What Trends Will Ensure Growth For Johnson Controls In The Future?

Johnson Controls (NYSE:JCI) completed its merger with Tyco on September 6, 2016. While Johnson Controls is a global leader in building controls, HVAC equipment, and energy storage technology, Tyco is a global leader in fire and security. The new company hopes to bring together complementary businesses to capitalize on the transitioning of the home-products industry into a new world characterized by smart, connected products, referred to as the ‘Internet of Things” (IoT). The two firms are building a business that possesses every facet of the so-called smart building, wherein everything from the air conditioning to light bulbs can be connected to the internet, with data being used for energy efficiency and productivity gains. JCI’s product offerings and development include IoT connectivity for smart buildings, campuses, and cities, and it is here that JCI will be able to take advantage of Tyco’s complementary business. The main purpose of the merger seems to be gaining size in its area of focus, which is becoming a colossus in the building controls and equipment market. The new company will be able to witness immediate opportunities for growth, through cross-selling of products, complementary distribution networks, and a widened global reach. The geographic fit seems to be ideal, with JCI strong in the Chinese market, and Tyco effective in Europe.

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A number of trends will ensure growth for the combined 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. The bulk of this demand will be centered around Asia Pacific, where a substantial infrastructure gap can be seen across the region, and where the share of its global infrastructure spending is set to increase from 30% in 2012, to 40% in 2018, and 48% by 2025. As the economies grow, so does the need for the development of new infrastructure, on a sustainable basis. Moreover, the region’s growing prosperity is also igniting social infrastructure development. This includes hospitals and senior centers, fueled by an increasingly aging population, particularly in Japan and Korea. In contrast, the less developed economies, which currently have some of the youngest populations, will witness a greater need for schools and education centers.

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 $90 trillion investment in urban infrastructure. Again this growth is expected to be concentrated in the developing economies, constituting 35% 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, under-invested 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 a $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 increasing demand, and improving economies, for energy storage. In the latest Energy Efficiency Indicator survey conducted by Johnson Controls, the company found that the interest and investment in energy efficiency “are at an all-time high.” The survey of over 1,200 facility and energy management executives in the United States, Brazil, China, Germany, and India showed that 72% of the respondents expect to increase their investment in energy efficiency over the next year. What is noteworthy is that the same metric for 2013 was at 42%. In China and India, a whopping 85% and 89% of the respondents planned to increase such investments. 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.

According to Bill Jackson, president of the Building Efficiency segment, “energy efficiency is the center of a major transformation of our buildings, energy systems, and urban infrastructure.” Much of their work focuses on driving down energy costs, which is the main driver for the adoption of such solutions by organizations in the commercial, industrial, and government sectors. 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. In the US, rising energy investments has become a key priority. As reported by the Bloomberg New Energy Finance, the electricity demand in the country has been flat since 2007, as opposed a  CAGR of 2.4% during 1990 to 2000. A key driver for the decoupling of electricity usage and GDP growth has been numerous state policies promoting energy efficiency; electricity load growth in 2015 clocked in at only 0.5%, compared to a growth of 2.4% in the GDP. Meanwhile, annual investments in energy efficiency have continued to grow.

4. Higher Regulations

In the latest Paris Climate Change Agreement, many countries have undertaken to reduce their carbon emissions, and 70% of the G20 economies have been covered by mandatory fuel economy standards. These increasing regulatory standards are driving a technology shift in buildings and the automotive industry, which means that Johnson Controls’ Power Solutions segment’s future looks bright. This division has managed to grow substantially in recent years, driven by a demand for their AGM (Absorbent Glass Mat) batteries, which are used in vehicles with the start-stop technology. Approximately 24% of all batteries sold are paired with this start-stop system. The company expects the batteries with this technology to increase from 24% today to over 60% in 2020. A number of factors work in its favor. 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 environmental regulations. These AGM batteries are also able to handle the higher usage that comes along with the new technical features being added to cars.

The electrical vehicle boom, and the opportunities provided by the Chinese market, make this business poised for substantial growth in the future. According to Ray Shemanski, a vice president of Johnson Controls, about 40% of new vehicles in China will be fitted with the ‘start-stop’ technology by 2020, the same year when the Chinese government requires automakers to further lower the average fuel consumption, from the current 6.9 liters per 100 kilometers, to 5 liters per 100 km. In order to accomplish this, carmakers have taken to developing electric vehicles or by adding the start-stop system. Currently, such a system, which reduces fuel use by as much as 8%, is present in only about 5% of vehicles. Start-stop technology automatically shuts off the engine when the vehicle is idle and restarts it when the driver’s foot leaves the brake pedal. During this time, the car’s electrical systems use energy from an advanced lead-acid battery (AGM) rather than the gas-powered engine, which results in fuel savings.

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

• Adient To Rely On China For Growth In The Future
• Johnson Controls Powers Through Its Financial Year 2016
• How Will Johnson Controls Perform In Its Fourth Quarter?
• 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?
• What Is Adient’s Position In The Global Automotive Seating Market?
• How Has Adient Performed For Johnson Controls?
• How Can Increasing Interest In Energy Efficiency Help Johnson Controls?
• How Did Johnson Controls Fare In Q3 2016?
• How Will Johnson Controls Perform In Q3 2016?
• Why Is Johnson Controls Banking On China For Its Absorbent Glass Mat Batteries?
• Why Is Johnson Controls Increasing The Production Of Its Absorbent Glass Mat (AGM) Batteries?
• What Are The Prospects For Johnson Controls’ Power Solutions Business?
• What Will Be The Effect On The Segment Operating Margin As A Result Of The Johnson Controls-Tyco Merger?
• What Are The Benefits Johnson Controls Will Attain From The Tyco Merger?
• Will The U.S. Treasury Department Rules, That Killed The Pfizer-Allergan Deal, Affect Johnson Controls-Tyco Merger?
• Johnson Controls’ Earnings Beats Expectations
• Will Johnson Controls Miss Estimates Again?
• How Has Johnson Controls’ Net Sales Changed By Geographic Areas?
• How Does The Adient Spin-Off And Tyco Merger Create Value For Johnson Controls’ and Tyco’s Shareholders?

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