Auto Focus: Automotive Merger Mania – How Long Will it Last?
Shoreline Business Monthly • September 1997
by Jim Gillette
How long will this frenzied merger and acquisition activity among automotive component suppliers likely to go on?
It’s an important issue among West Michigan component suppliers, especially after the sale of Prince to Johnson Controls made it clear that any company was for sale if the price is right. The best answer I can give is, M&A activity is not likely to drop off anytime soon.
Consolidation to achieve critical mass
The automotive component industry is currently working through the second of a three-stage process.
During the first stage, there has been a fast consolidation with big companies almost in a competition to buy other companies of all sizes to create massive, global enterprises. The customers (i.e. the carmakers) have Signaled that they needed “full-service suppliers” with the capability of delivering parts just-in-time anywhere in the world. If you want to remain Tier One, what choice do you have? (Actually, a lot of choices, but I’ll leave that for another article.)
The initial impetus for consolidation was certainly the globalization of the auto industry. Faced with intensive competition in the mature markets of the U.S. and Western Europe, car makers have been fleeing to the emerging markets in hopes of renewed growth that will bring economies of scale and higher profit margins.
Rising product development and technology costs have provided incentive to offer fewer vehicle platforms, with greater unit volume per platform, using as many common components as possible in multiple markets.
Small- to medium-sized, privately held suppliers are disadvantaged in this environment, with limited access to capital, and engineering and marketing resources.
Repositioning Prince, for example, to be a global player would have probably taken more resources than were available internally, in spite of how successful the firm has been as a regional supplier. Acquisition by a publicly held, global firm was the only viable outcome (and Johnson Controls was by no means the only suitor).
Implications for customers
This first stage consolidation has moved so quickly that, some months ago, auto makers were quoted as having some concern that industry consolidation was “going too far.”
Their thinking was that, if suppliers kept combining, soon the market for a given component or system might evolve into an oligopoly with real economic power vis-á-vis the car companies. To the contrary, the M&A’s have, for the most part, been beneficial to the auto makers.
Auction-style purchasing as practiced by Lopez first at General Motors and later at Volkswagen requires a large number of willing sellers (price takers) bidding for contracts among a limited number of buyers (price makers). Ford, for example, has been very careful not to give too much of its seating business to either Lear or Johnson Controls in order to ensure neither gained the power to demand price concessions.
The large car makers are quite happy with mergers and acquisitions if, and only if, they result in greater specialization at key suppliers that could show tangible evidence that they were achieving economies of scale. The payoff? Lower costs and more technological innovation.
The assumption (probably correct) is that companies that focus their core competencies on related vehicle subsystems will achieve economies of scale in marketing, design, engineering and manufacturing.
When it works, it provides an interesting twist to the ongoing battle between the purchasing moguls and the suppliers. By constantly asking for price cuts from suppliers, the car companies are exacerbating the process of industry consolidation and realignment.
Whenever an inefficient producer sells out to an industry leader or one that is considered more cost efficient, the purchasing moguls say, “See, we were right. Now we can get the part cheaper!”
Growth to build competencies
Most of the mergers and acquisitions we have noted this year fall into the second stage classification: focusing the business to emphasize products and processes that best fit the suppliers’ competencies and resources.
The quintessential example is the division swap that occurred between Dana and Eaton during July. Eaton took Dana’s clutch business in exchange for Eaton’s axle and brake operations.
Another example is Hidden Creek Industries of Minneapolis (partnered with Onex Corp. of Canada). Having put together Automotive Industries Holdings Inc., a large interior trim supplier that. was sold to Lear in 1995, Hidden Creek is currently committed to building Tower Automotive into a structural stampings powerhouse.
The third stage of the M&A cycle
When will the third stage, re-fragmentation, kick in? In fact, it has been going on for some time. GM, for example, found out long ago that many of its parts-making operations did not stand a chance to be competitive against leaner, more entrepreneurial independent suppliers.
Delphi Automotive Systems is a much smaller entity than the old GM Automotive Components Group of the 70s and 80s, as many facilities have been sold off. The same process will work its way through even the newest of the global suppliers.
If the automotive components industry changes as much during the next 10 years as it has in the last 10, (and it’s almost a sure bet that it will), changing markets and technologies will rapidly obsolete existing corporate structures as well as plant and equipment. As has been true in the past, spun-off operations and innovative startups will step in to take business from slower moving behemoths.
For now, if you own an automotive component manufacturing company and would like to sell, there are plenty of buyers.
Roger Penske has recently formed Penske Capital Partners and is looking to spend $1 billion for companies that make auto parts, truck leasing companies, and/or vehicle leasing companies. Even after paying nearly $300 million for Germany’s Keiper Car Seating, Lear claims it still has $1 billion to spend, although it will target firms located in emerging markets. That’s only naming two. Numerous German and Asian firms are actively seeking U.S. acquisitions or partners.
If you don’t want to sell, don’t panic! There are still many opportunities for auto suppliers with sales under $300 million to thrive.