Something remarkable is happening within <a href="https://www.itt.com/" alt="ITT Inc.">ITT Inc.</a>, something that's flying under the radar of most analysts. While the company delivered a strong Q1 2024, exceeding expectations on revenue, margin, and EPS, the real story lies in the unprecedented outperformance of their Friction OE business in China. This isn't just a blip on the radar; it's a potential seismic shift in the automotive landscape that could reshape ITT's future.

Global Car Production vs. ITT Friction OE Performance in China

Let's delve into the numbers. Global car production in Q1 2024 saw a modest decline of 0.8% year-over-year, defying some expectations. Notably, Europe faltered, with a 2.5% decline, while China surprised on the upside with a 4.4% surge, a testament to the market's resilience. North America, meanwhile, chugged along with low single-digit growth.

Amid this landscape, ITT's Friction OE segment in China exploded, registering a staggering 38% growth. This wasn't just outperformance; it was a complete decoupling from the underlying market trends. To put this in perspective, imagine a speedboat effortlessly cruising ahead while the rest of the fleet battles a strong current. That's the picture ITT paints in the Chinese auto market.

The Secret Sauce: ITT's Winning Formula in China

<a href="https://www.itt.com/people/luca-savi" alt="Luca Savi, CEO, ITT Inc.">Luca Savi</a>, ITT's CEO, attributes this phenomenal success to flawless execution, an in-region for-region strategy, and substantial investments in local capabilities.

"Impeccable Execution: The China team boasts an awe-inspiring 100% on-time delivery rate in Q1, coupled with a quality metric of less than 1 PPM (parts per million). These figures are the hallmark of operational excellence, demonstrating an unwavering commitment to meeting customer demands with the highest precision. In-Region for-Region Strategy: ITT isn't simply exporting products to China; they're tailoring their solutions to the specific needs of the Chinese market. This involves working closely with local OEMs, understanding their unique requirements, and developing products that resonate with Chinese consumers. Strategic Investments: ITT hasn't shied away from pouring resources into bolstering their China operations. A prime example is the launch of a best-in-class testing center at their Yellow Mountains site in October 2023. This facility, developed in collaboration with OEMs, enables real-time performance monitoring and rapid problem-solving, solidifying ITT's commitment to their customers."

Sustainability and Future Growth

The question arises: is this sustainable? While maintaining a 38% growth rate over the long term might be a tall order, ITT's approach suggests a calculated strategy that's likely to yield substantial, enduring results.

"Consistent Outperformance: The Q1 performance wasn't a one-off fluke. The China team consistently delivered throughout 2023, outperforming the market by over 1,000 basis points. This suggests a deep-rooted operational strength that isn't easily shaken by short-term fluctuations. Building a Strong Reputation: ITT is building a powerful reputation for reliability and responsiveness. Their impeccable on-time delivery and quality metrics are earning them loyal customers who recognize the value they bring. In the fiercely competitive auto market, this kind of trust is a potent weapon. Fueling Future Growth: Savi highlighted the impressive 50 start-of-production programs and over 100 process validations in Q1 2024 alone. This pipeline suggests a robust future for their Friction OE business in China."

Hypothesis and Potential Implications

Hypothesis: ITT's China Friction OE success could be a blueprint for broader outperformance in the global automotive market. Their meticulous execution, tailored solutions, and strategic investments point towards a sustainable strategy that transcends regional boundaries.

Potential Implications:

Continued above-market growth for ITT's Friction OE business in China, potentially in the high-single digits to low-double digits range. Gradual expansion of this strategy to other markets, driving similar outperformance in Europe and North America. Consolidation of ITT's position as a leading friction material supplier, particularly in the booming EV market.

This is not just a China story; it's an ITT story. And if they're able to replicate this success on a global scale, the company could be poised for a level of dominance in the auto industry that few could have predicted.

Motion Technologies Margin Trend

This chart, derived from ITT's Q4 2023 and Q1 2024 earnings calls, shows the sequential margin improvement in the Motion Technologies segment. As mentioned by Emmanuel Caprais, CFO of ITT, they expect this positive trend to continue.

"Fun Fact: ITT's legacy stretches back over a century. Founded in 1920, the company initially focused on the telephone industry before venturing into other sectors like pumps, valves, and automotive components. Their diverse history reflects an adaptability and knack for innovation that continues to define their approach today."