative arena of auto components. One of its most significant acquisitions came in 2001 when it bought a controlling interest in DaimlerChrysler’s Temic auto-electronics business.

Continental Originates As a Rubber Goods Manufacturer: 1871

The Continental-Caoutchouc und Gutta-Percha Compagnie (Continental) was established in Hanover in 1871, and the city remained the center of the firm’s operations. It was by no means the first German rubber company; several small firms had been active in Hanover in the previous decade. Continental was promoted by a group of financiers and industrialists with established interests in the rubber business. The initial capital was 900,000 marks. The firm’s product range consisted of waterproofed fabrics, footwear, and solid tires, but soon a general line of industrial rubber goods, medical supplies, and sundry consumer goods, such as balls and toys, was added.

During the 1870s Continental developed slowly; dividends were first paid in 1875 when additional capital was raised. In the following decade, however, the firm became highly prosperous and dividends increased from 7 percent of nominal ordinary share values in 1880 to a constant 27 percent between 1884 and 1892.

An expanding demand for industrial rubber goods was accompanied by the introduction of cushion tires under a patent from the British firm Macintosh. More significantly, in 1892 Continental commenced the manufacture of pneumatic tires for bicycles to cater to the growing interest in cycling. Although less innovative than Dunlop or Michelin, in the 1890s Continental was the first German producer of pneumatic tires. The 1890s proved more profitable than the previous decade. Continental’s gross profit rose from 485,821 marks in 1891 to 1.8 million marks by 1898, and dividends were 55 percent annually between 1896 and 1898. The firm’s capitalization was increased in 1897, doubled again two years later, and totaled 3 million marks by 1901. The workforce expanded from 600 to 2,200 between 1893 and 1903. This growth was primarily domestic and was supported by the development of agencies throughout Germany. Continental’s leading position was suggested by its 65 percent share of a market-sharing agreement for cycle tires with Hannoverische Gummi-Kamm in 1894. The establishment of a German factory by Dunlop in 1892, however, provided a potent rival.

Responding to Increased Demand for Automobile Tires: 1890s to 1900s

The next phase was the development of the automobile tire business. During the late 19th century the prominence of German engineers in the early car industry created an additional market for solid tires, and there was also a growing demand for motorcycle tires. In 1898 Continental designed and began to manufacture a pneumatic tire, a significant technical accomplishment given the larger tires and greater weight and forces involved in automobiles. In 1904 a patterned tread was added to the previously smooth tires, an innovation in which Continental was slightly ahead of the U.S. tire industry. Four years later the detachable rim was adopted to simplify the mounting of tires. This sequence of product innovations completed the fundamental advances in motor tire design, although Continental continued to refine and improve its tires to 1914.

The effectiveness of Continental’s response to the demand for car tires confirmed its leading status in Germany, particularly as Dunlop’s German subsidiary failed to move into the new sector. Continental’s workforce expanded to 12,000 by 1913. In the same year capitalization was raised to 12 million marks while dividends averaged 43 percent from 1900 to 1913. Such profitable growth also encouraged regular extensions of the factory and new investment. An export trade was built up with the establishment of marketing subsidiaries in Britain, Denmark, Sweden, Romania, Italy, Norway, and Australia between 1905 and 1913. Nonetheless the firm lagged behind Dunlop, Michelin, Pirelli, and U.S. Rubber in the establishment of overseas factories and, in some cases, rubber plantations. The outbreak of World War I forced a concentration on supplying military requirements and led to the dissipation of the overseas sales network. At the same time shortages of natural rubber compelled rationing of supplies, use of reclaimed rubber, and experiments with synthetic rubber. In 1909 Continental had produced a few tires using synthetic rubber supplied by the Bayer laboratories. Overall the war severely disrupted the firm’s prewar expansion and prosperity.

Civilian production began again in 1919, but despite the underlying civilian demand for tires Continental faced difficulties. Although exports resumed, the earlier momentum had been lost. Moreover, the German car industry grew relatively slowly in the 1920s, and the general economic instability was a further constraint. Continental’s response was imaginative. Goodrich, then the fourth-ranking U.S. tire firm, seeking overseas connections, took a 25 percent financial stake in the German firm in 1920. Bertram G. Work, a prominent Goodrich executive, was a director of Continental in the mid-1920s. The relationship provided access to superior technology for tire designs, rubber chemistry, and manufacturing.

In 1921 Continental introduced the cord tire, a lower pressure tire already coming into vogue in the United States, and three years later added the balloon cord tire, a design first adopted in France. The Goodrich connection may also explain Continental’s use of carbon black—a filler used to improve the durability of tires, especially aging, and a standard additive in the United States—in its tires from 1924. In addition, Continental endeavored to modernize its production processes, adopting U.S. tire-making machinery, with a subsequent rise in productivity. Generally the relationship with Goodrich appears to have been highly valuable for Continental. Nonetheless, the unfavorable business environment ensured that the firm’s workforce barely increased during the 1920s. Returns were poor compared to the heady prewar levels, and no dividends were paid in 1922, 1923, or 1926. The resulting competitive and financial pressures led to the amalgamation of several German rubber firms to create a new and larger Continental company.

In 1928 Continental took effective control of the neighboring Hannoverische Gummiwerke “Excelsior,” and the Goodrich shareholding was terminated at this point. In the following year, four further companies were added to the amalgamation: Peters Union of Frankfurt, Gummiwerke Titan B. Polack of Waltershausen, Liga-Qummiwerke of Frankfurt, and Mitelland-Gummiwerke of Hanover. Negotiations to add the Phoenix Gummiwerke AG company failed, but the expanded Continental firm was by far the largest German tire company. In April 1929 it became known as Continental Gummi-Werke Aktiengesellschaft. During the amalgamation, the Opel family, which had recently sold its car business to General Motors, acquired a substantial shareholding in Continental. Fritz Opel was a director between 1932 and 1938, and the family representation on the supervisory board continued with Wilhelm von Opel from 1939 to 1946 and Georg Opel from 1939 to 1971.

The Influence and Implications of the Nazi Government in the 1930s and 40s

At first the new combine had to retrench in the face of the Depression: Continental’s workforce declined from 16,765 to 10,602 between 1929 and 1932 as demand, prices, and profits all slumped. From 1932 the economic upturn and, in particular, the impact of the Nazi government’s program to motorize the German economy and use the construction proceeds as a contribution to reducing unemployment produced a new phase of rapid expansion in car-tire demand. Total German tire output doubled between 1934 and 1938, and Continental’s workforce rose to 15,254 by 1937. Output and sales expanded rapidly, although dividends rose rather modestly. At the same time the strengthening of state controls resulted in trade agreements covering rubber products so that production and pricing decisions were subject to central direction. In 1938 a new factory was opened at Stocken, Hanover. Buoyant domestic demand made Germany the principal market, but there was a revival of exports within the framework of Nazi trade policies, including expansion in Spain, where Continental established a sales subsidiary in 1934.

Company Perspectives:

We understand and respect the interests of our stakeholders. Our stakeholders are our customers and shareholders, our employees, the community, our partners, and our suppliers.

We work closely with stakeholders across a broad front, delivering customer benefits, creating shareholder value, and building a working environment that inspires excellence.

Integrity and respect are at the heart of all our actions. We are always honest and fair with our stakeholders. We keep our promises.

The rearmament program of the late 1930s increased state influence, especially given the interest in synthetic rubber development. In World War II tire and rubber output was regulated closely to meet military requirements, especially for truck and aircraft tires and the manufacture of clothing, footwear, and other supplies. With the severe shortage of natural rubber, Continental cooperated with the major German chemical firms in the development and, especially, the utilization of new synthetic rubbers. Overall, with the reduction of civilian business and conscription, sales and employment actually declined during the war.

In the immediate postwar years Continental struggled to resume civilian production amid the physical damage of war and the uncertainties of occupation and reconstruction. Factory employment, down to 6,733 in 1945, rose gradually to 11,891 four years later and dividends resumed in 1948. In a strategy reminiscent of the 1920s, Continental turned to the United States. From 1948 to 1954 Continental had a technical assistance agreement with General Tire. More indirect technical guidance was obtained through a contract to manufacture Goodyear tires for the leading U.S. firm’s German marketing operation. Again, the U.S. link provided advice on modern machinery and manufacturing methods, but the necessary new investment was financed by Continental itself.

Deutsche Bank had a major influence on the company’s affairs, with representatives on the board from 1953; the Opel family remained the largest single shareholder, with Georg Opel serving as chairman of the supervisory board between 1946 and 1969. The Deutsche Bank was the major financial institution involved with Continental.

Product Innovation and Diversification in the 1950s and 60s

Continental, like tire producers everywhere, undertook considerable product innovation. A line of mud tires and snow tires was introduced in 1951, tubeless tires in 1955, and radial tires appeared in 1960. These products kept the firm abreast of general developments, although Continental lagged behind Michelin and Pirelli with radials. Over the same period, there were successive changes in the materials used in tire construction with the advent of synthetic fibers. The technical challenges and the increasing sophistication of rubber and tire science required the development of research facilities, including in 1967 the opening of the Contidrom tire testing track. Continental remained the largest German tire producer and competed primarily with the subsidiaries of multinational companies.

Between 1950 and 1965 Continental enjoyed a rapid expansion due to the strong growth of the German car industry. The firm supplied original equipment tires—tires installed on new cars—to leading German carmakers and also benefited from the spread of motoring in the increasingly prosperous domestic economy. By 1965 employment totaled 27,447, more than double its 1950 level, and capitalization stood at DM 210 million.

The firm also followed the carmakers, notably Volkswagen, overseas with increased export sales. This expansion was supported by investment in a tire factory in northeastern France in 1964 and the acquisition of marketing subsidiaries in Italy, Portugal, and the United Kingdom. Foreign subsidiaries were also acquired in Spain, South Africa, and Brazil. The firm promoted its tires, often on German cars, in various forms of motor sport in the 1950s. The industrial rubber goods business, much of it also related to the automotive sector, also expanded.

In the early 1960s Continental opened a new plant to produce plastic components for cars and established a new industrial goods plant. Acquisitions of smaller, specialist rubber firms in Germany achieved further expansion of the nontire sector, including footwear, foam, rubber boots, and plastics. Continental usually purchased a full shareholding or a majority stake; later this domestic strategy of acquisitions was to be transferred to a global stage.

Increased Competition Leading to International Expansion: 1970s–80s

Continental’s sales and profits remained good in the late 1960s, but as the rate of growth slackened competition increased. In the 1970s these tendencies were aggravated by the effects of recessions and higher oil prices in the car sector. There was a swift transition to radial tires, whose greater durability further dampened sales, while new investment was required to produce radials. Similar influences and the resulting financial problems affected all European and U.S. tire markets. The leading international tire companies now competed aggressively in all markets, with the Japanese industry emerging as a potent force. The consequence was a restructuring of the global industry through companies leaving the industry, acquisitions, and new foreign investments. Continental experienced financial difficulties; there were no profits between 1972 and 1974 and no dividends between 1971 and 1979.

Key Dates:

1871:: The Continental-Caoutchouc und Gutta-Percha Compagnie (Continental) is established in Hanover, Germany.
1898:: Continental designs and begins to manufacture a pneumatic tire for the automobile, a significant technical accomplishment.
1929:: Company becomes known as Continental Gummi-Werke Aktiengesellschaft.
1951:: Continental initiates a concentrated program of product innovation.
1979:: Continental pursues strategic acquisitions, beginning with the purchase of the European tire factories of Uniroyal.
1987:: With the purchase of General Tire, Continental transforms itself into a major international producer; the firm’s name is shortened to Continental Aktiengesellschaft.
1991:: The operations of Industrial Products are reorganized under the brand name ContiTech.
1995:: Continental establishes an Automotive Systems division to pursue research and technology in automotive electronics.
2001:: Company spends $570 million to purchase a controlling interest in DaimlerChrysler’s Temie auto-electronics business.

Chairman Carl Hahn directed Continental’s initial retrenchment, and reports of merger negotiations with Phoenix came to nothing. There was a degree of diversification with the expansion of the automotive products division including the addition of fan belt manufacture in 1975 and investment in a massive facility for conveyor belt production. Nonetheless, tires remained the principal product and the intensifying oligopolistic rivalries resulted in more potent competition from subsidiaries, notably Michelin, in Germany.

By world standards Continental was relatively small and exposed to the threats of takeover, isolation in a few markets, and inability to sustain investment in new technology and research. In this context Hahn settled on a bold strategy of international expansion through acquisition. Continental’s approach was not unique. Pirelli, Bridgestone, and Sumitomo all pursued a similar course and many smaller firms merged defensively. By contrast, Michelin invested directly in its own foreign factories, notably in the United States. In 1979 Continental purchased the European tire factories of Uniroyal, the U.S. firm that was beginning its retreat from the tire business. As a result Continental obtained a second French factory and another German plant plus factories in Belgium and Scotland. The other gain was the established marketing position of the Uniroyal brand. The acquisition of Kleber-Colombes, a financially troubled French firm in which Michelin held a major stake, was discussed, but not pursued in 1980.

The firm’s penetration of two important markets was increased by production contracts. In 1981 a contract was signed for Toyo Rubber Industry Co., Ltd. to manufacture Continental tires in Japan, and there was a similar agreement with General Tire in the United States in the following year. In 1982 Hahn was succeeded by Helmut Werner who had been with Englebert, Uniroyal’s Belgian subsidiary.

In 1985 Continental purchased the tire division of Semperit, the largest Austrian rubber firm, for DM 47 million. The expansion and diversification coupled with an economic upturn contributed to an improvement in the firm’s finances. Dividends were resumed in 1983, and in 1986 Continental’s profits totaled DM 114.4 million on a total turnover of DM 4.97 billion. The most remarkable step in Continental’s transition, via acquisition, to major international producer came in 1987 with the purchase of General Tire for US$650 million from GenCorp. Continental obtained the four factories, the brands, the original equipment contracts, and the marketing network of the fifth largest U.S. tire manufacturer. In addition, General Tire had owned Mexican and Canadian factories. As a result, Continental then accounted for 6.6 percent of the world tire market in 1988 and 8.1 percent in 1989, making it the fourth largest producer, with more than double its market share at the beginning of the decade. Even so, Continental’s market share remained less than half that of Michelin, Goodyear, and Bridge-stone. The expansion raised Continental’s market share and its profile in the business, but also substantially raised its managerial tasks in directing a large, global, and diverse business, particularly one in which the various national units often had their own traditions.

In 1990 Continental purchased a 49 percent stake in Nivis, a tire firm created by the earlier merger of the two leading domestic tire firms in Sweden and Norway; a share in Mabor of Portugal; and a British tire distribution business. Continental also entered several technical agreements with overseas producers. The political changes in Eastern Europe prompted further developments in the form of cooperative relationships and continuing discussions of other possible ventures as Continental followed the German car manufacturers’ lead.

In 1987 the firm’s name was shortened to Continental Aktiengesellschaft (AG). During the 1980s Continental appeared in a strong position with solid finances, persistent expansion in the passenger tire and truck tire markets, and innovative tire development and research. The earlier dependence on the German market had been successfully reduced; foreign markets accounted for 62 percent of the group’s sales in 1990 compared to 38 percent a decade earlier. Nonetheless, tires accounted for around three-quarters of company sales, and the competitive forces that had inspired Continental’s acquisition policy remained powerful as tire capacity outstripped demand once again in 1989 and the early 1990s. The tire business, notably the General Tire subsidiaries in North America, recorded substantial losses in 1990: DM 48.63 million in the United States and DM 36.15 million in Canada. Despite increasing total sales, Continental’s net income declined from DM 227.8 million in 1989 to DM 93.4 million a year later. Further restructuring plus the effort to implement improvements in quality posed new challenges.

Werner, a leading figure in the achievements of the 1980s, resigned to move to Daimler-Benz in 1987. In September 1990 Pirelli, fifth in the world tire industry and also experiencing losses on its tire business, proposed that Continental purchase Pirelli’s tire division to form a combined business, in which Pirelli would hold the controlling interest and thus managerial control. Such a merged business would be virtually on a par with the largest producers in terms of market share. After negotiations Continental rejected the scheme, but Pirelli and several supporters bought a stake in Continental and claimed the backing of a majority of shareholders. In May 1991 Horst Urban, Continental’s chairman and an opponent of the Pirelli proposal, resigned—an apparent indication of a softening in Continental’s attitude.

Apart from Deutsche Bank, other important German shareholders were Bayer, Volkswagen, Daimler-Benz, and BMW. Discussions of possible forms of cooperation, such as research-and-development work, continued, although an immediate merger appeared less probable. The persistent trend toward the domination by Goodyear, Michelin, and Bridgestone of the world tire industry suggested that Continental would move into some form of merger sooner or later, but would seek to maintain its independence.

Relentless Cost-Cutting in the 1990s

When Hubertus von Grunberg took over as CEO of Continental in 1991 the company was, in his words, “bleeding like a stuck pig.” Fierce competition persisted in the worldwide tire market, and Continental recorded losses of 128 million marks, or US$78 million, for the year. After signs of recovery in the first half of 1992, market conditions deteriorated again, and von Grunberg characterized the early months of 1993 as “miserable.”

During this period, Continental committed itself to rigorous cost-cutting and company-wide restructuring. Central to these initiatives was the effort to reduce labor costs. Hence Continental laid off 10,168 workers, or 20 percent of its labor force, between 1991 and 1993. In 1994, the company announced plans to trim another 1,500 to 2,000 employees from its ranks.

Continental also made aggressive strides to improve returns by shifting production away from Germany, with its high labor costs and highly regulated work practices, to less expensive locations in Eastern Europe, Central and South America, and Southeast Asia. In 1993 Continental and General Tire entered a joint venture with Mexican manufacturer Carso to oversee the operations of four manufacturing plants and 1,000 sales outlets in that country. Under the brand name Euzkadi, the venture would account for the majority of tire distribution in Mexico. Also in 1993, Continental gained a majority interest in Barum, a Czech company whose assets included a commercial vehicle tire plant in Otrokovice. By 1998, the Czech Republic plant was Continental’s highest producing car tire manufacturer. In 1995, Continental completed construction of a new DM 180 million manufacturing plant in Lousado, Portugal. Heralded by Grunberg as the company’s “most modern plant in Europe,” the factory was expected to yield labor costs one-third lower than those in Germany. In 1997, Von Grunberg’s goal was to realize 40 percent of Continental’s tire production from such low-cost sites.

Technical innovation was another key component of Continental’s cost-cutting program. To further facilitate the globalization of tire production, the company developed something called the modular manufacturing process (MMP), whereby basic tire parts, or modules, were produced at low-cost sites and subsequently shipped to plants in other markets for assembly. In 1998, Continental was building plants in Russia and Brazil where MMP would be implemented. Von Grunberg estimated that MMP plants would be six times more cost efficient than standard conventional plants.

By the late 1990s, Continental’s dogged determination to cut costs had begun to pay off. Even while 1997 tire prices averaged lower than in 1996, the company realized a 67 percent increase in net income to $176 million during 1997, marking the return to profitability of U.S. subsidiary General Tire, as well as Continental’s beleaguered truck tire division.

Diversification for the 21st Century

Von Grunberg was cautiously optimistic about Continental’s recovery, but he was by no means content to leave his company at the mercy of the fiercely competitive, low-margin tire business. According to von Grunberg’s vision, diversification was essential to Continental’s long-term success. Throughout the 1990s, the company had invested heavily in technology, and the sales of Contitech, the company’s diversified rubber products division, had contributed significantly to stabilizing the company’s profits.

In 1995, von Grunberg established Continental’s Automotive Systems division to pursue research and technology in automotive electronics, which promised much higher profit margins than tires. One of the key innovations of this group, introduced in 1997, was an electromechanical brake system called the Integrated Starter Alternator Damper (ISAD).

The ISAD received widespread praise and garnered the German Industry’s Innovation Award. In 1998 Continental broadened its investment in auto components with the $1.93 billion purchase of ITT Industries’ brake and chassis business.

In 1999, Continental forged even further ahead with its investment in electronic safety systems. In 2001 the company spent $570 million to purchase a controlling interest in Daimler-Chrysler’s Temic auto-electronics business. The objective was to gain strong competitive position in the fast-growing market for electronic stability programs (ESPs). ESPs, which evolved from antilock braking systems, were electronic sensors that helped to detect and correct the instability responsible for vehicle rollovers, an increasingly high-profile safety problem in the era of SUVs.

In 2002, weathering continued instability in the economic climate, Continental resumed broad restructuring, including widespread job cuts and plant closures. While the cutthroat competition and price pressures of the world tire market posed ongoing challenges, the company’s demonstrated determination to contain costs and its shrewd ability to innovate would likely continue to serve it well.

Principal Subsidiaries

Benecke-Kaliko AG; Continental Teves AG & Co. oHG; ContiTech Antriebssysteme GmbH; ContiTech Vibration Control GmbH; ContiTech Luftfedersysteme GmbH; ContiTech Kühner GmbH & Co. KG (86%); ContiTech Schlauch GmbH; ContiTech Transportbandsysteme GmbH; ContiTech Techno-Chemie GmbH; Conti Temic Microelectric GmbH; Vergolst GmbH (87.5%); Barum Continental Spol. s.r.o. (Czech Republic; 85%); Continental Automotive Products s.r.l. (Romania); Continental Benelux S.A. (Belgium); Continental France SNC; Continental Gislaved Dack AB (Sweden); Continental Industrias del Caucho (Spain); Continental Mabor Industria de Pneus (Portugal); Continental Matador s.r.o. (Slovac Republic; 76%); Continental Teves Czech Republic, s.r.o.; Continental Teves UK Ltd. (U.K.); Continental Tyre Group Ltd. (U.K.); ContiTech AGES S.p.A. (Italy); ContiTech Anoflex SNC (France); Semperit Reifen Ges.m.b.H. (Austria); Temic Telefunken Microelectronic Hungary Kft. (60%); Continental Automotive Mexicana de C.V. (Mexico) Continental do Brasil Produtos Automotivos Lda; Continental Teves Corporation Japan K.K. (51%); Continental Teves Inc. (U.S.A.); Continental Tire de Mexico, S.A. de C.V. (80.6%); Continental Tire North America Inc. (U.S.A.; 80.6%); Continental Tyre South Africa (Pty) Ltd (60%); Compa ñ ia Ecuatoriana del Caucho (Ecuador; 38.6%); Drahtcord Saar GmbH & Co. KG (Germany; 50%); KG Deutsche Gasrusswerke GmbH & Co. (Germany; 32.1%).