To Consolidate or Not Automotive Suppliers in a Flux

Many innovations and customer needs such as efficiency and autonomous driving are now causing the automotive industry to change dramatically. Suppliers are hit hard with these requests from Original Equipment Manufacturers (OEMs) and are seeking solutions but evolution requires dramatic actions like consolidation.

Consolidation of automotive suppliers has been rather diverse. The occurrence of these actions is quite fascinating. A majority of suppliers have opted for Mergers and Acquisitions (M&A) for growth opportunities, but some suppliers who currently have automotive businesses have decided to separate themselves from the automotive business altogether. OEMs with internal suppliers or divisions are seeking a lean and low-risk portfolio, whereby the sale of their internal suppliers or divisions is likely.

Strategy 1: Mergers and Acquisitions

M&A have been synonymous with growth in various industries. Automotive suppliers are utilizing this strategy to get hold of target suppliers which will enable them to be relevant in the future. Majority of the M&A have been by bidders from Germany and China. Currently, German suppliers are spearheading the supplier consolidation process. Chinese firms that are acquiring suppliers and innovating are likely to be at the forefront of this M&A effort in the future. The Chinese administration's current initiative of ‘Made in China 2025' places heavy importance on innovation-driven manufacturing, quality over quantity, and optimizing the structure of the Chinese industry. M&A is a short and sweet approach to grow and achieve the Made in China 2025 initiative. The shift to Chinese firms spearheading automotive supplier M&A should not be understated.

M&A Automotive Suppliers, Global, 2010–2015

Strategy 2: Supplier Spin-off

From M&A to supplier spin-off, Johnson Controls (JCI) has decided to take the spin-off approach. JCI chose to be asset-light and technology-heavy and more involved in China. JCI's automotive experience division is to be spun-off, will operate as a separate publicly traded company, and will focus on JCI's core growth platforms around building efficiency and energy storage. Even though JCI's automotive experience division accounted for more than 50% of the company's top line in FY2014, the spin-off was necessary for JCI to create a low-risk portfolio.

Johnson Controls Automotive Division Spin-off, Global, 2015

JCI wanted to shift from the lower-margin automotive parts business to become an asset-light and technology-heavy company. This is a unique approach compared to the approach of other mainstream auto suppliers growing through M&A. Then again, JCI is not a typical automotive supplier. This begs the question, will suppliers that have an automotive division in their overarching portfolio look into to a potential spin off or will they position it for future acquisition?

Volume is indeed a king in the tier I automotive supplier market. With R&D and product development cost for new and innovative components on the rise, operations must remain lean to achieve margins. Conservative estimates predict that 60% of an automobile will be software driven. With fewer components, consolidation is inevitable. JCI's spinoff of its automotive experience division is likely to create a momentum among more suppliers with comparable portfolio to behave similarly.

Strategy 3: Detach Suppliers Internal to OEMs, Creating Liquidity

Visteon, Delphi, and Denso once were a part of Ford, GM, and Toyota respectively. The once-internal divisions or suppliers of these OEMs separated from their respective OEMs making the OEMs leaner and providing them a low risk portfolio. For example, during the 2010 global economic recession, Visteon and Delphi filed for US Chapter 11 bankruptcy protection. If they would have been part of an OEM, these suppliers could have potentially placed their OEMs in a greater turmoil.

OEMs Shedding Load While Creating Liquidity, Global, 2015

Fiat Chrysler Automotives (FCA) understands this issue. It is in the midst of creating a leaner, efficient organization. To accomplish this goal, FCA is likely to detach from its internal suppliers and create liquidity. FCA owns suppliers such as Magneti Marelli (100%), Comau (100%), and Teksid (84.8%). With the current state of FCA, selling these assets will create a leaner organization and provide it with the liquidity it needs for growth. These internal suppliers can also be seen as cash cows for FCA. There is an opportunity for equity firms to acquire these suppliers and later split them up and sell them off to mega tier I suppliers or other equity firms. The inescapable end result is expected to be a leaner OEM.

Conclusion

The automotive landscape is changing at a dramatic pace; consolidation is foreseeable for automotive suppliers. M&A is expected to be the most common form of growth. Spin off of automotive divisions from non-auto centric suppliers is expected by 2030. Only a few OEMs possess internal suppliers and they are to be sharply watched. These deals could potentially make an overnight mega tier I