PwCConsultingStrategy M&A in the global automotive supply industry: Study finds a bull market with room to grow
M&A in the global automotive supply industry: Study finds a bull market with room to grow
Dietmar Ostermann, Doug Harvey, Jan Hesse, Shan Haque
Published: January 14, 2016
Mergers and acquisitions in the global automotive supplier sector are occurring at an unprecedented level in 2015, according to the Strategy& seventh annual “Consolidation in the Global Automotive Supply Industry” report. Based on data from the first six months of 2015, Strategy& anticipates that deal value will top US$48 billion for the full year, a 340 percent increase over 2014. What is particularly striking about the current trend is the rise in deal value. The figures indicate a slight decrease in the overall number of deals for the year, but a vast increase in the number of megadeals.
The gains in deal value are themselves the payoff from a host of positive factors in the supplier sector: several years of healthy profitability; technological advancements in the areas of fuel efficiency, lightweight materials, connected cars, and autonomous driving; and increased private equity interest.
For the third year in a row, the report identified North American suppliers as the largest consolidators, followed by European, South Korean, Japanese, and Chinese companies. The majority of global consolidators and their targets were powertrain and chassis suppliers.
The study’s findings also proved that it pays for automotive suppliers to be acquisitive: Strategy& analyzed the top consolidators over five years, from 2009 to 2013, and found that more than 70 percent of top consolidators outperformed their peer group in EBITDA growth. Moreover, five of the 10 top consolidators grew EBITDA margins by more than 50 percent.
Based on this analysis, we believe that the M&A boom in the supplier industry still has room to grow, and there are plenty of opportunities for significant returns on investment.
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.
Strategy& estimates that the number of Chinese families that can potentially afford to buy a car will more than double by 2021.
The seventh annual “Consolidation in the Global Automotive Supply Industry” report is based on financial, operational, and strategic data collected by a global team of Strategy& automotive specialists representing all of the major automotive markets.
We looked in-depth at the top 815 global automotive suppliers from key regions, such as Brazil, China, Europe, India, Japan, North America, Southeast Asia, and South Korea, by revenue. Companies included in the study are Tier One, Tier Two, Tier Three, and raw material suppliers. Relying on data from public information and proprietary research — including interviews with industry observers, select suppliers, and OEMs — Strategy& ran a model that analyzed more than 30 variables, weighted appropriately by category. Based on these metrics, we generated a list of the global top 100 suppliers.
The 30-plus variables assess suppliers’ strategic positioning, financial performance, and operational capabilities across eight categories:
Size and criticality
Capital structure and health
Segment commodity structure
Ownership structure and management
Scores were then developed to reflect each supplier’s vulnerability to acquisition or breakup, and its financial strength and likelihood of acquiring part or all of other companies. Although many of the companies covered in the study are privately held, we gathered sufficient data to score 80 percent of all suppliers.