The Case for an Independent Magirus

With CNH Industrial’s new CEO receiving competing bids for IVECO’s commercial truck and bus business from large state-owned Chinese industrial conglomerates in his first week on the job, it’s conceivable that two of Germany’s top three firefighting vehicle producers will be Chinese-owned within a year’s time. IVECO currently controls only about 5% of Magirus’s outstanding shares, but without IVECO’s commercial truck business it makes little sense for CNHI to continue ownership of Magirus when considering the relatively small value it holds within it's larger portfolio of companies, which would leave only Magirus, Iveco Defense Vehicles, and FPT engines—assuming the Chinese suitors, FAW and Shandong Heavy Industries, would be interested in adding the maker of fire trucks to the offer—leaving CNHI with several niche companies with little in common.

The China Factor

While North America still holds the crown as the largest market for firefighting vehicles by value, the Chinese market is the largest globally by quantity, at over 7,000 units annually, pre-COVID. Firefighting vehicles are an attractive market that could be a valuable higher-margin niche than the hyper competitive commercial chassis market in the country.

In 2013, following a price fixing scandal among the leading German firefighting vehicle producers, which led to large fines that destroyed liquidity and prompted insolvency, Ziegler was acquired by China’s CIMC Group, a giant maker of shipping containers, tractor trailers, and airport jet bridges. CIMC later packaged Ziegler under the banner of China Fire Safety Enterprise Group (CFE) together with one of China’s leading domestic fire trucks builders, Sichuan Chuanxiao, and Allied Best, a maker of fire protection and suppression equipment including monitors and portable pumps.

The addition of Magirus to the roster of Chinese-owned fire equipment manufacturers would conceivably benefit the German company in the Chinese market, where the brand has stagnated for years where, despite their early entry and China being the largest single market for aerial fire trucks, their inability to scale service capabilities for their famous aerials to match the fast evolving expectations of the China Fire Service has led to poor brand reception amongst users. This is in stark contrast to their home country reputation for top quality firefighting vehicles by a hallowed name in the fire service.

Rosenbauer, Magirus, and Ziegler are Germany’s “big three” fire truck builders. Although Rosenbauer is, technically, an Austrian firm a large share of their manufacturing is in Germany—especially since their acquisition of Metz, the aerial ladder producer located in the city of the same name. Having two of the three leading German, and arguably European, producers is unlikely to go over well with the highly nationalistic German Feuerwehr, but their vote is unlikely to count for much when the IVECO offer is valued at over €3.5 billion.

Lots to Consider

CNH Industrial’s new CEO, Scott W. Wine—the American born former CEO of Polaris—is under pressure to make a decision within his first 100 days, which is the traditional timeframe where a new executive is expected to lay out their strategic plan and take steps towards execution. His predecessor detailed a plan and began steps to split CNH Industrial into two companies, one focused on off-road (agriculture, tractors) and the other on-road (trucks, buses, and engines), as a way to create additional value for shareholders as “pure play” companies. Value of conglomerate-owned subsidiaries is often diluted as it is difficult for investors to value each operating entity with different value potential and location within market cycle. Mr. Wine is now faced with the choice of continuing with his predecessor’s planned split of CNHI or with entertaining the new Chinese offers which, if accepted, would remove the largest value contributor—IVECO—from the “on-road” group, making the planned split essentially dead on arrival.

An attractive alternative, in our opinion, is to spin-off Magirus into a self-governed, stand alone entity with an acute focus on its craft of building highly capable firefighting vehicles. This would give management greater motivation to compete more aggressively in the three major Fire markets, China, North America, and Europe, two of which it does not currently operate in and in all of which its competitors are growing increasingly strong.

Under the current setup, as an awkward speciality subsidiary of CNH Industrial, Magirus has experienced five years of negative to flat revenue growth leading to an inability to focus on high value-add innovation to establish and maintain growth within the market, and a lack of global activity at a time when increased spending on public infrastructure throughout the developing world continues to its upward trajectory.

Magirus Group enjoys gross revenue of around €1.3 billion, which—according to financial documents—includes all of IVECO commercial truck’s German sales and service network, averaging about €100m for each of the subsidiary service companies. In actual firefighting-related business an adjusted revenue of approximately €300m is more realistic, far behind its main rivals of Rosenbauer (€1.2b) and Pierce (€1.1b).

The Upside

A pure play fire truck builder in Magirus would be an attractive investment vehicle for state and municipal pension funds as a way to keep profits and jobs recirculating through their respective economies, as the contributors to these funds are many of the same who are driving and relying on these trucks every day. Further, with general nationalistic trends taking root over the past several years as domestic economies stagnate—which was certainly exacerbated during the pandemic—the appetite for another Chinese acquisition of what is arguably critical infrastructure and a large recipient of government funds is unlikely to be approved if the deal were forced before a transaction review board.

The global Fire market is large enough to support the idea of a spin-off. While a micro-niche of the global economy, a billion euro manufacturer with solid growth potential and relatively low cyclical risk is something likely to stir interest with investors. Equity investors could be easily convinced of the upside potential for a globally-focused specialty industrial manufacturer under independent ownership, a new management team with intimate market knowledge, and an ambitious agenda to establish sizable presence in the major markets.

There are currently no truly global maker of fire trucks—with manufacturing operations in all of the "big 3" markets. Rosenbauer was close after a short-lived tryst in the Chinese market in the form of a joint-venture with Yongqiang, a family-owned builder of fire trucks in Dongguan, China. The relationship was cut short when the markets crashed in 2008 following the subprime financial crisis. Rosenbauer, a mostly family-owned Austrian company, is purely focused on the Fire market, an advantage not seen in any of the western peers. Their decades of aggressive expansion has not gone unnoticed by other industry players. Beyond building fire trucks, they’ve taken on makers of the portable firefighting equipment and tools that are often mounted inside the compartments of their trucks. While some of these smaller product categories have been more successful than others, and the profitability of each is unknown to outsiders, it has brought the company closer to the firefighting users that will eventually decide to buy a Rosenbauer truck. To that end, and worthy of mention in this article, Rosenbauer has begun acquiring some of their distributors in several countries—likely adding to the profitability and further deepening their relationship with the markets and users into which they sell.

Pierce, a subsidiary of Wisconsin-based Oshkosh Corporation (OSK), is largely focused on North America with a small share of export sales mostly limited to Latin America. Pierce has a very American, industrialist business model of build in America for the world. Their custom fire truck chassis focus, compared to international market preference to use standard commercial chassis results in a product cost often 2-3x that of their global competitors. Despite the claimed benefits of custom chassis, their current range is unlikely to be successful internationally. What works in the North American market often does not translate well internationally where price is weighed much more heavily. Pierce has experienced its own conglomerate-ization effect under the Oshkosh umbrella. Compared to its international peers, its investment in innovation is more focused on group-wide technology sharing rather than Fire market focused deep dives.

Market Consolidation

One of these three builders—Rosenbauer, Pierce, or Magirus—will become a global maker at some point in the next decade as global markets continue to grow, sector consolidation continues, and shareholders voices become louder to demand greater value after years of stagnation under the umbrella of industrial conglomerates. Whichever one achieves the goal of securing sizable market share in each of the top 3 markets, likely putting it at more than €1.8b, will be well positioned to fund continued offensive growth well into the future. The likelihood of a more aggressively poised outsider, however, is growing. There are three companies in China that, although perhaps unknown to most westerners in the industry, are delivering 1,000 trucks annually and making iterative leaps in innovation at a pace unknown to relatively conservative Western companies. Their ability to produce, desire to invest in continuous improvements, and access to capital for further growth—organic or otherwise—is only dulled by the cultural struggle of expanding beyond their home market.

Beijing Zhongzhuo produces more the 1,000 trucks in an average year. A subsidiary of Guangtai, a manufacturer of airport ground support equipment headquarters in Weihai, China, Beijing Zhongzhuo is well-known in the Chinese domestic market to produce higher quality trucks than their peers with a large majority of their output using imported European chassis and components. Their management structure is perhaps their greatest advantage, compared to their fellow Chinese competitors. Guangtai runs a tight ship, with strong board-driven performance management on the company to focus on building a solid enterprise and mostly eshew the predominant “guanxi” based corporate decision making that plagues the domestic industry.

Shanghai Grumman, originally the Chinese fire truck building subsidiary of Northrup Grumman and now owned by Xuzhou Handler—although the North American assets are under the control of the US-based KME brand, now part of REV Group—has grown into a powerhouse in its own right. After years of aggressive attempts, Handler found its stride in elevated platform special vehicle manufacturing for power utilities, construction, and fire trucks. Annual output of Grumman is around 1,000 trucks, with a solid market share in both municipal and military markets. They’ve invested a lot in the past decade in advancing robotic technologies in the fire service with eleven models in production for various applications. Their steadfast commitment to developing robotics that can fit into the fire service mandate has greatly influenced the market and set them on a path for market leadership.

SANY Group and XCMG Group, both giant heavy equipment manufacturers most commonly compared to the likes of Caterpillar and Komatsu, also have small but promising fire truck divisions. While not yet with the impressive annual volume output of Beijing Zhongzhuo, their commitment to top quality engineering, the massive resources and talent pool from their parent companies—and each other’s as they are located only kilometers from each other in Changsha, Hunan Province—and their existing service network shared with their other product lines that count more than 1,500 service centers each shows these companies are taking the long view and building formidable challengers to the existing market players.

Despite recent political turmoil, nationalistic trends, and the wrath of the pandemic on nearly all industries the Fire market is poised for solid cash production in mature markets and high growth rates in developing markets due to the steady, critical, non-cyclical nature of emergency services, and the greater APAC region coming of age in population growth and education and the expected public services that come with these demographic trends. The case for a pure-play global fire truck builder in Magirus, with a sight on strategic M&A for an established foothold in both North America and China is growing more attractive and more necessary as the global business environment, post-COVID and post-Trump, begins to favor regional manufacturing strategies rather than the flat-world “made here, sold everywhere” strategy that is more common place today.