Henkel AG & Co. KGaA (ETR:HEN3)
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Investor & Analyst Day 2019

Jul 2, 2019

Jan-Dirk Auris
EVP of Adhesive Technologies, Henkel

When you think about to protect an aircraft at all time of the flight, that requires quite some know-how and knowledge. To come up with an innovative solution, it requires also a very deep understanding of that particular industry. You also need a very deep understanding how an aircraft is designed. Of course, you do need to understand our customer specification and processes. Most important, you do need access to a complete set of technologies. What's the solution? It's a composite structural film adhesive. More important, the qualification before you finally can commercialize the solution takes usually three years. Before that time, you have probably, with the solution of that type, a two-year development work. During that time, of course, you do run very extensive programs, testing programs with our customers.

On top of that, the solution might require for your standard manufacturing processes, some adaptations. A design change, a process change during that time needs to be done in parallel. If that all works out and very smoothly, first-year sales of a solution of that type is around EUR 2.5 million or EUR 5 million. Over time, of course, you can scale that solution, making certain modifications, and it has probably a peak value of probably around EUR 30 million to EUR 50 million. Why did I take you through the process and gave you that example? That is, of course, just one example for the aerospace industry. Keep in mind that on an aircraft, we have around 100 different applications. You will see and hear many, many more applications and very attractive markets throughout the day.

Of course, not all our applications are as dramatic as this one. Of course not. The process, how it works is exactly the same. We felt that this gives you a good feel and understanding how it works and what we do. We provide our customers with high-impact solutions, and there are basically two ways how to think about. Either we create a new application together with our customers, either by developing a new process or introducing new materials which can be bonded, sealed, or coated, or overall rethink the entire design where before no adhesive, sealant, or functional coating was used. The other way how to approach is take an existing application and simply make it better. Make it either more efficient, reduce the waste, or solve a problem.

We provide solutions always with a very high performance impact and with a very low cost impact. Almost all our solutions represent less than 3% of the bill of materials of the finished product of our customers. At the same time, we create significant value through the performance of our product. Even more important, in case our solution doesn't work, the risk and the cost of failure is very high. Of course, the valuation and the differentiation differs quite a bit by application and markets. Across almost all solutions, the performance, the value of the performance is always significant higher than the cost of the solution itself. Customization. There are very, very few drop-in solutions. What does it mean, drop-in? Drop-in means you take a product off the shelf, and without running any testing programs, you can introduce that to the customer.

Almost every solution we provide have to deal with very, very complex situations. Complex, first of all, that almost every application is different, even for the same customer at a different location. You have to take into consideration different materials, different specification of the material. Is it going to be used in Asia or is it going to be used in Europe? Of course, the way how the solutions get applied are very, very, very different. We always talk about complex solutions, and we always customize the solutions towards the requirements of our customers. When you look at the entire portfolio, customized solutions represent roughly 50% of our entire portfolio. What is important when we talk about customization, the customization is always built on our technology platforms. Our high-impact solutions very often set the standard and drive specification.

That is on the one-hand side, of course, very important for our customer because our customer can scale, it's also good for us. We have a very, very high customer proximity, and our go-to-market model is always based on being very close to our customers. Of course, you need trust, you will see that with many of our very good customers, we have a relationship which goes back 50 years. For very close and complex customers, we even go a step further. We put in so-called resident engineers, trying to be available for the engineers of our customers at all time, and of course, being the natural go-to person when it comes to solve a problem or come up with a new design.

Being, and that is important, the incumbent at a customer application is a tremendous competitive advantage, and of course, it's a big advantage for our customer because there's always somebody to go to. For those not so familiar, you hopefully get a feel what we do. Let me share a bit who we are. We are the global market leader for solutions around adhesives, sealants, and functional coatings. 2018, we generated throughout our portfolio, EUR 9.4 billion in sales in a market of around EUR 65 billion- EUR 70 billion. Always very difficult to find the exact number for the market itself because as you probably know, it's a very fragmented market, fragmented in terms of segments, applications or technologies. Same holds true for the competitive landscape.

The top 10 competitors more or less represent 40% of the total market, you will find thousands of small and mid-size companies. However, you won't find any of our competitors offering and serving the entire industrial market. We are not only the global leader from a worldwide perspective, we have also a leading position in all our six regions. Even more important, we do have a leading position in all our industrial, or in most of our industrial markets and verticals. Therefore, the overall market size gives you just some sort of a direction. More important is obviously to go one level below and basically look at the different industries and the verticals we serve. Most important, what is the attractiveness of those verticals or applications within a vertical in terms of growth potential, but also in terms of profit pool.

Those applications at those verticals are supported by long-term growth trends. Therefore, to give you this answer and to show you where we stand and how well Henkel Adhesive Technologies is positioned, we build very much the entire day around the mega trends and how those mega trends have an implication, of course, for our customers, but certainly also for Henkel and representing significant opportunities. We serve 130,000 customers direct, and we serve millions through distribution. We have very long-lasting relationships, which go back 50 years, and you will find a solution. Yesterday night we had a conversation. In almost all OEMs, for automotive, you will find Henkel solutions in almost all aircraft. You will also find solutions with pretty much all the leading electronic manufacturers, and I can go on and on with the packaging industry and such. We are a very customer-centric organization.

White collar, roughly 6,500 of our colleagues, experts, are customer-facing, spending roughly more than 1 million visits per year. What do they do? They consult, help to identify opportunities, either to change the design or make an existing application better, and of course, they do support our customers and run line trials. We have 2,400 scientists in the field and in the lab running tens of thousands experiments and trials, always with the objective to come up with the perfect solution. Last, we do have a global footprint. When we talk about global footprint, we're not talking only about our number of sites spread throughout the region. We talk also about a global footprint along the value chain.

Across many countries, you will find Henkel Adhesive Technologies represented with a large part of the value chain, being its sales experts, sales engineers, technical customer service, product development or business development. The key message I want you to keep in mind, Adhesive Technologies has tremendous assets in place, being it our very strong customer partnerships, our people, our expert network, the know-how, and the infrastructure for local supply. That represents a very great value for our customers. Of course, when you look at the market, it is not easy to replicate, and it's of course a strong competitive advantage. How do we operate and what do we do different versus competition? How does the value creation work for Henkel? We are a know-how business with a large number of experts. Again, always very close. We call it a high-touch business.

Our experts are very often specialized on certain industries and in many cases, even very much specialized on a certain application. The knowledge goes far beyond the application and the product and the solution itself. It's always comprehensive, always try to take into consideration what is required for the customer to come up with a solution to create value, change the design, or solve a problem. To a large part, our go-to-market model, particularly for our B2B businesses, are direct. Even for our business, which goes through industrial distribution, even there, we maintain direct customer access because almost all our solutions require demonstration and testing. At the same time, being in such an industry, you need to have a very strong network of partners. Again, the solution is usually a very complex one.

We have very strong relationships with almost all leading machine equipment application manufacturers because that is crucial to apply our solutions for the different processes of our customers. Of course, we do have also very close relationship with the materials we either bond, seal, or treat. When we talk about creating value through customized and high-impact solution, for those solutions, we access a very broad portfolio of different technologies. You heard that probably many times. What does it mean? When you look at our space, there is a certain amount of technology you need to solve a problem, Henkel has a toolbox for simple terms, which includes all potential technologies to come up with a solution. Many of our customers operate with just a few technology platforms. For us, technology is not the driving force.

For us, it's always the customer and what is the best solution for that particular case. We are also able to scale our solutions, and that is very special, across different industries. You will see a couple of very interesting examples where we take a certain technology from one application and scale it into other industries or for other applications at other customers. The reason why I picked the aerospace example, you saw it takes a while to get a product commercialized, two years development work, three years qualification. In between, the teams have to make sure that we are finally also able to produce. Yet the application for the first year is two and a half million and EUR 5 million. Two and a half million to EUR 5 million is for us also already a big application.

That goes across throughout many of the use cases you're going to see, because that is a bit the nature of our business. At the same time, we are able to scale those applications, being it either through the industry across the globe or taking those set solutions and leveraging those solutions across other industries. Again, keep in mind, our solutions are based and built on technology platforms, and usually those solutions require some modification when you leverage them somewhere else. That put us in a position, in many cases, to be more innovative, of course, also faster, and creates quite a competitive advantage. Let's talk a little bit about our portfolio serving attractive markets. We are organized by verticals.

For those joined us in 2013, that was the time when we changed the way how we went to market from a very regional perspective into a very industry vertical organization. That puts us in a position to scale and drive synergies along those verticals for different industries and different markets. You will get the sales breakdown, don't worry. You will get the sales breakdown throughout Anders' presentation of our different business areas. By the way, we will share, of course, all the material anyway, after the investor and analyst day with you. Key message here, we run the business not as a whole. We are very much focused on verticals. Our teams are set up into verticals, that's basically how we differentiate, that's how we pretty much look at our entire market.

The second message is that when you look at our portfolio, we more or less cover the industrial production space at all. You will find most of our verticals covering the entire space of industrial manufacturing. The second piece is equally important. When you look at the vertical, you get, of course, significant insights. You need to go a step further. Managing that type of business, you need to figure out what is the right level of granularity. Even within a vertical, you can find applications which are highly attractive in terms of growth and profit pool, and we will talk about that pretty much throughout the day. You will also find applications and segments which grow significant less or are even at the end of their life cycle.

We always try to focus on the most attractive markets and applications, and there are, in almost all our businesses, very attractive pockets of growth. Of course, those growth applications help us to balance different and volatile market environments. Over the last year, we talked quite a bit about active portfolio management. At the end of the day, it is about managing the business on the right level of granularity. It is about reallocating and allocating our resources towards those applications which help our customers create the largest value. Of course, those applications where we see the greatest growth opportunity. That is pretty much how we run the business since 2013.

We have established a very rigid process to make sure that on the one hand side, we have a longer term perspective, which goes always beyond three, four years to see how certain markets, applications, and customer groups are going to develop. We do a review pretty much also every year, and that is the baseline for setting targets always for the next year to come. Having that said, of course, we do look at markets and adjust at a time if certain things and assumptions change. Strong portfolio, and let me share with you some additional thoughts. Of course, some of the question almost everybody, I guess, has on his or her mind is. How is that portfolio able to cope with different market developments and with the potential slowdown? Of course, to state the obvious, our business depends on demand of our customers.

If demand goes down in a certain area, of course, we also feel that in our sales development. Looking at the portfolio at a whole, you see we cover very much all the industrial manufacturing space. Of course, if industrial production slows down, we also see that in our sales development. Having that said, even in a market where overall there is a slowdown or the market is soft, you will always have opportunities to capture growth and to balance to a certain degree, certain overall market developments. We have, again, Anne will share with you the breakdown by region. We do have a fairly solid and good regional mix, and diversity. We do have a good mix when it comes to so-called non-cyclical and cyclical businesses by definition. We do have a good mix when it comes to customer portfolio and application.

As I said earlier, if a market is down, we talk quite a bit about the opportunities in the automotive industry. I am not sharing with you any secret that the automotive industry is facing some challenges from a market development. You will get very tangible examples how even then we are able to position Adhesive Technologies to participate in attractive growth opportunities in pretty much that market, but that applies very much across most of the industries we serve. You take a look at our business model, we believe that the business model and the way how we go to market creates significant value for our customer and is a key competitive advantage. It helps us, of course, to scale throughout our portfolio, smaller applications, being it in the vertical itself or being it across different verticals.

We believe that we have a very good combination of how do we run the business and what is our portfolio. As a result of that, we believe that we are very well-positioned for sustainable and profitable growth. Of course, I'm pretty sure you heard that many times, but we do have a proven track record. When you do look over the period of the last six years, I just picked the events when we had the Investor Day. We had, throughout that period, couple of years where we had tailwind when it comes to market development. We also had couple of years where we had headwind. Of course, the same also applies for currencies. Nevertheless, throughout that period, we were able to generate profitable growth.

I have to admit, I don't recall exactly, but I believe that applies very much for all our business areas throughout that period. Most important, throughout that period, we created substantial value for our customers and helped them to succeed. We also generated, throughout that period, quite a significant amount of cash. We kept our net working capital as a % of sales at a low level, comparing that with our peer group. Also important throughout that period, we kept investing into our business, roughly EUR 300 million CapEx per year. We completed couple added-value acquisitions. Let me just basically mention two. One, you might remember our acquisition in the West was Bergquist. It's a great company. At that time, we acquired Bergquist predominantly to support and strengthen our electronic business.

We also acquired Bergquist because they do have a very strong position about thermal management. Talking about mobility, talking about a rising and emerging application, that position is helping us tremendously now to leverage that technology into other applications. The other one, just recently, two years ago, was Darex. Darex was for us, again, a very important acquisition because, again, it strengthened the position of some of our verticals. It increased the value chain we offer to our customers. Since then, both businesses are very successfully integrated. They help us to contribute to the profitable growth of our business. Let me also mention, because we don't cover it throughout the day, throughout that period, we also set up our corporate venture fund, and Adhesive Technologies was, if I may say, to a certain degree, a frontrunner.

Not because we like to experiment so much, we do, but in that field. We had a clear strategy. Our investment, we invested since then EUR 41 million, part of that investment went into material science funds. Why? We felt that this is a perfect opportunity to scout the market. Before that time, we had our own scouting teams on top of our 6,500 customer-facing experts. We felt that being invested through a material science fund, one in the U.S., one in Europe, more or less, and one in Asia, gives us a perfect opportunity to see if emerging technology comes up. Of course, either agree on a joint development approach or have a minority share. Even during that period of time, we did some investment into funds. We did six investments into promising technologies, early stage, with a minority share.

Let me basically come to moving forward. Let's change gears for a second. Let me talk about strategy and priorities. You will hear all day long, how do we leverage megatrends? What does it mean? How do we translate that? What are the opportunities for Adhesive Technologies? We will talk a bit about our innovation pipeline. How do we make substantial investments into our capabilities to even bring our innovation capabilities to the next level. When you look forward, digitalization plays a very important role. I will come back to that. Most important, we do have also a very customer-focused organization. We are very proud of our 12,000 white-collar, if you will, for lack of a better term, experts who serve customers day in, day out.

Of course, we're also proud of our 14,000 blue-collar worker, making sure that our products get produced and shipped. The key message we want to get across, we feel. We are always very reflective. We feel we have a great customer-centric team. We just started to even organize ourselves to get even more customer-focused throughout the organization. In simple term, objective, we want to even further reduce interfaces. To really zoom in on the different verticals. Make sure that we are always the frontrunner. Leveraging megatrends. Of course, those megatrends, as you know, they do not only change the specific industries, of course, they also change the world. What is important, why we changed a bit the gears. How do we present our business to you today versus some of the other investor days in the past.

We believe that sustainability, connectivity, and mobility very much is relevant for almost all our customers and all our industries. Coming back to the previous statement I made, we are in many cases, the incumbent. The incumbent with all our 130,000 direct customers. That puts us, of course, in a very good position to be the go-to person to help them, our customers, to manage and master the transformation of the different industries. We are in a know-how business. We are in a pole position. Accelerate through innovation. Just a few quick facts. When we think about innovation, we have an NPI rate of 30%. 30% of our sales are products which we launched over the last five years. We always have the objective when we launch a new product, that the product in its product line is accretive.

Being it by creating more value for our customers, or being it by producing the new solution more efficient or having the solution more efficient formulated. We have a very healthy pipeline, and of course, we want to leverage that pipeline even moving forward. Yesterday we had some sort of a chat about our 3D printing business. Michael, you're going to use 3D printing as an example because it gives you a good feel in how do we do innovation, how does innovation work, and how do we apply all our assets through a certain application, and win in that particular space. Just to be also very clear, 3D printing will not move the needle over the next few years. The reason why we spend money and the reason why we think it is important, because it is relevant for almost all our customers.

We do believe that 3D printing, the space and the application we cover, is going to be very relevant for our company probably 10 or 15 years in the future. The last piece, and you had clips, and you're going to see a bit more, is our investment into our innovation capabilities. When you looked out of the window, you saw our EUR 130 million investment into our new innovation center. This is not why we like to build buildings. The idea is very simple. The idea was born when we reviewed our innovation workshops. We do quite a lot for our customers. What does it mean? We ask customers to reserve two hours of their time. We come with all our basket of different technologies in our portfolio, and we ask the customer to put as many design engineers through that innovation workshop.

In every single case, we walk out of that workshop with a meaningful at least one new application or new solution we can then further develop. Investing EUR 130 million is about creating basically an innovation workshop, accelerated, if you will. It's also about making sure that we recruit the right talents because the environment and how do we work with each other is going to be significant different than some of our laboratories. Last, you heard us often talking about leveraging technologies. We want to make that natural by having, particular for Europe, a large part of our scientists all together so that naturally we're going to leverage ideas because that's what we believe new ideas will happen. Let's talk about digitalization quickly. We believe it's enabler to increase our competitive advantage.

We do not have a digital strategy itself because we believe that digital is an enabler of pretty much what we do. When we talk about leveraging platforms, technology platforms, product platforms, we believe that digitalization is for us, the next platform to scale our business to the next level. We do have a very complex business. We have to manage very huge amount of information all the time, and we believe that information technologies and tools cannot only help us to bring our knowledge business to the next level, we also believe that digitalization with its tools and technologies will help us to enhance our customer journey experience, really differentiate in a B2B world, and of course, driving efficiency. With that, let me basically come to the key takeaways.

We are the global market leader with a very strong portfolio serving attractive markets, and you will see all day long the different applications, not as dramatic as the one on the aircraft, but for us, very exciting. We do have a business model which is able to create sustainable value for our customers, but of course, also for us. We do have a track record throughout many years to deal with markets going up and markets going down. We have a very clear strategy and priorities. With that, we do believe that we are very well-positioned to create value in a sustainable way moving forward. Most important, and you're going to get a very good view on that, we do have, and I'm admitting I'm a bit biased, also the best team in our industry. Thank you very much.

Carsten Knobel
CFO, Henkel

Since 2015, since we last met for the Investor Day, since then, we have added EUR 400 million in sales. In 2018, we achieved EUR 9.4 billion in sales. The growth rate that we delivered over the past three years since 2015 was clearly above the industrial production growth and clearly means more than one point. Over that period of time, we were also able to, once more, continuously increase our margin and now reached a level of 18.7% last year. With that, we delivered an absolute EBIT amount of almost EUR 1.8 billion. Jan- Dirk promised that I would give you a couple of details on our portfolio. You see here the breakdown by business areas as well as by geographies.

Looking at the business areas, as mentioned, we have five business areas in which we basically run the business, the largest one being the Packaging and Consumer Goods one with more than 30%. Second largest, Transport and Metal, 24%, General Industry, 15%, consumer Craftsmen and building, 19%, and Electronics with 11% being the smallest, but still more than EUR 1 billion in sales. The market itself is set to deliver consistently around 2%-3% growth over the cycle every year. Within this market, there's clearly attractive growth pockets that allow for an even faster growth. Looking a bit at the geography profile, clearly the U.S. is our largest country, but Asia in total is our largest region with 28%. Out of the 28%, approximately half is contributed by China. I think that's also important information these days.

Western Europe is our second largest region, here, Germany accounts approximately for a third of Western Europe. Overall, our emerging market share is around 50%. With that, we are also perfectly set to capture growth in emerging markets. Let me now take a look at our growth profile since 2015. Over that period of time, we achieved an average growth per year, organic sales growth of 3.9%, but you also see the impact of portfolio development in this bridge pretty clearly. We added approximately half a billion EUR in sales with the most prominent acquisitions that were mentioned of Darex and Sonderhoff. Also we did a couple of divestment over that period. Some of them pretty small so that we didn't even talk a lot about it, actually pretty important because yesterday evening we also had some conversations.

Why would the margin improve also quite a bit over that time? The portfolio composition at first glance hasn't changed dramatically since 2015. That's perfectly correct. The five business areas themselves still have pretty much the same weighting as five or three years ago. Within those segments, we also of course did a lot of portfolio management. Just to cite some examples, in Mike's Electronics business, we divested a couple of businesses that had reached the end of their life cycle and were not contributing to profit at all, which of course helped us overall also to drive the margin. Total amount of business disposed was something like EUR 200 million sales over that period of time.

In those last three years, we were also hit significantly by negative FX development in total on a top-line level, approximately even EUR 1 billion, ending then at EUR 9.4 billion of sales. Talking a bit about profitability increase. Since the last Investor Day, we were able to add 160 basis points in margin. How did that happen? Mix was one thing, as mentioned, with the both inorganic moves that we made, acquisitions and divestments, but also portfolio management within, by focusing on the most attractive segments of the market. In that period, we also had a pretty volatile environment when we talk about material costs. 2016 is characterized by decreasing raw material cost, but then steep increases in 2017 and 2018.

Over that period of time, we have been pretty much able to compensate for the raw material price increases or respectively at the beginning of the cycle, keeping very well our sales price levels intact. One other important contributor was all our fund growth initiatives, and that on both ends. When we talk about gross margin impact, operations, and supply chain driven, but also on the SGA cost. Next one on profitability increase, taking a bit of a deep dive into operations and supply chain. Jan-Dirk mentioned that every year we invest something like EUR 300 million into CapEx for our business. With that, we still consider ourselves as an asset-light business if you compare us to chemicals industry or to specialty chemicals. CapEx and % of sales, pretty low.

Nevertheless, we drove quite a bit our profitability upwards in the past years if you look at what we did in manufacturing footprint optimization over that period of time. Here on purpose, we put how our factory landscape looked in 2004, 133 sites. Then you see how many we acquired. A large part of the 100 that we acquired, of course, with the National Starch acquisition in 2008. We also built a couple of new ones, 25. Then you see how many we closed or divested, more than 100. That today we operate 141 sites. With that at the very right, you see the productivity gain arising from this. Sales per factory, if you want to do quick guerrilla math, increased from EUR 32 million per site to more than EUR 67 million per site.

Coming a bit to cash, net working capital, Jan-Dirk and [Carsten] mentioned it already. Over time, and you see here the periods of the last Investor Days, 2012, 2015, and 2018, we were able to keep our net working capital at a pretty low level if you compare us with our peer group and with the market. Nevertheless, we still see levers for further improvement over time. There will be, of course, some fine-tuning, like if production shifts are now over for some of the big new plants that we're building, inventories are going to go down a bit, but that's not going to be a step change.

A step change, probably more likely we're going to see if we implement professionally new digital tools, and that is why digitalization for us is so important, and you're going to see a couple of examples also later in the exhibitions. One important point, for example, on inventory management, would be that we get better in anticipation of demand swings. When markets go up, we are better prepared for it, and when markets go down, we also not only rely on statistical forecasting, but get that done better. Key takeaways on our financial performance. We have a very attractive market with nice growth rates and attractive profit pools, and we have a very unique business model to capitalize on it.

We believe we are very professional when we talk about portfolio management, and we see portfolio management also as a very important part of value creation going forward. What do we do with this? We drive the resource allocation to drive the profitable growth, and as mentioned before by Jan-Dirk, we also continuously look at our structures and adapt them to the market environment. Thank you.

Michael Todd
Head of Innovation of Henkel Adhesives Technologies, Henkel

When we talk about mobility, there are basically three sub-trends, and some of you, I'm sure are pretty familiar for you. There is the emergence of alternative energy vehicles, whether those are plug-in hybrids or fully electric vehicles. There is a trend towards autonomous driving in different degrees, which is combined with another effect that drives the content of electronic components in a vehicle. I will talk about that one as well. There is a trend that is prevailing already for many years in the automotive industry, and that is a need for lightweight structures to compensate some of the additional weight that has been put on a modern vehicle over the last couple of years. Let's start with alternative energy vehicles. When we talk about alternative energy vehicles, we talk about full plug-in hybrids and fully electric vehicles.

There is obviously a big discussion about that topic. The electrification of the powertrain is probably the single biggest disruption the automotive industry has experienced over the 100 years of its history. Talking about autonomous driving, there are different degrees of autonomous driving. We are not suggesting that in a few years we see completely driverless cars. The level 3, level 4 of autonomous driving is becoming a reality, what is accompanying this trend is the demand from us as a consumer for more and more safety and comfort features. All of those trends result in an increase of electronic components and sensors that are built into the latest generation of vehicles. The third sub-trend is lightweight. Clearly not a new phenomenon in the automotive industry.

Automotive OEMs are thinking about how to take out weight or at least to counterbalance additional weight that goes into a modern vehicle since many, many years. The two trends I elaborated about before make the challenge even harder in order to comply with the emission standards that have been put out by the different governments. A full electric vehicle carries a battery that weighs six up to 700 kilos. All the electronic components that I mentioned before add additional weight to a vehicle, that needs to be, at least in parts, be balanced out. As a consequence, we do see an increase of lightweight materials. We will see plastics. In some specialty areas, probably composites. We will see especially lightweight metals and first of all, aluminum.

A typical car body, which used to be a pure steel construction, will move to a multi-material setup. That creates significant challenges, which represent, again, an opportunity for a company like Henkel. Classical fastening methods like welding, which was standard practice for a pure steel body, are not possible anymore. With this, the demand for structural adhesives is increasing significantly when we talk about a multi-material body. How does this translate into the value opportunity for Henkel? What I put on this slide is a comparison against the value potential that we would see if we would supply all our solutions into a classical car with a combustion engine.

Usually, we quantify that value around EUR 100. When we talk about a fully electric vehicle with a battery size that I mentioned before, reach 400 km- 500 km, 600 kilo in weight, that value goes up to EUR 270. That is truly an exciting growth opportunity, a highly attractive pocket of growth for our business. What are those solutions? I don't have time to illustrate the entire breadth of our portfolio, so I just picked a couple of examples how we shape the future car.

Starting at the bottom right of the slide, we are delivering a full range of assembly adhesives as well as structural adhesives to manufacture the latest generation of infotainment systems in a reliable, you can imagine the displays are getting bigger and requirements over 10 years of the lifetime of a vehicle are pretty significant. The solutions that we provide need to ensure that those displays and infotainment systems work in a very reliable way. We also deliver all kinds of materials that protect electronic components, which you see on the bottom left of the slide. Those include potting materials, encapsulation materials, electrically conductive adhesives to not only produce the sensors and electronic components, but also to protect them again across the entire lifetime in an electric vehicle. Key takeaways and key messages.

There are unique growth opportunities in the area of alternative energy vehicles, autonomous driving, more electronic components hitting the modern vehicle, and by the need for lightweight designs. We do feel we are very well positioned to capture on those opportunities. We have a high ability to win with very strong customer relationships, but especially with our unique portfolio and an in-depth knowledge carried by our experts. With this, we feel that Henkel is actively helping our customers to shape the car of the future.

Mike Olosky
Head of the Electronics and Industrial Division, Henkel

We think this is absolutely just the beginning. Soon, we really believe we're going to have a fully connected world. Okay? Let's expand that mobility example just a little bit more. The cars are talking to each other and the traffic control systems. Traffic in large cities is going to get a lot easier and going to be much more efficient. Connected cities. Connected cities will better be able to manage their grid. They'll better be able to manage and conserve resources. Connected governments. They'll use connected sensors and big data to help them predict and manage natural disasters. California's actually doing that today with wildfires. Okay? On the B2B side, a fully connected smart factory is going to make things much more efficient, and we're going to have significantly more efficient supply chains. We're actually already seeing that today in a lot of our smart factories.

That's going to make everything much more efficient, and Henkel is partnering with all the companies that are making that happen. We are working with them to build that technology. Because we're active in the development of all these technologies that are going to make a fully connected world, we see what's coming out. We see what they're about ready to launch. We see the technology that's going to come out in a year or two, and it's pretty exciting stuff. That's why when we see all this stuff, we believe the inflection point is now. We think we're right on the edge of really getting a big jump in connectivity. Okay? The biggest driver behind this whole inflection point, it's going to be 5G. The fifth generation of a wireless system. That's the new, latest wireless protocol.

It's the fifth generation. A lot of times in Europe, you're getting 3G and 4G. The 5G systems are very fast. It's 100 times faster than conventional systems. The 5G systems can handle a lot of data. They can handle 100 times as much data as the current systems. They're quick. They have a much faster response time. It's often called latency. They're 10 times quicker than our current systems. What does that mean for you? Well, you'll be able to at least download a movie in three seconds. Okay. Developing all of that technology that enables connectivity is not easy. It's going to take a lot of advanced materials to make it work. That's where Henkel comes in.

We are working with them to help enable and shape all this technology. We believe by developing new materials for them, that's going to create a billion-euro incremental market for us with that total market growing roughly 10%. A EUR 1 billion to help enable connectivity systems. That's not going to be EUR 1 billion easy to get. Okay. We're going to have to work pretty hard for that. Our customers in this space are very large global companies. They have very high quality standards. They have very high specifications. They are extremely demanding. Very high standards. I think that's actually good for us. That gives us the ability to differentiate. When we differentiate, the more we differentiate, the more we're able to price, making that billion-euro incremental opportunity a pretty attractive segment for us to be in. Okay.

We're also working to get a good handle on where that EUR 1 billion is because it's pretty fragmented. We're spending a lot of time running all of these opportunities through a market attractiveness and ability to win filter. You'll see a little bit more about that, to be really clear on what exactly are the best opportunities in that fragmented market. We want to make sure we resource those opportunities correctly, because that'll give us the best ability to win. Bottom line, we think this is an absolutely, really perfect market to be in. Okay. Now let's get a little bit more into the detail. How do you build a fully connected future? Well, these are the three major building blocks, smart devices, infrastructure, storage, and processing equipment. Let's go through each one of these. Smart devices, that's easy.

Everybody knows the mobile phone. You have a lot of cameras and sensors as well. By the way, you have cameras and sensors, as Michael knows, in factories a lot, too. A lot of cameras and sensors with the phones. They're sensing, they're interacting, they are also generating a lot of data. Infrastructure. Okay. That's antennas, that's base stations, that's basically 5G. That's the backbone that helps connect everything. Storage and processing. Okay. That's servers, that's storage equipment. That's basically the cloud. That's where a lot of our data gets stored, also where a lot of the data gets processed. There are about 50 companies that are basically directing this market, making the majority of it happen, plus their supply chains. There are literally hundreds of very unique applications, all requiring a high degree of customization.

To play in this market, it is a very high-touch business. Now I get a little bit more into the detail. Developing that technology that I just showed, all that technology that enables connectivity, that's not easy. Our customers have some very big challenges. High speeds, either data speeds or processing speeds, it creates issues. Electrical interference, and it makes that equipment generate a lot of heat. Miniaturization, that results in assembly problems. How do you put all that stuff together, okay, especially when you have all these tiny components in small spaces? Reliability's a big deal. This is 24/7. Everybody wants this stuff to work around the clock, okay?