Hello everyone. Most of you on this call probably know me, but my name is Tim Rokossa. I'm in charge of DB's Global Automotive Products, focusing primarily on the European side of things. It is my pleasure to welcome Dr. Elmar Degenhart, the CEO of Continental for our fireside chat. He's a very experienced Automotive Executive, having worked for several suppliers before joining Continental in 2009 already, steering this company through very exciting times. Mr. Degenhart, we just discussed about this on Monday. The times are not getting any less interesting or difficult to manage. I'm really looking forward to our discussion and see what you have to tell us, what the future will bring on autos. Just for logistics, we will do a fireside chat. Just for the audience, you can submit your questions online whenever you feel like it. I can see them.
I will either include them directly in my discussion or I just read them out loud at the end. With that, Mr. Degenhart, I would like to structure this in three parts. The first one would really be short-term demand and production trends that we're seeing right now. The second one is the restructuring that you have been doing now for some time and that you probably have to intensify, as the press article that you also did this morning in the German press suggests. Finally, some takeaways from this crisis and the strategic position to the extent that you can already talk about this. If we do start with something that's perhaps a little bit lighter and more cliché to start this discussion with, but nonetheless very important, what is the feedback that you are getting by region in terms of demand currently?
Very different feedback, starting with China. China's back on track, selectively in May, 2% above prior year. Year to date, at a level of about -25%. Question now and challenge to sustain this, perfect V-shape recovery and, to end up, best case even above prior year levels for the rest of the year and not below. Utilization rate, above 90%, talking about our situation in China. North America, also, -25% year to date, running behind China. But, all in all, optimistic view. Customer demand has to be seen as, good, and utilization back on a around 50% level. Again, this is country-specific. Most concern with Europe. Europe, year to date at -40%. Germany year to date even -44%, the lowest level, seen since 1975. Fast recovery not expected. Suppliers are struggling with the fact that, our customers are still reducing call-offs on short notice.
And we hope that this will turn around into a positive development in the next two months. But this is hope. Unfortunately, and we criticize this, the governments are spending enough money, but they don't spend the money efficiently in the right areas. And a strong impulse would have been needed, short-term impulse, including combustion type of powertrains. Neither France nor the German government has decided in favor of such a measure. So it's not the volume of money included into the packages, but how these packages are spent. And incentives for R&D are welcomed. Support for charging infrastructure, very reasonable, welcomed. But they will show effects midterm, long-term, and not in the next six months, unfortunately. We are dependent up to around 50% on the European market with our sales volume. And that explains why we are so concerned about the situation, especially in Europe.
Should answer your first question with regards to the different market situation.
Yeah, very good. How have you reacted to the crisis so far? Have you reshuffled some of your budgets? Have you tried to preserve cash flow, cut back on investments? What were really the main things that you have done?
Yes. We are coming from a light vehicle production according to our definition of 95 million vehicles in 2017. According to IHS, we are at risk dropping below 70 million this year. That would correspond to a decline in the ballpark of 25%, compared to a 12% decline in 2009. So this is an unprecedented situation which needs immediate reaction. What have we done besides flexibility measures like short-time work? We experienced the situation end of April where around 60% of our employees had reduced time arrangements worldwide, including short-time measures where it was allowed to apply them. We reduced spendings, knowing that cash is everything in such a situation. By 26% year- on- year in the first quarter, we are targeting at least a 20% decline for the full year 2020.
We addressed our working capital situation, knowing that we had to deal with elevated tire stocks from the retail closures of our tire dealers, which normalized in the meantime. We balanced this out while we shut down our facilities for sure. We are talking intensively about our fixed cost situation, that we are adjusting variable costs, clear. But we came to the conclusion that with a perspective to end up below EUR 70 million, yes, with a growth in 2021, but still far away from 2019 levels, not talking about 2017 peak levels, that we cannot bridge our cost level with the help of reduced time arrangements. We have to reduce fixed costs sustainably. We entered discussions with the unions, with a target to develop a kind of a toolbox till end of July, which can be applied by all business units and functions afterwards.
The better plan is that, end of July, we should have a better forecast, projection, about 2021. Half year will be gone. We will have a very good view into the third quarter, a good estimate, into the fourth quarter, which is a base to make a good projection into 2021, volume-wise, production volume-wise, consequently sales volume-wise. Then we know which cost levels we can afford, and then we can define targets for the different functions and business units, market-specific and product-specific. And, by applying the toolbox I mentioned, the target has to be to reduce fixed costs and to realize most of the targets we will set to our people by the end of this year. This is absolutely addressing the short-term situation and is, unfortunately, I have to say, necessary and unavoidable.
We mentioned not a concrete figure, but we told our people, and this was an internal information which leaked today, that we are talking about a couple of hundred million EUR, which will come definitely on top of what we announced end of last year. End of last year, we discussed measures and decided upon measures which will address our footprint, our portfolio, and organizational structure with more a midterm focus to improve our competitiveness midterm. What we are discussing at the moment is triggered by the economic situation, the recession, and needs immediate reaction.
Is this something, to the extent that you can talk about this already, that impacts the overall group, or would you say that this is primarily an automotive problem and within automotive primarily a problem for certain segments?
No, this will impact the whole group, definitely, but we will differentiate in between the situation, the specific situation, business units, and markets are in. To give you two examples, China will grow. I mean, they're coming from 27 million light vehicles produced. They will drop towards a level of, I don't know, 20 million, 21 million this year. They will go up, next year and the following years. I'm convinced that we will see the 27 million again and that China is good for a 30 million figure light production produced. It's only a question when. So it would be nuts if we would treat our organization in China, in the same manner than we are treating our organization in West Africa. Second example, business unit ADAS. This is the growth engine for chassis and automotive. Growth driver will be assisted functions in the next five years.
Then Level 3, Level 4 functionalities will kick in, which will give us a boost beyond 2025. To request from this business unit to cut R&D costs would be completely counterproductive. While a business unit operating as a pure commodity player, having a very good market position in Europe, has to reduce fixed costs, including R&D costs, no doubt about it.
When we think about what you just characterized in terms of demand, specifically on the European side and the need to cut back on the fixed cost line, we have heard from you after Q1 that your operational leverage could be better in the second half of this year, possibly already in Q1 than it was, possibly already in Q2 than it was in Q1. Is that still something that you see, or with the developments that we're seeing right now, there's probably not much chance of that happening?
It has to improve because we operated at an operating level reaching the group level of 38% in the first quarter. We are optimistic that can be that we can bring this leverage down to 35% for the full year, by improving our fixed cost base. What you have to take into consideration, these numbers are pretty high, and they are burdened by higher D&A related to growth investments in the past years, that makes a difference of about six hundred basis points. So, out of the 38%, about 6% were impacted by higher D&A, explainable by the investments we have done in the last one, two years.
Not only at the automotive side, but especially also at the automotive side, you know, the tire side, you know, that we are currently ramping up two greenfields in parallel, one in the U.S., a truck tire facility, one in Thailand, a passenger car facility. Looking backwards, you always know better. So, if we would have known, we would have realized these two greenfields sequentially and not in parallel. Okay, now we have to deal with the situation, and I'm optimistic that towards 2021 that we can improve our operating leverage further.
Do you feel like your fixed cost cuts will have to focus on Europe? You already said it is across a variety of divisions. Will it be regional focused, or is this also something that, with the exception of China, you already made that very clear, is something that impacts other regions as well?
It will impact North America also. But the major impact will come from Europe. While we have the majority of our R&D headcount located in Western Europe and Eastern Europe, for sure we will not touch best-cost countries, again, counterproductive. The majority of the measures will be applied in high-cost Western Europe.
Last question on the more short-term side before we move on to more strategic things. We have seen a relatively soft price mix development over the last couple of quarters. You already mentioned that inventory at the dealer level has now been reduced. Do you envision a situation where in the second half of this year we can see an improvement in the price mix on the tire side again, or will this rather remain soft for the time being?
We have hope that we will not see higher pressure in the replacement market. Actually, currently, there is price discipline existing, if I can say so. If while raw materials provide us with a tailwind, the industry is intelligent enough and bold enough to increase prices, we don't know. That will definitely not be the case at the OE side. There we are still suffering from increased price pressure, and that's explainable because more Malaysians are trying to use the European market to their benefit. 10 years ago, a BMW or VW would have never taken into consideration to equip new cars with Chinese brands. Today they are not shy doing this, just as one example.
You know that while the market grew only moderately by some 20 million tires over the course of the last 10 years, that the imports increased in the, in the same time frame by, 50 million, which, means that, the local manufacturers, reduced their volume unintentionally for sure by some 30 million over the course of the last 10 years. We have seen a similar development at the truck side to the point where the imported tires were cheaper than the retreaded tires in Europe. When this point was reached, we had a, an argument in Brussels, and, the, authorities reacted and implemented tariffs. There is no retread business existing at the pass car side, but last year we got to the point where local suppliers and manufacturers, tire manufacturers, were forced to, shut down facilities and to reduce capacities, to mitigate their situation.
What we will try for sure to argue with the employment situation and that jobs are at risk in Europe because of the imports from Asia. Difficult to judge if this will be good enough to make Brussels move, but at least we will give it a try. That would help not only the replacement situation but also the OE situation. We have two issues, quantity specific. I cannot talk about competitors. The increased pricing pressure in the OE arena is concerning all local manufacturers. Besides this, we have a utilization issue. Best situation we can talk about, we have a utilization degree of 90, around 95%. Currently, we are operating at a level of more 85%. Now, there are two thinkable scenarios. We have to make a decision towards the end of this year.
Either we are convinced that the market will come back and that we can bring our utilization rate back to a level of at least above 90%. If this wouldn't be the case, we would be forced to think about capacity, capacity reduction. If so, then we would do this certainly in a high cost environment, and we would do it in Western Europe again because in North America we are winning market shares, and we are convinced that we can load our facilities in North America nicely.
When we think about the impact of COVID-19 on your business model, do you think there will be on the mid to long term anything that you will have to invest more money into because of this and something that you can invest less money into, or do you think COVID-19 is something that temporarily has hit this industry and will not permanently impact it?
There will be one impact which we believe will be a very positive, not at the product side but at the process side. This whole situation functioned as a kind of an accelerator, of a booster, to use digitalization technology to a much higher extent than before this crisis. We are talking about the productivity in all areas of our business processes, and this will have a positive impact regarding our productivity as such, not only in the supply chain, including our production facilities, but in all parts of our company. So it will increase the speed of implementation, how we are using connectivity and cloud technology, tracking technology in our supply chain, tracking tools which will allow us to trace parts.
For example, how we use cloud solutions to collect information from our supply chain, how we can use artificial intelligence to optimize our inventories and the inventory of our suppliers by creating higher transparency, by shortening reaction times. Things which we have done more manually after the crisis 2009 can now be automated. We are moving away very fast from paper stuff because working from home doesn't allow to work with paper sheets. Another example, we will allow most of our workforce to work at least one, two days per week from home. That opens up complete new perspectives with regards to how we arrange office work. All of a sudden, we know from our people that the acceptance for having no desk any longer with my name on it enormously.
Shared desk work in our office space can be implemented much faster, allowing us to reduce necessary office space. I could go on with other examples. This will really be a positive outcome of this bad situation. Product-wise, it will force us to prioritize more because a reduction of fixed costs, especially in R&D, can only be realized if we are leaving things also away, which forces our managers to make decisions in between what is a must-have for the next two, three years and what was a nice-to-have, which can be delayed or skipped completely. Again, positive and negative aspects because if a Mercedes, and I'm naming a customer from us now because they made it public, decided to put investments into fuel cell technology applications at the Vitesco side on hold, then this is considered from us definitely as a negative.
If the industry decides to delay investments into Level 3, Level 4 automated driving, then I think this is justified and can be afforded. There is no economic case existing in the next six, seven years which would justify to name Level 3, Level 4 investments today as a must-have. While assisted driving functions, Level 2, I would clearly categorize as must-have for the next five years for the sake of safety.
That is already one aspect that I wanted to get to so the technology is obviously rapidly shifting in this industry. We will talk tomorrow with your head of automotive, Nikolai Setzer, about trends like Advanced Computing Systems, specifically auto software. We noticed many times in the industry that when you introduce new technology, specifically on the electric car side, margins are not quite what they are on traditional material. Is that a trend that you feel will weigh on your profitability over the next couple of years, or do you see a change in trend towards a situation like you have it in your ADAS segment where you relatively quickly came to a profitability that is actually above the average automotive profitability right now?
That's a very difficult and highly relevant question you're raising. The big pit is that, basically nobody's really earning money with electrification technologies, neither at the supply side nor at the manufacturer side. The whole subject is enforced by regulation, and here we consider, at least for the short term, the fact that we have the toughest regulation emission-wise in Europe as a disadvantage. Everybody who is participating in the marketplace has the same conditions for sure, but manufacturers who have a higher market share and who are more focusing on North America and/or China are having an advantage here because there we have not the same environmental regulation-wise. Normally it would be logical if the authorities would give the industry more time to transform from combustion side to electrification side, including fuel cell technology.
Okay, for the sake of the environment, authorities, especially in Europe, don't give the industry the time which would be necessary to keep economical and ecological aspects in balance. That has as a consequence that the industry is doing exactly as much as necessary to fulfill the obligations and regulations and not more because it would hurt bottom line. So the industry is behaving very, very rationally. From an emotional point of view, public-wise and from a view from the politicians, the industry is under big pressure and is getting heavily criticized why the industry is not doing more and moving faster towards electrification cycles. So the big question is how will the consequences look like for the suppliers and the manufacturers in the next five years?
What I am seeing currently is that the suppliers don't accept any longer that they are not able to make money with the technologies while volumes are going up. So the manufacturers will end up in a situation where they have no choice than pricing these vehicles at a level where they are also allowed to make money, which makes it difficult to make these vehicles attractive for the end consumer. We will end up in a regulated sales environment where manufacturers will seek opportunities to force end consumers to buy EVs for a higher price level than combustion vehicles. This is the only exit which I see makes sense and is reasonable for everybody. Vitesco has a complete profile to support the electrification trend. It has one of the most complete portfolios in the industry, very strong at the electronic sensor software side.
Their task is to ramp down the combustion stuff at the one side, which requires enormous discipline at the cost side. We decided, because we are in a specific situation, even to accelerate the ramp down at the side of high-precision mechanical parts. We are talking about high-pressure pumps and injectors. Since one year, we don't actively acquire business for high-precision mechanical pump components any longer. Why? Because unfortunately, we didn't succeed in the last years to really make money with this stuff. So we have a two-sided situation, very acceptable profitability with electronic stuff, totally unacceptable situation with high-precision mechanical components. And then the second task, which is a growth story, to ramp up the electrification stuff. And there's a shift in R&D from the left side to the right side. Not very difficult with the electronic sensors and software engineers.
The hardware engineers have to be trained and educated, at least the young, flexible ones, to be used at the electronic side in the future, at the electrification side, so a big, big challenge, huge transformation, really disruption, and that's one reason why we believe and why we are convinced that Vitesco with a requirement of an utmost flexibility and agility is better off if they can make decisions on their own. This is one big argument for the spin-off and should be attractive for the capital market because they're operating close to a break-even level today. I'm convinced they have a great team. They will be capable to move margins upwards towards, in a first step, 5-6%, and in a second step, towards 8%. If they can create momentum and trust, they will be capable to move towards a direction of 6-8%.
This should be an absolutely attractive story. They're one of the big players having the potential to grow towards a EUR 10 billion level, playing an active part in the consolidation, which will take place in the powertrain arena in the next years.
And with that, you actually already answered my final question of the day, and we also happen to be right at the end of this first session. So thank you very much, Mr. Degenhart, and good luck with the rest of the meetings, and have a good day, everyone who dialed in. Thank you.
Thank you. Take care. All the best to you.
Hello everyone. For those of you on this call that don't know me, my name is Tim Rokossa, and I'm in charge of DB's global automotive product, focusing on the European side of things mainly. It is my pleasure today to welcome Nikolai Setzer, the automotive CEO of Continental. Nikolai is a homegrown executive. He joined the group in 1997. He originally climbed the ranks in the tire division of the business, where he already held various executive positions for a number of years before becoming the automotive CEO in April last year. Nikolai, yesterday I discussed with Mr. Degenhart, your group CEO. Today we're gonna dive into a few more details of the automotive business, and I'd like to structure this into three parts, really. The first one is just short-term demand and production trends.
Secondly, maybe talking a little bit about the restructuring you have ongoing and the, the more to come stuff that Mr. Degenhart already alluded to yesterday. And then finally, some takeaways from this crisis and also latest technology trends that you see within Conti Automotive. As for logistics for the audience, this will be a fireside chat. You can submit your questions online whenever you feel like it. I can include them either directly in our conversation or I will read them out loud in the end without mentioning your name or institution. And Nico, we know each other for a couple of years now. We have done a number of investor meetings already. You took over the new job about a year ago. This is now the first time you do talk to investors in this new role. How do you feel about the current situation?
What do you think you have learned on the tire side that now really helps you in this very difficult situation in the automotive industry?
So once I started last year, I got already lots of congratulations from my colleagues. You started a very difficult time. Now, after Corona, everybody said you can't get hit harder. Looking on my experience, I've been in the U.S. for the tire folks responsible from 2006- 2009, where we restructured basically all of our business, and we turned the North American business around. And at the same time, the market plummeted, which was a long-lasting journey. And clearly, coming out of that, and then 2009, coming back to Europe, and I had the tire division then totally continuing this restructuring in Europe. I learned a lot about how long does it take to restructure business on the one hand and to how fast you must be in order to react to the markets.
And this is unfortunately exactly what we're reading right now on automotive, the most volatile market I've ever been in, at least in the last two, three months. At the same time, we need to manage our operational excellence, very obviously, and we have to take strategic decisions for the future. So this is a cocktail which is a very stressful and difficult one, which is the bad news. The good news is everybody's in the same boat. I don't see one of our competitors which does not have the same environment and the same situation. So we simply have to manage it better than the other folks.
We have now heard from a number of companies here in Detroit virtually on the phone or through the webcast, and we're getting very different feedback by region. That is nonetheless sort of the same from everyone. I was just curious what your view on the key demand by region currently is. Let's say we talk about China, Europe, and the U.S. for now.
Yes. So I, I think we are very aligned there, and we see clearly that China has a strong V-shape coming back after the trough in February, which was at the same time Chinese New Year's, which at the end helped a bit the China total demand over time because it was anyhow low there. It comes back to 100% or 102% where the sales last month in May and production goes in sync. So there we are as well, on 100% capacity, capacity utilization in the meantime. As opposed to at the beginning where we had to fight to find all the supplies from China to send around the world, where our suppliers, our supply base, which is huge in China, has been short. Now we have the opposite to manage, particularly out of Mexico and North America.
We had to manage supply towards China, but we managed this nicely, so far we have not seen interruptions, and this works out. In certain areas, it has been fast and others critical. The U.S. is most likely the second best region in recovery, so to say. We've seen vehicle registrations in North America 30% down, but this was basically in sync with U.S., and the trough was not as deep as in Europe, so 70% vehicle sales, and the first week of June has shown a - 10% versus prior year. We've seen dealer inventories dropping from more than 120 days last month in May to 61 or 60, something in that range, which is a quite healthy range, so we see that there is enough meat there to assume that the further recovery in the U.S. and North America will take place.
Our manufacturing sites, they're ramping up towards 50%, 60%, 70% during the course of this month, and then going further into the next quarter to, very hopefully, normal levels or slightly below normal levels, which we can assume. Let's see how this further carries out, which is difficult to see. Yeah, and in Europe still, after this plummeting, awful April where everything was closed, so no surprise that vehicles couldn't be sold. We have seen -60%, now -57% registrations in Europe, and manufacturing followed suit more than you see in other areas because Europe is more build-to-order markets at a certain point of time when dealerships don't have the newly ordered cars anymore. You can only produce what gets newly ordered. So this was clearly a hop-on, hop-off month, April, May, and or May.
Now we see as well, we are coming back to the 60%-70% capacity utilizations in our clients. But still, we believe that Europe lags farther. Incentives, as we all know, in Germany have not been approved. In France, only a smaller package. We have to assume that Europe takes as well, based on consumer confidence, a little bit longer to get back into shape.
We have now heard from a number of suppliers over here that in light of this still fairly volatile situation, the call-offs of the OEMs are not giving you a lot of visibility. We have heard things such as two or three days really only. Is that a view that you would share from your business?
Yes, and particularly it holds true for Europe, but as well partly for the U.S. I mean, we have seen with the Mexico, I mean, the North American industry is very much depending as well on Mexican supplies. And if Mexico is not fully ramped up, it's hard for the U.S. market to fully get ramped up as well. And we have seen so many decisions back and forth in terms of when suppliers and capacity could open. In Europe, it's very much what I referred to before. It's very much demand-driven. So if vehicle orders are not there yet, and how could they be? Because dealerships have been closed, first customers coming in, and they didn't come in that fast as everybody would like to. So until order is in the system, until the vehicle can be built, it takes some time.
Everybody wanted to ramp up in Europe, and we've seen high order fluctuation because shifts have been canceled. It was forced to start with two shifts and then reduced to one shift. This has stabilized more right now, so May was very much driven by very, very volatile demand. It has stabilized more in June, but it still was a normal level on a very, very high base, but we assume that going into Q3, that should calm down. However, I have to say we are still within the scenarios which we made ourselves, Continental.
So what we assumed, the devil is always in the detail, which product exactly, which platform will be ordered, which means that our precise production forecast is always affected, which means on the other hand, if the precise production forecast and schedule on plant level cannot be 100% planned due to what we believe before, you get again manufacturing variations and higher production costs because you cannot fully utilize then short-term work or sending people home. That is a bit of a pity, which we realized. We've been okay, but that is a drawback clearly from those hop-on, hop-off call-offs.
In your production planning and looking at those hop-on, hop-off call-offs, as you called them, do you notice any SOP movements among your customers to a degree or are people largely still sticking to the timelines that were discussed?
We see still the automotive OEMs, they are sticking to their timelines. That might be due to Corona impact and certain weekly delays, which we see, but not in general, in general still. And as lots of new launches are related to either electrification or more digitalization models, or clearly those model changes are so decisive for the OEMs, they are going with full speed and keeping their SOPs. So that stressed obviously the system because our R&D folks had to stick to their guns, continue the most critical projects and delivering on time in order to make those schedules from the OEMs happen and make sure that we have a safe launch.
We have a follow-up question from the audience on the demand situation differences in the U.S. and Europe. Can it be in your experience that your customers on the OEM side have not embraced as much on online vehicle ordering and sales in Europe as they have done in the U.S.?
That is most likely true. Yes, I would agree.
Then you already mentioned the German stimulus program. Obviously it is a problem that it's not yet been fully approved and that the VAT cut will only be followed from July onwards. So probably not too positive for demand in June. But with all seriousness, how, how do you see the German stimulus impacting your business?
I mean, the best news is that it's out now. So nobody's waiting for anything anymore. It's out that there's nothing. And value add, okay, it's still there is an impact. And 3% you can calculate easily makes EUR 1,000 per vehicle. That might be a certain, has a certain effect, but it will not be a tremendous pull. And, the consumer confidence, which is low anyhow, and in particular is low then for higher consumer goods such as cars. So that's why I said at the beginning we expect a staggered demand ramp up as opposed to what we see in the U.S. and much faster, which has to do as well with online. I mean, if you look to Germany, the traditional car buyer goes into a dealership, asks for a consultation, goes left and right, and makes up its mind, and it takes time.
This time could not be taken in April, in March. That explains a staggered approach, at least out of those countries. In particular, if you're looking in the south, I mean, Spain or U.K., registrations have been still very, very low, plummeted in those months. This will take as well a certain time until really the consumer comes and comes back. We are convinced that they will come back. If you look at the average age of the car park, and there are lots of reasons as well with the new models that, consumers will come back, but there will be a time there.
Is what you just threw on demand true for the entire automotive group, or do you notice material differences that are better or worse within your portfolio?
No, within the portfolio, we have to say, as we have basically a relatively well-distributed, customer mix in those, in our areas as well in the business units, you see a similar tendency. So there is nothing specific on the one side, on the other side. The one business area is a little bit stronger on the China side than the other, which obviously helps them with a faster recovery and the more, but there is no substantial difference of the different business areas.
So when we try to build the bridge, sorry, go ahead.
Go ahead. No, no, it's fine.
So when we're trying to build the bridge to the second element, which is the restructuring part of the question blocks, but really thinking about the more immediate short-term impacts, have you reshuffled your budget? If you're seeing a fairly broad-based weakness across all sorts of divisions, I find it difficult to see how we can really steer CapEx and R&D budget. Or is it something that you found relatively easy and have done successfully, or was there a cut through your overall budget rather than that?
There's nothing easy in those times. The easiest thing is obviously once you see that less vehicles are produced in the future, and we have to assume right now, I mean, pre-Corona, we have seen already after 2018 and 2019 a certain drop in our expectations in our five-year plan. Now post-Corona, we see another drop, and we have to assume that the 2019 figures, I mean, this is basically IHS, will only be recovered in 2023, and 2017 will even take longer, may, maybe then two, three additional years. So the only easy part is reduce production volumes going forward for those projects where we are still investing. So there you can postpone certain investments, and you can postpone obviously certain greenfields and new buildings, as certain blocks. Those are the only easy ones.
The most, by far most difficult one is the R&D side, because on the R&D, as I referred before, our customers, they are still seeing in particular the new technologies, which we are strong in, still as decisive in order to differentiate and come back into the market. They still stick to their SOPs. So at the same time, we have to cut budgets on the R&D side, where our customers are even demanding more complexity and, and tougher projects. How are we doing this? On the one hand, we have obviously some options with short-term work and some cost measures and voluntary pay cuts and so on, which helps with, on, on those areas.
On the other hand, we shift on the R&D side certain projects we cancel and certain parts which are more advanced engineering, more out in the outer years. I mean, Level 4 , Level 5 , Level 3 autonomous driving, for instance, or those areas which are more long-term where the market is anyhow right now not in the mood to come fast. We shift those or we cancel some specifics. But in the operational operation, means application research and development, we are not able to cut substantially right now without putting our critical projects in danger. However, in total, we still are fighting, and we believe that we can reduce our fixed cost base as well in automotive, despite the high level of R&D which we have by 5% this year. This is still in reach, and we work, and we even try to deliver more.
We have heard from Mr. Degenhart yesterday that the restructuring is impacting the entire group. But if we maybe focus a little bit more on automotive, the automotive restructuring was already a big part of the restructuring that you were working into going into this COVID-19 crisis now. How shall we think about how the automotive group will look like going forward? Can you give us a few snippets of what is important for the so-called new Conti that will emerge out of this crisis on the automotive side?
I mean, if you look more long-term, and I mean, we have on purpose called our transformation, Transformation C, how we called the program, which we started in the third, fourth quarter last year, where we said 20,000 out of 240,000 employees will be affected. Affected means some will be redundant, of course, some will be maybe in disposal, activities included, or some have to change their jobs within the company as long as they are jobs. So, once we started that, we've seen already, certain areas coming in. On purpose, we said this will be a program until 2029. Why did we put 2029? Because if you look in the history on our automotive side, we are a patchwork family. So we have been grown by lots of acquisitions. Acquisitions take with them certain manufacturing sites, diversity of manufacturing sites.
In the meantime, we have 58 on the automotive side. So we added three additional with the Kathrein antenna acquisition, which we did last year. So with each acquisition, you add new manufacturing sites, you add more R&D locations, you add more locations itself. And as long as business runs like business runs, it's relatively tough to go down. And this is the clear Transformation C task, which we are doing in automotive. We already have announced certain locations which will be closed, certain which we will be consolidated. And what you can expect is that during Transformation C, and we don't have to wait until 2029, already in the next five years, we will have a reduced, by far reduced number of manufacturing locations. We will more consolidate. We will have less R&D locations. We have less R&D locations overall.
Obviously, depending on how the vehicle, the light vehicle production will continue, we will have as well less employees over that time, at least on those areas which are on the production side. Industry 4.0 helps there obviously as well to replace some areas. On the SG&A, how the software side and the engineering side will develop, that remains to be seen. This is still an area obviously where we have to consolidate, where we reduce, where we keep focus, but where a certain growth over time, at least at the right locations, might be still possible.
Cutting back on R&D locations sounds like this is primarily impacting high-cost countries. Is it fair to assume that best-cost countries will be less impacted of restructuring than the high-cost countries?
Absolutely. Absolutely. Obviously, and some has been already announced, like on the instrument cluster side. So the analog part, by Babenhausen production side, there's a large R&D side as well. This is a typical example where we will build up a low-cost R&D or we use our low-cost R&D facilities and environments to staggerly build up then the competencies which we have in high-cost. So it will be clearly a reduction on the high-cost side and a consolidation on the best-cost side. And then it depends on certain disciplines. India for software, obviously, very clear. And perception computing areas is an area where we will further grow for sure. And to the same extent, we will reduce in other regions going down. A certain part of application engineering, we have to be close to the customer. There is no doubt. And this is a clear value in being close.
The main hubs, obviously on the U.S., center of Europe, and on the China side, we have everything which is not directly application engineering or which can be then, I would not call it offshore, but more platform development and support of those application engineering parts. Those are more on the best-cost side.
Can you just remind us, you're making massive work, massive use of the Kurzarbeit, which is by now a German word that everyone knows globally, at least in our community. Can you just remind us how many of your employees are currently in Kurzarbeit? And then also, this is a question I very often get from American and U.K. investors, is the fact that many of your employees are still in Kurzarbeit preventing you from doing any restructuring work?
Okay. Number one, how many are in short-term work or in Kurzarbeit? I mean, obviously we are still heavily as Continental in Germany, but you have similar programs in France and in other countries. I mean, you have, they are not one-to-one the same, but overall we had in April, May, roughly 60% of our workforce in Kurzarbeit or short-term work. The difficulty will be right now to have a firm number because obviously once a plant is shut down for one week because there's no demand, this is 100%. In SG&A areas and administration overhead areas, we have, we are going for 40% or 60% short-term work. Means you're just working two days a week or three days or four days a week, and the one, two, three is off. So it's very difficult to count.
At the end, you have to look on the cost balance, and we make the aftermath after Q2 in order to see what have been all effects, what have we got back from the government, on the different areas in order to see where we are. But the proxy of 60%, I assume, is a relatively good one. And your second question, I forgot now.
No problem.
It was a question.
It's a question that I get very often from American and U.K. investors. Is it preventing you using Kurzarbeit?
preventing from the restructuring, exactly. Okay. Obviously it's not firmly preventing. There is no legal law which tells that you cannot do that. That is for sure. Obviously, politically, you can imagine in those times it is a more difficult one as you have the dividend discussions and so on. However, we got to do what we got to do. And we have already announced, and Elmar Degenhart mentioned this, that in summer, and summer comes soon, we will further come out with the discussions which we had in the meantime with the employee representatives. We are on our way there, and it will not prevent us from taking actions because all actions which we are taking are not really related to the situation which we had in April or May.
They are clearly related to the post-COVID situation, to less demand in our markets, and to a certain extent as well what we have seen before already in the transformation and the reduced vehicle production. So that we have obviously not everything announced so far out of the fourth quarter. We just mentioned the 20,000 employees. We there have been projects already announced. There are more to come, and they will come as well. So however, this will be seen then overall more as a, as a certain mix, let me say. Again, it does not prevent us. Politically coming too early is difficult. However, we have already started the process. We discussed with our employee representatives, and we will move forward.
I would like to move our focus a little bit more into the technology side than we already touched on this, and to the audience, please continue to submit your questions. This works very well. I already asked a number of them. When we think about CapEx and costs going forward, do you think there's a structural change in investing that will remain in a post-COVID-19 world, or do you rather see the broader trends unchanged?
Can you refer to a little bit more what trend do you believe could be changed? Are you meaning more CapEx versus OpEx, or?
For example, yes.
Yeah. I mean, what I said already on the CapEx side, clearly we have been already this year on the brake pedal 20%, which we want to go down, and you see this across our business areas. On the operational part and our R&D side, I mean, that gets a little bit to what I mentioned before. It strongly depends, I mean, we have to do a certain work. There is no doubt. We have to make our homework and getting more lean and efficient. I said that consolidation, high-cost, low-cost footprint, getting a lower footprint on the total area and with the higher increase of software content which we see.
Obviously, I mean, in the past, where you had 70, 80 different ECUs in a car, you had domain controllers, body controllers, door control units, window control units, whatever, which is a certain portion of hardware with a certain more simple ECU converting into high-performance computing, into zone controlling, where you have still a certain box which you deliver with a bill of material content which is substantial. However, the operational spend, the R&D spend which you need for all the software engineering part is on a much higher scale than we have seen in the past. Same what's true for the autonomous mobility parts. There is still always hardware in place. There are radars, there are new cameras coming in.
There is LiDAR to come, which might get a little bit reduced, but the amount of engineering and system engineering, including software, is getting in a higher, higher part. Means OpEx will be more stressed than CapEx.
So it's great that you answered that way because that would have been exactly my next question. When we met in Vegas in January, back then when everyone was still allowed to travel, you showed a lot of software projects. And it's clear to everyone that software is going to become a lot more important for the automotive industry. You also see your future to a good degree on the software side. Now, I have two questions to ask. The first one follows up on what you just said. Isn't also the margin profile very different from a software perspective? So shouldn't the move towards software naturally mean that your margin will have to go up going forward? It's not just the investment profile that's different, also the profitability profile. And then the second element to that question, when we discuss with Mr.
Diess, for example, just because he's the most pronounced on the software architecture that VW is planning, and you are working on the project for the ID.3, for example, how should we think about the relationship between the traditional OEMs and the traditional suppliers on the software side going forward with the OEMs trying to do more and more to fit themselves?
This is a long question, and that expects a long answer, I assume. Starting first with the OEM, and how do you expect then the supplier industry will affect? I mean, obviously the OEMs or I have to start differently. If you see the way from the distributed ECUs over the car to a more server-oriented technology, why is this happening? Because this offers all the opportunities of keeping a vehicle up to date, having a smartphone basically on four wheels, having the opportunity to reduce as well ECUs and hardware and focusing this, and this was the CapEx OpEx discussion which we had before, to a clear differentiation tool as well.
So, you know the differentiation of a car. I don't tell you anything new. It is then more in the software and in the applications which you can do with it rather than the engine, in particular in an electric car. So, but first, from what we see, there's coming a huge complexity in terms of software along with it. And this complexity outpaces by far two, three times, four times what we can get in productivity in software engineering. And it's less having software development engineers. The coding part is the lowest part in developing software. It's the testing and validation. Testing, validation, I mean, the verification at the end, and obviously defining requirements. And seeing the projects which we have so far, developing an HPC, and for good and for bad, needs such strong resource focus experience. You integrate 19, 20 different suppliers into it.
You have 600 people running on it. I don't want to say that number. What I want to say is that you have only few companies which are capable to do this with half a century's experience. And those companies will focus on the future, in particular on platform, platform HPCs which are non-differentiating, which for the not for the suppliers, but for the OEMs. So you have your platform base, which I believe is rather still coming from high-performing suppliers which have the overview over several OEMs which have software capability. We have Elektrobit in our house. Other suppliers have this as well, strong software competence. Whereas the OEM will in the future focus very strong on differentiating part.
This part of the iceberg which you see in the car, I mean, your system, your human-machine interface where you see your applications which are on all the services, they will be the clear focus of the OEMs. What comes underneath the operating systems and, what basically nobody sees, nobody knows which one you have. I mean, this would be much more efficient if it comes from the supply industry. And we don't see that all OEMs, they have the capability, and it would be not efficient if they do everything on their own. Coming to your question at the beginning, how do you see margins coming? And you would expect now the answer that depends on what does it depend.
Looking into our first high-performance computer, which we do, which we did ICAS now for the Volkswagen one, which is most likely the first in the market coming with such a complexity, more to follow, and we see until 2025, most of the OEMs, they will have similar systems in their cars or coming. The big difficulty is you have 70,000 requirements for this high-performance computing, 70,000. So no human being is ever capable to read all those requirements. You need already computer knowledge in order to drill them down, cluster them, and understand what the customer wants. However, to build a car needs or to develop a car typically four years. Software changes within months, maybe half a year, maybe one year. So you need to have always agile loops in between.
So as opposed to the past where you were the customer wanted a brake, you offered a brake, you developed a brake, and you delivered a brake, you have agreed on a price, you got paid on your price, and you knew your profitability. Here, we don't know at the start to which extent the requirements will end later on in the product, how many will be added, and how the final product will look like, and how many resources from our side and licenses and other companies have to be integrated and where we are. So this is still a learning process. And, I agree if we are capable to differentiate via those large projects, via those very complex tools with our unique combination of software experience out of Elektrobit, which is an automotive embedded software company, Argus Cyber Security.
We have the whole user experience and vehicle networking part as well as autonomous driving and the safety part. So we have from the computer, from the computer vision and the functionalities which we integrate, one of the largest portfolios which you can get. And if we profit from that, yes, then you should expect as well margins which are higher than for typical commodities for sure, but as well compared to typical strong parts, which we supply in our core areas such as the safety part. However, if you don't get those projects in time, if they are changing very swiftly over time, then you will obviously end up in discussions with your customers, and you have to ask those customers to pay you to the right extent which you should be.
You have a long answer, long question. So fair enough. You have traditionally been quite strong on the electronics and software side anyway already. You employ several thousand software engineers. Do you have a share of software and electronics in mind that you see as the ideal ratio versus your entire portfolio going forward?
The ideal we can really not say so far. I mean, we know where we are. We know that the software content will further increase as well as the electronic content will increase and will further go up. We are right now in a full evaluation of all different action fields, particularly as well on the safety and on the user experience side. And we will make up further our mind during the strategic process during the course of the year where we will further focus on and where not. Honestly, I mean, we are very value creation driven.
If we have an area which creates value, which grows strongly in the future, which exceeds the market growth, or which fits there, which delivers the return on capital employed, which we need, and we have a USP situation where we have a strong or at least a very competitive situation, there's no problem to sell hardware in the automotive industry. Cars still need to run on hardware. If this works fine, then we are more than willing to go there. There is no ultimate share. We would say, okay, we just put our eggs in that basket. However, if a certain area doesn't tick the boxes, delivering the cash flow which we need and the returns which we expect, then obviously we have to take our decisions, be it software or be it hardware.
One other element that you already touched on that has been very successful for you over the last couple of years is anything that's associated to ADAS. We have heard here at this conference that Level 2+ is still very much on track or Level 3, however you want to call it, but that Level 4, 5 has probably pushed out a bit. You also indicated that already earlier in our discussion. Can you just remind everyone in the audience how big your ADAS revenue share is currently and how fast that's growing?
I mean, we have already published that ADAS was last year in the area of a EUR 2 billion business unit. That is, I would say, basically public knowledge. And we are belonging to the strongest players in that area. The market still is assumed to grow double digit. Obviously, and I fully agree to what you said, I mean, Level 3+ and I mean, the really what we believe in autonomous Level 4, 5 is further moved outwards. I mean, the hype which was existing has tempered. And basically because everybody has seen that the cost associated with it, not only for, I mean, from computer vision, from what we have to test, and the legislation is not far enough. So we see that the early installment of Level 4, 5 drivers will not happen, and in particular, not at the costs which the consumer would go for.
That doesn't mean that for, in particular, the hardware and certain software content, this will get diminished. I mean, clearly, be it a Level 2+ or a Level 5 car, you still need radars, short range, long range. You still need cameras and surround cameras. You might need ultrasonic. So you need all those components. And NCAP five stars already will push into it. So the hardware part on it will be still existing and will be continuing. What will be the full leveled automotive driving control units. Level 4, 5 will get them for the Level 2+ more into sensor fusion means radar camera information will get, you know, it's fusion. You use it commonly in order to have good Level 2+ driver assistance, good computer vision in it. And you have chips included which supply those perception modes.
This part will be still there and will even increase. We see a further shift into those 2+ because we clearly see that the market is demanding for it, whereas Level 4, 5, as you said before, will get reduced. The market is still on the hardware part there and will further grow on all those areas where we have a certain strength, in particular the radar competence. We can say there we are best in class. We have as well a LiDAR which is getting in, but LiDAR, that was the only one which I have not mentioned before, is very much associated to Level , the higher levels of driving 3+ . On the price tag, this is as well more on the higher end. That might get as well as this provide. But the rest is still there.
We believe with our competencies, we have all in place to get a fair share in this business.
Nico, that has been a very lively discussion. We already came to the end. We're actually already two minutes above our time mark, and I don't want to keep you up any longer because, I mean, thank you again, especially because you're making time on a bank holiday today in Germany. Thank you very much for your time. I hope the discussion was useful for everyone in the audience, and Nico, I'm sure we're going to catch up soon. Thank you very much.
All right. Thank you, Tim. Talk to you soon. Bye-bye.