Chuk Nowak/The Globe and Mail
If the first prerequisite for success is being in the right place at the right time, Swamy Kotagiri seems to have that covered. Right time? With the rapid adoption of electric vehicles, the rise of alternative fuels and the march toward autonomous cars, the auto industry is suddenly a hotbed of innovation. There may be no company better situated to profit from that potential than auto-parts giant Magna International, with more than 330 assembly plants and 158,000 employees worldwide, a diverse product lineup and the ability to assemble full vehicles to order. Right place? Well, all of that, plus the fact that Kotagiri is the first CEO to take over at Magna in the post–Frank Stronach era. The company bought out its colourful founder in 2010 and stopped paying him a salary in 2014. With Stronach out of the picture, then-CEO Don Walker (Stronach’s former son-in-law) tapped Kotagiri—who’d started as a simulations engineer in 1999 and wound up leading Magna’s entire engineering effort—as his likely successor. Kotagiri spent the next few years getting a crash course in Magna operations, launching facilities in India and Thailand, taking on the role of chief technology officer, and running the company’s electronics group and powertrain divisions before becoming president in 2020 and, finally, CEO this past January. As the pace of change accelerates in the auto industry, it’s now up to Swamy Kotagiri to keep Magna on course. He spoke to us from Detroit.
I think you’re the first CEO of Magna who hasn’t had any ties to the Stronach family. How do you think that will affect the company?
I don’t think it should affect it in any way. Even when Don was running Magna, I think he was pretty agnostic and objective in terms of—call it the constitution. His demeanour, how he ran the company, was more a company culture. My intent is to leverage the foundational stance we have and build on it.
What’s your strength as a leader?
I’ve grown up in Magna. So there is a sense of familiarity. I always enjoyed the culture, which presents very few obstacles or hurdles, or putting you in a box and saying, “You’re a testing engineer, so you’re doing testing.” You have the freedom, the ability to act on your own. The decentralized structure and compensation structure allows that. Every general manager of a plant owns the profit-and-loss statement of their plant, and their compensation is based on their profitability. So everybody’s an owner. All of those things have really kept me enthused. From a personal perspective, I like systems thinking—looking at the extent of Magna, the broad product portfolio we have and what we should be doing. Where the world is going in the next five, 10, 15 years. To be able to connect the dots—I enjoy doing that.
Do you see the company changing over the next few years?
I thought of it this way, Trevor. I was at the table as the strategy was discussed over the past three to five years. I’m sitting in a different chair right now but at the same table. Our focus is accelerating investments in the megatrend growth areas of the automotive or mobility industry. I purposely use the word mobility, because it’s about moving people and goods from point A to point B in the most efficient way. With the broad portfolio we have, I think we can play a larger role. The industry’s growing, it’s transforming. It’s a $3-trillion industry, and we are $40 billion. We have a long ways still to go.
I want to touch on some challenges Magna’s facing right now. One of them is the chip shortage. First, is the shortage preventing you from fulfilling your orders, or have the orders themselves been cut?
No original equipment manufacturer had to shut down because Magna couldn’t supply. The chip shortage has caused the demand to be reduced by the OEMs. The market demand is there, but the OEMs are not able to build, and therefore Magna is impacted. Not because we couldn’t make it.
What’s the main cause of the shortage? Is it a lack of materials? A bottleneck in shipping?
It’s a complex story. When COVID first came, in the first half of 2020, the automotive industry stopped in stages. First it was China, then Europe, then North America. Then they all started back up. I think the expectation of the industry coming back so soon was not there. And so the semiconductor industry reallocated capacity to other areas. And when the auto industry came back, we started seeing the bottlenecks.
Were you aware that reallocation was happening?
I don’t think there was much attention paid to it, until it started hitting. Definitely one of the lessons learned is that the visibility needed for the supply chain in semiconductors is not in weeks; it’s in months, and maybe even a full year. So there is that fundamental question being asked right now: How good is “just-in-time,” or should we start talking about buffers so we don’t face the issue? There is no clear-cut answer.
Do you think it’s the chip-shortage hiccup that has affected your share price? Since June, it has fallen by 20%.
Definitely overall the industry has been impacted by the chip shortage. By next year at this time, I think there is going to be stability. But to be honest, we really look at the long term. If you continue to look at the stock price every day, it’ll be very difficult to operate. The better way to look at it is, how is Magna performing compared to its peers? I think relatively, if you look at it, we are outperforming the peer group.
Vis à vis your peers, Linamar’s profit margin is twice that of Magna’s—4.8% versus 2.3%.
Again, you have to look at it from a long-term perspective. And you say Linamar—it is just one aspect of Magna, right? We have body and chassis. We have full vehicle. We have seats. We have a whole bunch of things. So Linamar wouldn’t be a full comparison, apples to apples. But they are a peer, for sure. Our seating group has been more adversely impacted by the chip shortage, and the OEMs have stopped particular vehicle lines. It’s kind of a mix of everything.
In July, you made big news with the announcement that Magna was buying Veoneer. Then in August, Qualcomm swooped in with a bigger offer. What happened, and where do things stand now?
I can’t talk about Qualcomm, obviously, but part of our strategy was to strengthen our business in the driver assist area. We felt it was complementary to a good business that we already have. So we followed our strategy. There’s always a chance that somebody could come in, and that’s what happened.
Did you actually have an agreement with Veoneer?
We have a merger agreement with Veoneer that is signed. Actually the proxy was filed, I think, in August.
How does the Qualcomm offer affect that?
Qualcomm made an offer and, from my understanding, the board of Veoneer has to look through it and see what’s good for their shareholders. And that’s what they’re going through right now. We’ll be looking at all options.
You’ve identified three megatrends in the industry: electrification, autonomy and new mobility.
There are four, I would say. The three you mentioned, and connectivity—for example, 5G and the new developments happening there. The consumer wants a seamless transition from the office or home into the car. How do we stay connected?
What does “new mobility” entail?
I would define new mobility as the most efficient, effective, economical way to get from point A to point B. Mobility as a service is one aspect of it. Do people want to own vehicles? Or do they just want to have the service? The other aspect is micromobility. You’re in a big city, you use a public transportation system, but then you have the last mile. You want to get from there to wherever. And goods delivery. People are trying to order things now rather than go personally to stores. Two- and three-wheelers are going to play a bigger role.
Is there one megatrend that will affect Magna more than others, at least in the short term?
Magna has a broad portfolio. Whether mobility becomes a service, or you have electric powertrains instead of the internal-combustion engine, you’re still gonna have a body, a chassis, some form of seat. Are all of these products evolving? Absolutely, yes, but we are very well positioned to address that evolution. So that’s one piece of it. The other piece—the electrification, and driver assist and mobility-as-a-service—we’ll use what we have and continue to accelerate our investments there to take a leading position. The ability of Magna to design and engineer full vehicles, and manufacture them for OEMs, is unique. So as new entrants come into play, all the existing OEMs wanting to do a different variant of a vehicle—Magna is very well suited to do that.
Looking ahead a few years, how much of Magna’s product line will be devoted to EVs versus internal combustion?
It’s difficult to quantify. Powertrain, which is about $6 billion in sales today—more than half of that will be electric-based products by 2025, roughly. Our body and chassis structure is not typically related to electrification in anybody’s mind. But we form battery enclosures. Any vehicle that has a battery needs an enclosure. Every vehicle that needs a battery is an addressable market for us. That’s a huge market—it could be up to $25 or $30 billion, even if it’s 30% electrification by 2030. That’s all additional business for us. And obviously we are making electric vehicles. We make the Arcfox in our joint venture in China. We are making the Jaguar I-Pace and E-Pace; the I-Pace is electric. We’re gonna be making the Fisker. So if you take all of that and tie it to electrification, it’s a big number.
You mentioned your deal with Fisker to begin assembling the Ocean SUV. How many vehicles will you be producing?
I don’t know whether I’m allowed to talk about their product plans, because the volumes are usually given by the customers. All I can say is the start of production is planned for November 2022.
Are you seeking out more of those sorts of partnerships?
I would say we are seeking growth, as far as it meets our metrics. It needs to have the returns. It needs to have the longevity and the road map. Once those two fall into place, then we start looking at what makes sense. Fisker is really a proof point. With a newcomer that is focused on the consumer interface, new business model, we bring to the table the supply-chain management, the full-vehicle engineering, the build. We can also bring certain platforms, which help speak to market. We brought the electrical architecture, we brought the entire ADAS system. That doesn’t stop them from having flexibility to change, which gives them their brand differentiation. But you’re not starting from ground zero. Everybody doesn’t need to reinvent the wheel.
You’ve talked about the industry transforming, and in the past you’ve discussed the importance of disruption in technology. What is Magna’s role in all that? Should you be the disruptor, or should you be responding to disruption?
I don’t think you can separate the two. If you’re not the disruptor sometimes, I don’t think you’ll be a good Tier 1 supplier. If you’re waiting for the OEMs to come and tell you what they want, you are not a true partner. We look at material advancements, process advancements, and bring synergies to products and a value proposition to the table. You have to say, “Hey, there’s a new steel coming. I developed a process so you can make B pillars, or A pillars, that could help you in your crash resistance.” You have to figure out what’s happening in various parts of the industry and see how it applies, so you’ll have an advantage at the table. That’s where you need to be the disruptor. The other one is being able to implement. We are looking at disruptions in robotics and automation in other fields, like medicine and packaging. We try to learn from that, and we bring it to the automotive side in our own factories.
What excites you most about the changes coming to automotive technology?
Whenever there is a transformational change, there is an opportunity. Technological change is happening in communication, in computing, in AI, in machine learning, and automotive is one of those industries that has all of these elements. All of the things come together. If you’re not excited by that, I don’t know what else would excite you.
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