Schaeffler, the German automotive and industrial giant, is best known for its cutting-edge solutions in electric mobility and advanced chassis systems. It’s a company synonymous with high-tech, future-oriented innovation. But nestled within the company's recent Q1 2024 earnings transcript lies a hidden gem that may have slipped past most analysts: the unassuming, "boring" bearings business.

This often-overlooked segment, now integrated into the Bearings & Industrial Solutions division, is quietly positioning itself as a powerful growth driver, fueled by the very trend that's seemingly eclipsing Schaeffler's traditional strengths: the rise of Chinese electric vehicle (EV) manufacturers.

The narrative surrounding Schaeffler often centers on the tension between its "mature" combustion engine-focused business and its burgeoning EV segment. The current quarter's transcript confirms that the mature business is exceeding expectations, providing robust profits thanks to extended production runs of traditional vehicles. At the same time, the EV business, while securing substantial orders, is still in a ramp-up phase, diluting overall margins.

Yet, beneath this familiar story, a fascinating subplot is unfolding. Schaeffler highlights its strong performance in the bearings business with new Chinese EV players. The transcript reveals that this growth is "significant," even though these OEMs consider bearings mere components.

This seemingly innocuous detail carries enormous weight. It signals that Schaeffler is cleverly capitalizing on the meteoric rise of Chinese EV brands like BYD, NIO, and Xpeng, not solely through high-profile powertrain deals, but through a more fundamental, high-volume approach: supplying essential components like bearings.

Why This Is a Potential Game-Changer:

Scale Advantage: Schaeffler, as the world's leading bearing manufacturer, holds a distinct advantage in meeting the massive demand for components driven by China's rapidly expanding EV market.

Profitability Potential: While bearing contracts may seem less glamorous than headline-grabbing powertrain deals, the sheer volume involved, coupled with Schaeffler's expertise in cost-efficient production, can translate into substantial profitability.

Reduced Risk: By diversifying its EV exposure beyond powertrain systems, Schaeffler reduces its reliance on the unpredictable pace of technological development and evolving consumer preferences in that specific sector.

Hypothetical Scenario: Impact of Bearings on Schaeffler's Bottom Line

Let's assume Schaeffler's bearings business currently accounts for roughly 20% of its total automotive revenue. Given the transcript's emphasis on "significant" growth with Chinese EV makers, let's further assume this segment experiences a 30% year-on-year growth driven by this trend.

If we estimate Schaeffler's average EBIT margin for bearings to be 10%, this translates to a potential €180 million increase in EBIT for the Bearings & Industrial Solutions division solely from this source. This figure represents nearly a 25% increase in the division's 2023 EBIT.

This hypothetical scenario, though simplified, underscores the potential for the bearings business to significantly impact Schaeffler's bottom line. While the transcript doesn't provide precise numbers, the qualitative indicators are compelling.

Moreover, this stealth play is perfectly aligned with Schaeffler's vision of becoming a "leading motion technology company." By leveraging its core expertise in bearings across diverse applications, Schaeffler is positioning itself to win in both the mature and growing segments of the automotive industry, particularly in the high-growth Chinese market.

It's a strategic move that may appear unassuming at first glance, but one that could ultimately propel Schaeffler's success for years to come.

"Fun Fact: Did you know Schaeffler bearings are used in some of the world's most iconic structures, including the London Eye and the Beijing National Stadium (the "Bird's Nest")? Their precision engineering is quietly powering the world around us, from the everyday to the extraordinary."

Analysis of Schaeffler's Q1 2024 Earnings Call

The following chart analyzes the sentiment expressed in Schaeffler's Q1 2024 earnings call transcript. We've categorized key phrases and statements as either positive, negative, or neutral to gauge the overall tone of the discussion. This sentiment analysis provides further insights into Schaeffler's current performance and future prospects.

Schaeffler AG (OTCPK:SFFLY) Q1 2024 Earnings Conference Call May 7, 2024