Johnson Controls‘ (NYSE:JCI) plans to expand its production capacity as well as distribution channels in China will play a big role in driving its future growth. The company already has a sizable presence in this largest emerging market with leading positions in its auto seating and auto interior verticals, but overall, China constitutes less than 20% of Johnson Controls’ top line compared to around a third constituted by Europe and around 40% constituted by North America.  The company’s greater dependence on Europe, which is going through a slowdown and North America which is witnessing moderate rates of growth, is impeding its overall growth. In this context, the initiative to expand footprint in China will aid Johnson Controls’ growth by raising the country’s share in its earnings mix.
We currently have a stock price estimate of $40 for Johnson Controls, around 5% below its current market price.
- How Is Johnson Controls’ Power Solutions Business Expected To Grow In The Next Five Years?
- How Is Adient Expected To Perform In The Next Year?
- Why Has Johnson Controls’ Stock Price Appreciated 29% This Year?
- What Drivers Will Ensure Growth For Adient In The Future?
- How Has Adient Performed For Johnson Controls?
- What Is Adient’s Position In The Global Automotive Seating Market?
Johnson Controls is expanding in China across all its business segments, namely auto interiors, auto batteries, and building efficiency that provides energy efficiency solutions for buildings and heating, ventilation and air-conditioning (HVAC) systems.
In the auto interiors segment, Johnson Controls provides complete interior systems for automobiles including seats, instrument panels, floor consoles, door panels and sun visors. Currently, the company has 57 manufacturing facilities in this segment in China, and it plans to expand these to 68 in the next few years.  This increased production capacity will help Johnson Controls address the growing demand from the country’s automobile industry, which produced 10.75 million cars and commercial vehicles in the first six months of 2013, up 13% annually. 
A key strategy that Johnson Controls has employed successfully to scale up in China is the formation of joint ventures with local partners. Today, in the auto interiors segment, the company operates 32 joint ventures in the country involving 24 local partners.  This strategy has allowed Johnson Controls to expand quickly in this fast growing market without having to make the entire capital investment or to assume the entire risk associated with expansion in a new market.
Alongside auto interiors, the growing production of vehicles in China is also raising demand for auto batteries. Johnson Controls currently produces auto batteries from three plants in China and to capture their growing demand it is in the process of setting up two additional plants targeting a total annual production output of 30 million lead-acid batteries in the country by 2017. In comparison, the company produced 135 million lead-acid auto batteries worldwide last year.  Additionally, Johnson Controls is also investing to set up a start-stop battery plant in China that will by 2015, produce over 2 million advanced auto batteries annually. 
Additionally, apart from targeting vehicle manufacturers, the company is also building distribution channels to capture the auto battery aftermarket in China.
In the building efficiency segment where Johnson Controls provides HVAC, control systems and services that improve energy efficiency of buildings, there is large scope for growth in China. According to figures cited by the company, 350 million additional Chinese are expected to move to cities from rural areas by 2025, which will require construction of around 50,000 new high-rise buildings.  The will create large incremental demand for HVAC, control and building energy efficiency systems that Johnson Controls can take advantage of. The company is also well-positioned in the country in this segment with two HVAC manufacturing facilities in Wuxi and Guangzhou. Currently, it is in the process of expanding the Guangzhou production capacity by 30% to address the rising demand from the China building market. (See Johnson Controls Expands HVAC Production Capacity In China On Rising Demand)Notes:
- Johnson Controls’ investor presentation, August 2013, www.johnsoncontrols.com [↩] [↩]
- Johnson Controls plans further production expansion in China, September 12 2013, www.johnsoncontrols.com [↩] [↩]
- OICA: first six months auto production statistics, September 18 2013, www.oica.net [↩]
- Fiscal year 2012′s 10-K, November 19 2012, www.johnsoncontrols.com [↩]
- Johnson Controls China fact sheet, June 12 2013, www.johnsoncontrols.com [↩]