I'm excited to host the next fireside chat. This is one of the few overweights that most of you probably know I'm fairly cautious on the sector right now. But I think there's good catalysts here with Aptiv spinning their EDS business, I think, going to focus on the connectors software and active safety, which are sort of the higher growth areas and sort of I think, make a favorable sum of the parts comparison when that happens.
And it's also one of the few companies that I think has -- still has a pretty good secular growth story, which I think is pretty key from my perspective in this sort of challenged production environment, which I guess we could talk about fairly shortly.
So I'm happy to kick it off today with Aptiv's CEO, Kevin Clark; and CFO, Varun Laroyia.
If you have questions, definitely jump in, but I'll just kick it off. Maybe to start, I mean, obviously, last quarter, you removed guidance because of the tariff uncertainty. What do you need to see to sort of reinstate it? And how are things currently trending from your perspective since you reported?
Yes. So first, thanks for having us here. We appreciate it, Colin. Yes, as we look at the year and we look at our announcement from a Q1 standpoint, so we gave guidance in February following Q4 for a full year outlook.
And then in Q1, obviously, we went through that period where there's a lot of discussion about trade, a lot of discussion about USMCA. And I would say, a diminished visibility into the -- probably the back half of the year really. We felt like we had very solid visibility to the second quarter.
We had a sense for where the U.S. administration was headed and what they were sensitive to priorities for Mexico, EU and to some extent, China. But we needed to see all that play out. And obviously, with what you'd read about in the newspaper, it was tough to predict from a day-to-day basis. And quite frankly, our customers weren't really quite sure, which at the end of the day, to Colin's earlier point, vehicle production is what drives our revenue growth.
So we gave guidance for Q2, which we had a high level of confidence and we tell you we still have a high level of confidence in, and so we had very solid visibility to near-term production schedules, but it was really the back half of the year and how that plays out.
So for us, time has passed, so that's been beneficial. I'd say there's more visibility with respect to the U.S. and what the Trump administration wants from a USMCA standpoint. So that's been helpful. Obviously, there's still a lot of dynamics between U.S. and China, U.S. and EU that need to play out.
So we just need to get a bit more visibility to that. But we're hoping on our Q2 earnings call, we're in a position to give better visibility in the back half of the year, more clarity to investors. So...
I mean how are you thinking quarter -- Q2 production trending as you kind of expected heading into the quarter? And any thoughts about how the rest of the year might trend?
So Q2 production, pretty much trending as expected. Back half of the year, we've seen some movement of schedules. We've seen, relative to when we gave full year guidance in February, North America schedules a bit weaker. Some small changes in EU, principally in and around EV platforms.
And quite frankly, China stronger. But net-net, I'd say, by and large, all of them washing each other out. So I think a slight mix change from a regional standpoint, from an OEM standpoint, but the industry looks like it remains relatively on pretty decent footing at this point in time.
And initially, you were guiding light production down 3%, North America down 5%.
Correct.
So down 3% seems like it might be still good and down 5%...
Yes. I think if we were sitting here today for the full year, we'd probably say just given the uncertainty, the down 3% is down 1 point or 2 for the full year. I think that's where we'll likely end up. But again, we need to see how things play out.
And the very positive news last quarter was that you said you're 99-plus percent USMCA compliant. Do you -- for that 1%, do you have to move anything? And is that a competitive advantage? Do you think you could take maybe share from people who aren't compliant and may be disadvantaged as they bid on business in the future?
Yes. So over the last -- probably over the last decade, we've been very focused on how we regionalize our supply chain as geopolitics change. So that's something that's been underway for an extended period of time.
So we manufacture and supply, and we're almost matched up 100% of demand versus supply in region for region. So that's China for China. That tends to be Eastern Europe, North Africa for Europe; and then for us, Mexico into the U.S. So we're pretty well matched.
I think that USMCA position where we are today, and it varies a little bit by product, so when you think about wire harnesses, for example, in North America, everybody is in Mexico. That's where that's produced. So I wouldn't say our footprint is a competitive advantage.
Our capabilities are. But when we look at our ADAS solutions, our user experience solutions, our interconnect solutions, we'd have some competitive advantage. That's certainly something that we're having discussions with customers about, especially those that are non-U.S.-based customers that actually are trying to have more USMCA content. So we'll see how it plays out.
So there is some opportunity maybe on the active safety side.
Yes.
Obviously, a big part of the story has been growth over market. It obviously softened last year more than we've seen. How is that tracking? I mean, obviously, you withdraw guidance, but you were initially expecting to return to growth over market. Any factors that changed since then?
Yes. Listen, I think investors need to recognize kind of growth over market and the underlying -- the denominator in that, right? That's global vehicle production. There's 100-plus OEMs across the globe, all with different mix and on a quarter-by-quarter basis, quite frankly, all with different growth profiles based on their platforms.
So you can have really strong revenue growth and have lower growth over market. I think we got to move from this growth-over-market concept to growth because there's an aspect of OEMs out there that in reality, especially China, as an example, as investors, you don't want us on their vehicles. They're not high volume. They're not going to be successful OEMs.
It's not profitable business. So I think when you look at holistically, we really need to transition to growth. Are you growing? If vehicle production -- obviously, we update investors on a quarterly basis with respect to current quarter and our outlook for the balance of the year. But that in and of itself, I think we need to back off that a little bit. And are we winning business, are we growing, are we expanding margins, are we generating cash flow, get to a KPI is more consistent with that.
Okay. What about kind of factoring on that is one of your issues has been the China local mix. I think it's pretty much almost all the suppliers have had [indiscernible] there. Where are you today? Because I think you've kind of caught up a big pretty big step last year. And then when do you kind of get in line with the market dynamics?
So from a booking standpoint, when you look at our mix of revenues versus mix of industry production by class of OEMs, so multinationals, Tesla and local OEMs. We've been roughly increasing our share of locals. So BYD, Geely, Chery, Great Wall can go through the list, at roughly from a bookings rate, roughly 10 points per year over the last 3 years.
So we'll exit this year at roughly 70% of our revenues will be on local China OEM platforms, some of them for the China market, some of them export, all really focused on the top kind of 8 or 10 OEMs in China. We don't pursue business below that, just given concerns about sustainability of that sort of business and profitability. So we'll exit this year that basically industry mix.
And last year, you were like was it like...
54%.
At the end of [indiscernible].
Yes, and the trajectory based on the bookings and the awards that essentially SOP, that's the kind of run rate exit is, call it, 70%, which is market parity.
Okay. Why that -- is that because the product cycle is so much faster in China that you're able to catch up because usually it takes 3 to 5 years...
In China -- listen, in China, you're awarded programs and they tend to launch within a 12-month time frame, even last 9 to 12 months. So a much faster launch period.
And you're not finding any concerns about wanting to use local competitors and Chinese competitors as a top concern I hear among investors. Are we -- are Chinese locals more biased to use their local supply chain?
No. It's focus what we've experienced. Well, let me back up a little bit. And just the commercial for our China business. We've been in China for 35-plus years. And we have local capabilities from an engineering, development, manufacturing, supply chain standpoint and a China management team.
So when you meet with our teams in China, it's a local Chinese automotive supplier, but has the benefit of the scale of a global organization like our own. Obviously, our products need to be competitive from a performance standpoint, quality needs to be competitive, our pricing or value needs to be competitive. And as long as you have that, you're in a solid position.
Now with players like BYD, Geely, Chery, others, who are very active on their -- either their export platforms or some of them, as you know, are launching production outside of China, a global player like ourselves with the supplier ecosystem is well positioned to support them in doing that because we have the relationship in China as well as the capabilities outside of China. So that uniquely positions us.
What about the margin profile with locals in China? Because I've heard from other -- when I go to industry conferences, a lot of suppliers are actually worried about how profitable the local China business is that is possibly lower margin than traditional supplier business.
The market is competitive. You have to choose your spots. You have to have a very competitive cost structure, which we do. So we've been very focused on rotating footprint, for example, in China to Western China, manufacturing as well as engineering.
We've been very focused on developing the China supply ecosystem. So using a China supply base, right, that is more cost effective than some of the Western players. And because of that, we've been able to maintain our margins in China while growing. But it's something that each unique pursuit we look and we watch very, very closely.
Shifting to the EDS spin. Is that still on track for Q1 of next year? What are the sort of next milestones we should be looking out for when maybe we get the management team or stuff like that?
Yes. Great question. So we announced the spin of the EDS business third week of January, the 22nd of January, actually. And as you can imagine, a lot of work has been taking place. We have a full standup separation management office.
We supplemented it with some external resources also, but largely by the team that essentially did Project Drive, which was the spin of the powertrain business in 2017. So we had the old muscle to be able to work through the entanglements and work through the separation process. And that work is on track, that work is on track.
The Form 10, the carve-out financials, those are on track also. Later this summer, we'll begin -- this is kind of getting to the more nitty-gritties of it, but the kind of mock close for the spin business, for example. So all of those pieces are as expected, right?
Same thing with the cap structure and getting in place the broader management team. As you can imagine, we have a tremendous set of operational management team, and that's the way each of our businesses operate, a series of activities which are done by corporate; tax, treasury, IR, things along those lines. So we do need to supplement certain functions from that perspective for the spin. But other than that, we feel comfortable and confident about the time line that we've committed to.
And should we expect like an investor event later in the year, something like that...
That's right. Yes. So thank you for reminding me...
That will be the end of the summer...
Correct. The public Form 10, we essentially would like to announce alongside our third quarter earnings or subsequent to that. And then hold the 2 Investor Days, one for EDS and a second one for RemainCo or new Aptiv in the third week of November.
Okay. Cool. From my perspective, the spin sort of highlights the sum of the parts, particularly with connectors maybe comping to much higher value companies. What are the operational benefits, I do get that from investors? What is helping the businesses operationally from the spin? And are there any dissynergies with the spin that we should be considering?
There are some dissynergies related to corporate overhead, right, large organization shrinking to a small organization. Varun's leading that activity. So in terms of eliminating any of the stranded costs. So we have an aggressive plan on that. That's a part of the separation office that Varun was talking about.
So that's something, obviously, we're all over. From a synergies tied to the separation, really, it comes down to focus. It comes down to more flexibility for the EDS business to focus on its product strategy, its customer strategy, similarly for the ECG and ASUX businesses.
We're positioning both for growth, both organic as well as inorganic. And as separate entities, it's easier -- it's quite frankly, easier to do M&A just given the financial profiles and the nature of those 2 businesses.
From a dissynergy standpoint, we run our businesses as global P&Ls, right? So global P&Ls balance sheet and operational responsibility. We don't have shared -- very few shared facilities, none in the manufacturing side, very little on the engineering side, some from a corporate or group overhead standpoint, but it's small. So from that standpoint, the separation is actually pretty easy.
So when we think of the spend, the EDS, there's not much acquisition there. So where the focus would allow the RemainCo to do more activity there...
No, listen, we think there's opportunity in both. So when you look at the EDS business, it's a #1 or #2 by region global wire harness company across the globe, principally full service business where that business is designing and optimizing full body full wire harnesses for OEM customers.
It's well north of 50% of our revenues. So very little sort of build to print. It's a great platform to build off of. Within the automotive space, there should be opportunities to consolidate and bring others into that. But we also think there's some fairly meaningful nonautomotive opportunities there, too. So there is a growth focus there, too, an opportunity for M&A.
Now when you look at the ECG business and the ASUX business, higher margin profile, naturally higher growth profile for those businesses. Path towards software-defined and vehicle connectivity, obviously, remains very strong. So obviously, there are both organic and inorganic opportunities for those 2 businesses as well. But I just -- both are going to be positioned for growth.
And then when I look at the -- at least the segment margins for EDS, they're much higher than sort of wiring comps that I've seen, there's not many. Why do you think they're stronger than...
Just to that business mix I talked about in terms of that full service that -- the value that we bring to our customers from a full-service design as well as manufacturing of wire harnesses. So we bring more value, therefore, we receive more value.
So obviously, it's a business where those of you that are familiar with it, it's low-cost country manufacturing, right? You need to run your manufacturing facilities effectively and efficiently. We do that well. To be transparent, our strongest competitors do that relatively well, too. It's really about that mix of business and the value that we bring to our customers where we save them money and we're able to share in some of the benefits that we bring to that makes a real difference.
You're referring to the fact that you don't do build-to-print, some of your peers do, which would be lower margin because you're not adding...
Yes.
Okay. Talking about margins, last year, you actually on, relatively flat sales, expanded margin. How should we think about that going forward? I mean, is there more restructuring opportunities and cost savings that could continue that? Or is it really now just we got to grow and you got the leverage on growth that typically drives the margins?
Sure. Listen, it's not a question of either, it's an and. We'll grow the business, right? And as you think about some of the comments Kevin mentioned earlier this morning in terms of where we see higher margin growth within our businesses, those continue.
So it's growth and then also the margin side of things, right? And so revenue remain -- revenue growth remains a focus for us. And then from a margin perspective, yes, clearly, with a higher top line, it gives you more opportunity. But having said that, as you've seen, the operational excellence muscle that the company has across each of our businesses across every region is tremendous, right?
And we've talked about footprint rotation, we've talked about footprint consolidation, we've talked about best cost location for engineering talent, where are the cars being made and hence, how do we get them closer to where the markets are, that activity continues.
The one piece that we don't talk enough about our Wind River business, for example. And within that, if you think about the engineering tool chain, which allows engineering departments to be able to develop that much more -- on a cross-border basis, more real time and that much more efficiently. We are eating our own cooking, right?
And so we've actually deployed that piece across our engineering teams on a global basis, and that continues to proliferate based on when new platforms get ramped up, you can't put them mid program. But as those come on, we're deploying -- we are seeing efficiencies come through there, and we're certainly seeing that take place with our customer set also. So again, there's more opportunity.
The final one is, listen, with regards to higher productivity, we've done a GSR at the end of 2023, and the vast majority of it came through in '24, some into '25. And then for '25, we've done a further 5% GSR. Some of it will come through in '25 and then the run rate will really be coming through in 2026. Said differently, there's a series of opportunities and levers, but growth remains a priority, and then it's an and rather than an either.
I'd say the other thing I'd add to Varun's comment is just supply chain. So those of you that are really familiar with us are very well aware, 2020 COVID, costs that came into the system, supply disruption that lasted into 2021, overlay on top of that semiconductor disruption, '21, '22, '23 and that impact on our supply chain and our operations and the inefficiencies that it created.
I'd say a big part of that, Colin, I think we've talked about to you in the past, was also in '24, kind of getting all of that inefficiency out, getting back to normal, driving performance, whether it's in manufacturing, whether it's in material, those sorts of things. So we went through this period where it was kind of hand to mouth in terms of keeping our customers connected, our employees safe, and we're past that. So...
Talking to some industry experts on active safety, there's a concern about where a traditional Tier 1 supplier might fit in the supply chain because you have -- the automakers keep talking about how they want to take a more active role in active safety and I guess, normal architectures as well.
And then you do have the NVIDIAs and Qualcomms of the world also taking a larger role. So how are you managing that dynamic to make sure you still have an important role? And where do you see that evolving going forward?
Yes. Listen, I think it's tough for us to react to what people are saying. We can certainly tell you what we're seeing, right? We're seeing the exact opposite, right? We're seeing with those OEMs, whether they're European or U.S.-based, who are most vocal about they're going to bring certain activities in-house.
The reality is they've tried it and more often than not, they failed. And they've spent a lot of money trying to do certain things that for some reason, for some period of time, they deemed core. And after they tried to do it, they spent a lot of money and they're -- they've kind of changed their objectives.
So there are several OEMs that, quite frankly, I would say, whether they were existing customers or conquest customers, where we've seen them do a 180. Now having said that -- just having said that, our approach has been we need to give customers choice, we need to give them what they want. So we've built an open architected solution.
So they can contribute to that if they'd like. They can take all of it if they'd like. It's chip agnostic. So if they're focused on using a -- for a controller, an NXP chip or a TI chip or in China, an AXERA chip, they can do that. From a vision standpoint, it's fairly vision agnostic where if they want to use a Mobileye solution, if they wanted to use an Arriver solution for Qualcomm, we can do that. We use as our base solution for our Gen 6 ADAS solution, a StradVision solution, a company out of Korea that we have an investment in.
And then in China, it's MAXIEYE for a China-based solution. So we're going to them with very open platforms where we can partner with them, we can give them flexibility, we can give them choice. We like the full system solution that we provide because our view is it's 20% to 30% lower cost at equal or better performance. But customers are looking for choice. So...
What about the semi supplier side of that? Because to be honest, I have your hesitation about the automakers and their ability to kind of do some of the more complicated software, but the NVIDIAs of the world seem like quite [indiscernible] threats and there's a sort of that they might be becoming like tier half or whatever taking a more integrated role with the OEM.
No, I think -- listen, I think there are elements of some of the semiconductor players are trying to put more software on their semiconductor chip. That's obviously understandable. But from a cost standpoint, from an integrations capability standpoint and from a lock-in standpoint, so we're very focused on how do we make sure our customers have optionality, the choice? They're not locking into a particular ecosystem that is very expensive to unlock. And that's been our approach in terms of going to market with them. And so far, it's been pretty successful. So...
Any update on smart vehicle architectures? We saw last year with the Rivian and Volkswagen deal was quite -- caused a lot of concern. How has your sort of backlog trended? And are you seeing kind of hear more talk on the same type of in-sourcing concern and are you seeing that?
It's mixed by OEM. I think -- let's start with -- I think the here and now, all the discussion about tariff trade our customers are focused on that. That is where our customers are focused. So I think it's dragged out ultimate decision-making on, quite frankly, a number of different things.
I think as it relates to smart vehicle architecture, we're working with several OEMs, global OEMs. We're working with several China-based OEMs, local OEMs on their smart vehicle architecture approach. So the demand is there. I think it's transparently with the slowdown in electrification in North America and then the trade situation, it slowed a little bit in this market, moving faster in China than -- or in Europe versus North America.
And then China, I would say, a relatively stripped down version of zonal controller usage. When I say stripped down, not fully optimized, not at the same level of content removal from a wire harness standpoint that we're talking to our European and U.S. customers about.
When do you think the platforms hit and sort of scale that we'll see notable...
Scale -- sorry, in the late end of this decade, '28-'29 period. So...
Maybe talk a little bit about user experience that has been, I think, it was down double digits last year. What is the trajectory there? How strategic is that long term from your perspective? It has been sort of a drag on growth?
Yes, it's -- so the drag on growth principally relates to 2 very large, very legacy infotainment programs, one in China with a multinational JV and one in Europe that business is transitioning. So we've won a number of programs that will start to come online end of this year. The mix of that product is in addition to what we used to call parts of infotainment, there's a bigger piece that's in-cabin sensing now, broadly speaking, or cockpit digitization.
We're starting to see in China the fusion of the ADAS controller and the cockpit controller. So they're coming together. We're working with a few of the semiconductor folks on a few semiconductor chip that serves both. If you were at our CES show the last 2 years, you've seen that, actually a Chinese chip manufacturer, Black Sesame that we're working with for the China market.
So it has strategic importance as those domains kind of come together ultimately, and you have a consolidated hardware stack and you have a consolidated software stack. So it's important. The revenue drag we've seen or growth drag in the ASUX business within that space is, again, it's 2 programs. So that should be behind us by the end of this year.
Any questions in the audience before I kind of figured you raise the hand. Any update on Wind River that you mentioned it earlier? How is that progressing versus your initial plan?
Yes, listen, core business performing well now. Q4 was a strong quarter. Q1 was a strong quarter. It's on track to grow double digit in 2025. I think if I were to double-click on the background, the question behind the question, Colin, perhaps was, was it a slower start since the time we acquired it just over a couple of years ago?
Yes. But I think predominantly owing to the rollout of 5G, for example, right? But the business is more than holding its own. We've invested from a sales perspective, from a product perspective.
And the business is beginning to win some new logos. In addition to areas where they were strong in aerospace and defense and telecommunications, the auto side is coming along nicely also. So yes, overall, we feel good about it. And as I mentioned, products such as Studio developer, which actually helps businesses optimize engineering tool chains coming along well.
How about what's your view currently on BEV and PHEV? I mean is that -- I mean that was a drag last year, which was no one expected. Is that starting to pick back up? I mean it doesn't look like EV sales are that great in the U.S., but I guess you're turning a little bit.
Yes, listen, we had headwinds on EV growth in North America given program timing last year. We never viewed -- I think 70-plus percent of our bookings were Europe and China for EVs historically. So outlook for electrification in the U.S. market, I'd say, is relatively low growth, but we continue to see our North American OEMs adopt electrification.
They're all working on BEV platforms. I'd say there's more focus on hybrids, plug-in hybrids. And they're doing that because, again, they work in product life cycles that are beyond election cycles. And in reality, the industry will say it's headed towards electrification.
It certainly is in Europe at a much faster pace than the U.S. at a slower pace than what we originally anticipated, but you're seeing EVs grow, certainly seeing plug-in hybrids grow. So to be relevant in those markets, the North American OEMs have to have electrification capability.
And in China, the Chinese OEMs are all in. I mean that's the fastest-growing sector from an overall product standpoint. So we see significant opportunity. It's important -- we've talked about this in the past. When you look at our content, our vehicle architecture content on an ICE vehicle, it averages about $600 or $700, that's on average. You look at it on a plug-in hybrid, it's close to $1,300. You look at it on a BEV vehicle, it's north of $1,400, so over 2x.
So the unit growth is helpful, but also that content growth is really helpful. And that's consistent by market, China, Europe as well as North America. So that's a tailwind in Europe and China that certainly our ECG business as well as our EDS business is well positioned to benefit from. And it's an opportunity to drive incremental growth. And again, we view it as a secular trend that's going to continue. You may see a pause in North America, but it's going to continue.
Makes sense. Any color on labor inflation? That was a big issue for the last couple of years. It seems I haven't heard much about it. Is that much more moderate at this point or is it still an issue?
Yes. We still see it in Mexico. We still see it in North America. Well, Mexico over the last couple of years has been the biggest challenge. We've -- our wage rates in Mexico, hourly wage rates over the last 5 years have increased, I think, 2.5x, so between 2x and 3x.
So massive labor inflation, both from a wage rate as well as social benefit standpoint. So the prior Mexican administration was very, very focused on this -- with all the onshoring given some of the geopolitics, how does the administration take advantage of it? It slowed this year, but it's still relatively significant. It's double-digit inflation.
And from a wage rate standpoint, we're watching in terms of incremental holidays, vacation pay, things like that. And that's factored into our longer-term guidance. And that's part of our rationale about how do we drive more efficiency, more facility consolidation, how do we bring more automation into some aspects of the wire harness production. So those are areas that we're investing in so that we actually reduce our dependence upon low-cost labor, and we're less impacted by it.
All right. I think we're actually out of time. So we'll wrap it up there. So thank you very much. Covered a lot. Thank you very much.
Thank you for having us.
