M&A in the global automotive supply industry: Study finds a bull market with room to grow

A value game ahead

In our view, the M&A explosion in the automotive supplier sector is just beginning to heat up. Perhaps the primary catalyst for more activity will be the efforts among many automakers to gain efficiency, improve margins, and increase scale by implementing more global architectures and platforms for their vehicles, designs that can be used in any market around the world with minor modifications. This shift and the desire to decrease wasteful complexity in the supply chain will significantly reduce the number of direct material suppliers that OEMs will contract with, in some cases by 50 percent or more. For example, Ford has already publicly stated its plans to reduce its global supplier base in the next few years, from around 1,500 now to 750.

Suppliers that hope to survive this round of massive consolidation will have to be active and innovative partners for automakers, offering new answers to connectivity, safety, and autonomous driving questions and fresh ideas that sell vehicles. Supplier technology skills, lean capabilities, and geographic reach will be at a premium and precisely what automakers will look for before engaging in long-term supplier relationships.

The outsized price tags in recent deals in the supplier sector might naturally scare off some acquirers that are also hesitant to pour significant money into an industry already feeling the pressure of feverish competition. But we believe that, in fact, the high valuations are frequently justified and there is more headroom for performance gains. The Autofacts forecast CAGR of about 4 percent from 2014 to 2021 could even be an underestimate, particularly if the economies of emerging nations rebound from their current doldrums. In spite of the slowdown in growth and sales, China still has a growing consumer market, and Strategy& estimates that the number of Chinese families that can potentially afford to buy a car will more than double from 150 million today to more than 300 million by 2021.² Growth like that could result in significantly higher orders for suppliers that are fortunate enough to make the global cut.

However, although optimism about the overall automotive supplier sector is justified, investments in these companies must be made carefully and diligently. Both private capital firms and suppliers that want to be active in M&A should make acquisition decisions based on the value of the products, innovation, and capabilities that the targeted company has — and not on merely the desire to expand revenue. Suppliers today should be focused on taking leading positions in connectivity, fuel efficiency, component electronics, and the like — in other words, the features that OEMs find most attractive, which may change over time — and, hence, their acquisitions should be based on furthering their ability to fuel the most critical industry trends.

In many ways, the automotive supplier sector is in a privileged position, providing products to an expanding and creative industry. Yet simultaneously, suppliers have perhaps never faced a more difficult landscape, littered by too many companies chasing customers that want to do business with fewer firms. M&A will shrink the competition a bit. But only innovation in design, development, partnerships, and acquiring critical capabilities will separate the survivors from the also-rans.