Johnson Controls: A Focus On China

Johnson Controls (NYSE:JCI) recently opened its second global corporate headquarters in Shanghai, China, supporting the enormous growth opportunities present in the country, as well as in other regions in Asia-Pacific. Already well-established in China, the company continues to accelerate its growth there through plant openings, key customer partnerships, joint ventures, and strategic agreements. The new facility has set “a new standard for green and smart buildings,” with a design that focuses on renewable energy, intelligent lighting, and building automation systems that are expected to reduce energy consumption by 44%, compared to local standards. Moreover, its gray water recycling programs and storm water recapture facilities will reduce water usage by 42%. Such a facility underscores the “company’s commitment to China and wider Asia-Pacific markets.”

Johnson Controls’ CEO Alex Molinaroli, while speaking with CNBC, has also stated that the company is bullish on China’s prospects, despite its  ups and downs. The company expects double-digit growth from the country in the next one to three years, given the high GDP growth rates witnessed there. China’s economy grew at a rate of 6.9% in the first quarter, despite the pace of growth slowing down in recent years.  JCI is also looking to make in-roads in the Indian market, one of the fastest growing major economies of the world.

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Growth Opportunities For Its AGM Batteries

Johnson Controls formed a joint venture with Binzhou Bohai Piston Co., an auto parts affiliate of Beijing Automotive Industry Group Co. (BAIC Group), to build its fourth automotive battery plant in China. This plant will manufacture both conventional flooded, and absorbent glass mat (AGM) battery technologies. AGM, which powers start-stop systems, are technologically advanced car batteries that are more expensive than a conventional lead acid battery, but are better equipped to handle the strain of frequent engine restarts and the ever-increasing load placed on car batteries. They are employed in vehicles with the start-stop technology, which, while being fuel-saving, can tax a car battery since the electrical system still uses the energy from the battery when the vehicle turns off. In the China market there is a large demand for auto part technologies that can improve fuel efficiency, and the demand for AGM batteries is expected to soar, as they increase fuel efficiency by up to 5%.

Johnson Controls has been well-established in the largest automotive market in the world for decades, through joint ventures and strategic partnerships with Chinese companies, as well as its own plant openings. It entered the Chinese automotive battery supply market in 2005 and set up two manufacturing plants in Chongqing and Changxing. The plant in Chongqing city reflects an investment of $154 million and produces 6 million automotive batteries a year. Johnson Controls also increased production of Absorbent Glass Mat (AGM) batteries in its Changxing facility, from 1.5 million to 3.4 million per year. Its third battery manufacturing facility is in the city of Shenyang, with an investment agreement of a $200 million plant. The production in this facility is expected to begin in 2018,  with a capacity of six million automotive batteries.

JCI considers the growth in the country to be attractive, and the new joint venture will position the company to take advantage of the market opportunity, as China is expected to be the largest automotive battery market in the world by 2020.

Car manufacturers are under intense pressure to meet strict fuel economy standards by 2025, and with the increased fuel efficiency of AGM batteries, this technology is destined to be in a majority of cars in the next few years. Currently, this technology is present in between 5% and 10% of the Chinese market. This figure is expected to rise to 50% during the next five years, according to Alex Molinaroli, CEO of Johnson Controls. 50% would imply about 15 million new vehicles that will be equipped with start-stop functionality in China, saving an estimated 1.2 billion liters of gasoline per year. It also reduces greenhouse gas emissions by 2.8 million metric tons per year. This is also key, as the increasing regulatory trends have been putting pressure on automotive manufacturers to reduce their carbon emissions.

A number of factors work in the favor of this AGM technology. As stated by Lisa Bahash, group vice president and general manager Original Equipment of Johnson Controls, strong growth is expected from this technology as it requires minimal changes to the vehicles, and costs considerably less than battery systems in hybrid or electric cars. It is also the best solution to aid automotive manufacturers to meet regulatory targets.

Favorable Trends To Boost Buildings Segment

A number of trends will ensure growth for the company in the long run, some of which have been highlighted below:

1. Favorable Demographics- According to data provided by Johnson Controls, sourced from United Nations, Pew Foundation, IMF, and CEIC data, by 2026, 500 million new urban middle class consumers will be added globally, and 66% of the global population will be considered as being in the working age bracket. Furthermore, 77% of this new urban middle class will be prevalent in Asia Pacific. These favorable demographics will ensure long-term growth for the company, as it will lead to a higher demand for security, productivity, comfort, and mobility.

2. Increasing Urbanization- With a rise in the rate of urbanization, it is inevitable that the middle class growth will be concentrated in urban centers. This will result in 160,000 new urbanites each day globally till 2030, and will create a need for a $90 trillion investment in urban infrastructure. Again, this growth is expected to be concentrated in developing economies, constituting 35% proportion of the urban population growth. These urban centers will depend upon the technologies and solutions provided by companies like Johnson Controls. Higher urbanization rates place increased pressure on weak, underinvested city infrastructure, and as cities become more sophisticated, infrastructure development will trend towards achieving a higher quality of life. There will be a need for smarter, more innovative, and technologically savvy buildings.

3. Rising Energy Consumption- As per Johnson Controls’ estimates, 60% of the energy consumption goes towards buildings and automobiles. This will give rise to $6 trillion investment for renewable capacity addition between 2016 and 2035, and will bring about a greater need for energy efficient products and operations. Moreover, there will also be an increasing demand and improving economies for energy storage. Energy efficiency is at the core of Johnson Controls, and the company has 125 years of experience in developing and providing energy efficient solutions, which are innovative, cost-effective, and scalable. Since, in many sectors, heating, ventilation, and air conditioning represent a significant proportion of the running costs, most are keen to boost the efficiency of such systems. While reducing business costs is the main reason for energy investments, companies are increasingly factoring in customer and employee attraction, greenhouse gas reduction, enhanced reputation, government policy, and investor expectations when making such investment decisions.

Have more questions on Johnson Controls? See the links below:

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