AUTOLIV, INC.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

A leading developer, manufacturer and supplier of vehicle safety systems, components, and modules.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Autoliv, headquartered in Stockholm, Sweden, designs, manufactures, and supplies a wide array of automotive safety systems. Their products range from basic components like airbags and seatbelts to more advanced systems, including active safety technologies. The company primarily serves major global automakers and operates in 27 countries.

Revenue Streams:

Autoliv’s revenue is heavily reliant on the sales of their safety products across various global markets. A few of their main revenue streams include:

Airbags: Various types of airbags, including frontal, side, and curtain airbags.
Steering Wheels and other related safety products: Steering wheels, advanced steering wheels and impact-absorbing steering columns.
Seatbelts: Seatbelts, seatbelt systems, and other related products.
Passive Safety Electronics: Electronic components that enhance safety systems.

Autoliv’s revenues are segmented into four regions: Americas, Europe, Asia (including China), and a category for Other. Historically, Americas and Europe have been the biggest, but recently, Asia (and particularly China) has been growing the most. As of 2022, net sales were divided by: Americas (24.8%), Europe (38.6%), Asia (30.7%) and other (5.9%). Autoliv expects that Asia and particularly China will have the highest growth rates in next few years.

Industry Trends:

The automotive industry is undergoing a significant transformation with the rise of electric vehicles (EVs) and the focus on advanced driver-assistance systems (ADAS). This is driving demand for innovative safety solutions, including advanced occupant protection, active safety systems, and new passive safety products that are integrated into these emerging vehicles. This is creating pressure on some of the traditional products of Autoliv, and they are trying to position themselves well in the EV space.

Margins: The gross margin in 2022 was 18.4%, and 20.1% in the first 9 months of 2023. This level of gross margin appears to be relatively steady. The operating margin in 2022 was 4.7% and in the first 9 months of 2023, it was 4.6%. This suggests that while Autoliv is able to make reasonable profits on each unit sold, operating expenses such as R&D and marketing expenses reduce profitability a lot.

Competitive Landscape:

The automotive safety market is highly competitive, with Autoliv competing against major players like ZF, Joyson Safety Systems, and Hyundai Mobis, each with varying degrees of technology and regional presences. They all compete on price, quality, and technology. Autoliv is attempting to compete through increased vertical integration. To a smaller extent, competition comes from various smaller suppliers focusing on more specific niche markets (like the niche producers in China and South Korea).

What Makes Autoliv Different:

Autoliv stands out due to several key factors:

Global Reach: The company’s vast global footprint and localized capabilities allow it to serve a wide range of customers, from small to large manufacturers.
Focus on Quality: Autoliv’s emphasis on high product quality, performance, and innovation is a key differentiator in the industry. For them, quality is not only a must, but a focus on their competitive position.
Strong Supplier Relationships: Decades of operating in the market means that Autoliv has strong and long relationships with its customers.
Technology Integration: A focus on the integration of new and emerging technologies to its products and the industry as a whole allows it to stay at the forefront of future industry dynamics.
Vertical Integration: In the most recent years, Autoliv has begun implementing a strategy of vertical integration, which will hopefully help them in the competitive market.
Commitment to Sustainability: The company is increasingly focusing on sustainability initiatives and environmentally friendly production.

Moat Analysis: Based on the economic moat approach by Pat Dorsey, Autoliv has a narrow economic moat.

Intangible Assets: The company has strong brands and patents. However, some of its main products face strong competition from companies with similar products.
Switching Costs: Customers do not have high switching costs but Autoliv benefits from the long relationships with the clients they have built. Since the parts are crucial for the vehicles they are designed for, switching to other producers may take time and capital and therefore, they benefit somewhat from switching costs.
Network Economics: These don’t play a major role in this industry.
Cost Advantages: There are limited cost advantages and it is easy to replicate such advantages. Although the company has a presence in several low cost countries, these low costs are not unique to Autoliv, and can be easily replicated by competitors.

Therefore, Autoliv has an advantage due to its brand recognition, strong customer relationships and its wide distribution network, yet this advantage is not as strong to put it into the “wide-moat” category. It is very likely that Autoliv will still be profitable for a long time due to such aspects, yet new companies can eventually penetrate their market share.

Risks to the Moat: Several factors could potentially erode Autoliv’s moat:

Technology Change The introduction of new technology, or a faster-paced change in technology compared to the competition, could have a huge negative impact. New methods of safety or methods that are cheaper and more effective than the traditional ones could hurt their product appeal.
New Entrants: A new entrant with a significantly cheaper cost structure or a better technology could threaten the business, particularly in the high competition environment.
Intensifying Competition: Aggressive pricing strategies from competitors and a shift in bargaining power of customers due to an increasing consolidation of the car industry would decrease profitability and increase financial risk.
Global Economic Factors: Fluctuations in global GDP or sudden shifts in supply and demand due to the business cycle might cause some problems and lower profitability. A particular example of this is the effects of COVID and the Ukraine war.
Regulatory Changes: New regulations, or changes in current regulations in the various countries, can have a considerable impact on the cost structure and the business of Autoliv.

Resilience:

Autoliv has demonstrated a solid business resilience and has shown an ability to make necessary changes through the years. Due to its size, and wide range of products, it is not at as much risk to adverse changes in the industry as some smaller companies. Their long-term relationships with big producers and their ability to innovate and adapt to new trends, should ensure its long term viability. However, their high leverage should be carefully monitored.

Financial Analysis:

Autoliv’s financials reveal a company with large revenues but relatively modest profit margins, indicating that it does not control pricing power. Here’s a detailed financial breakdown based on recent reports:

Revenue: Revenue has steadily increased in most of its regions. For the first 9 months of 2023 it has reached $7.37 billion. Although China has had some of the fastest growth, European and American markets make the bulk of the revenue.
Profitability: Autoliv operates on a 4 to 5% operating margin. There is a lot of variability in gross margins on different years but seems like the current levels are stable. Also, the company has a very low net margin because they face large costs from financing and restructuring activities. Net profit margins are at about 1-2%. As a result, the company struggles to translate its revenues into profit.
Capital Structure: As a capital-intensive business, Autoliv has a lot of debt. As a result, the Debt-to-Equity ratio of the company hovers near 1.0. Also, the Interest coverage ratio is at 3.6 meaning that they might have issues if interest rates rise further. They have also stated that it is their goal to reach an ideal capital structure, which is to reduce the amount of debt in their balance sheet.
Cash Flow: In the first 9 months of 2023, net cash from operating activities was $535 million. The company’s free cash flow seems to be affected a lot from increased capital expenditures. In the 12 months of 2022 their free cash flow was negative. However, the company continues to generate cash flows from operations and the need for increased capex is a sign that company is investing more into the future.

Recent Concerns/Controversies and Management Perspective:

High Debt: Autoliv management has recognized that their debt is at a high level and have stated to continue to reduce the debt over the following years.
Inflation: Company has been facing increased material costs and has stated that they are managing through them with price increase and supply-chain improvements. They expect that higher labor costs will continue to impact profit margins.
Supply chain constraints: They have been facing supply chain constraints through the last few years, but they have made improvements in sourcing and logistical improvements that have reduced such negative consequences.
China Risk The Chinese market has been a growing one for Autoliv. They are still heavily invested in China, but also have a contingency plan to minimize business risk due to China. Management expects the Chinese market to continue growing for the foreseeable future.
Restructuring: As they plan to integrate acquisitions and expand their offerings, a restructuring program is currently underway that has included a reduction of approximately 2500 employees, and a planned cost savings of approximately $100 million on the yearly basis.

Understandability: Autoliv’s business is moderately complex (3/5) due to several factors:

Complexity of Value Chain: Autoliv is positioned as a middleman between suppliers and automakers. Understanding their business model involves considering the entire production chain of vehicles. The complexity of that makes it difficult to fully understand the business.
Multiple Revenue Streams: The company’s revenue depends on a wide array of products and different categories. Understanding the specific nuances behind each is challenging.
Multiple Geographic segments: Because the business is present in many countries and therefore, exposed to different market forces, making it more difficult to understand.
Technological Developments: The changes in the automobile sector, and the integration of technological innovations into the company’s product offering, make understanding future growth trends a complex endeavor.

Balance Sheet Health: Autoliv’s balance sheet shows some strengths and weaknesses, which leads it to a moderately healthy status (4/5):

Liquidity: While the company has relatively liquid assets, it also has considerable amounts of short term debt that have to be taken into account. They have also been able to consistently generate cash flows from operations that can service the business.
Debt: The debt of the company should be closely watched. The high debt-to-equity ratio means that changes in the capital structure could heavily impact the valuation of the company. Also, it might face more severe consequences in cases of financial turndown.
Capital Structure: As stated before, the capital structure of the company means they are very heavily reliant on debt financing. The plan to reduce such dependence is still in the initial stages and will take some time to have a notable effect.
Tangible Assets The company does hold a lot of fixed assets, which might help them from a safety point of view.