Major Auto Mergers Drive Sweeping Change in the Parts Industry
24 March 1999
Major Auto Mergers Drive Sweeping Change in the Parts Industry, According to PricewaterhouseCoopers Survey
DETROIT--March 24, 1999--Major deals among automakers are driving sweeping changes in other parts of the industry according to the 1998 PricewaterhouseCoopers Global Automotive Deal Survey.Jeff Sands, U.S. leader for automotive corporate finance and investment banking services at PricewaterhouseCoopers Securities, notes, "The OEM consolidation trend will continue, fueling further M&A activity in the supplier base as they realign themselves with the needs of the new OEM groups." Survey findings support this viewpoint:
| -- | Of the 620 worldwide automotive deals last year, 320 involved parts suppliers. |
| -- | Disclosed value rose to $30.3 billion, nearly double the $16.7 billion reported in 1997, and 38% of 1998'S $80.5 billion industry total. |
| -- | Average value of the ten largest deals more than doubled, from $800 million to $1.8 billion. |
Intense competition, tight profit margins, and excess capacity of 21 million vehicles worldwide, challenge the viability of companies that produce fewer than 2.5 million units a year, lack a strong brand position, or cannot raise the R&D funds needed to bring vehicles to market. In the United States, automakers have shifted the design and manufacture of large, complex systems to Tier 1 suppliers, along with the attendant business risks. Mr. Sands sees "the drive to modular supply as a major challenge for medium-sized Tier 1 suppliers," forcing them to develop or acquire more sophisticated technologies, logistics support, and project management capabilities.
Tier 1 suppliers realize they must play according to the new rules laid down by vehicle manufacturers or lose their Tier 1 status. According to Mike Burwell, who leads automotive transaction services at PricewaterhouseCoopers, "If your sales are $500 million or under, you probably lack the critical size to be a long term player and remain a Tier 1 supplier, unless you have some type of proprietary technology. We believe this assertion is supported by the fact that the vast majority of deals are between $75 million and $125 million, which implies the parts companies at this size are either being sold or consolidated."
United States suppliers accounted for 180 deals, or 56% of last year's total, compared with 42% the previous year, with the average disclosed value rising from $142.4 million to $333.3 million. Led by Dana's $4.1B purchase of Echlin, seven of 1998's ten largest U.S. acquisitions were domestic. Lear and Textron each bought six companies, Magna and Federal-Mogul five and TRW four. TRW's $6.7B bid for LucasVarity signals that these players should remain active in 1999.
Messers Sands and Burwell believe that consolidation among parts manufacturers should continue for several more years and that the 1,500 Tier 1 suppliers in 1998 will whittle down to about 150 large system integrators and 450 direct suppliers who will compete largely on price. The rest of the field will become Tier 2 suppliers or exit the auto business. "Tier 1 suppliers are becoming the quarterbacks of the supply chain as they have to manage the Tier 2 supplier relationships even more than before. Logistics capabilities will be critical to becoming a successful Tier 1 in the next millennium", according to Mr. Burwell.
Transaction activity among dealers slowed in 1998, as Republic Industries reduced its transactions from 51 to three, and focused on building more value into its business model.
| -- | The total number and average disclosed value of worldwide dealer transactions fell 45%, from 189 to 104, and from $53.8 million to $24.5 million respectively. Only five deals had a disclosed value of over $50M compared with 38 in 1997. |
| -- | The United States led with 48 transactions, followed by 33 in the United Kingdom. Only 10 deals were cross-border. |
The dealer sector, which has the lowest return on capital in the automotive value chain, remains ripe for transformation as new technologies, such as Internet buying, new business models, the transparency afforded by EURO pricing, and the pending abolition of the European Block Exemption take hold. Transaction activity among dealers should be stronger in Europe, where PricewaterhouseCoopers estimates that there is $35B in potential savings.
Messers Sands and Burwell see the adoption of new business models, such as OEM-owned retail sites with single-price selling and Internet sales, as the early signs that OEM's are looking to capture margin in the retail sector and force dealers, like component suppliers, to consolidate.
The Survey showed that consolidation in the vehicle leasing and rental sectors has gathered pace as the major players seek economies of scale in areas such as capital and financing costs, fleet purchasing, maintenance, IT systems and infrastructure. Activity was highest in the United Kingdom, despite a market slowdown in the second half of the year.
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To obtain a copy of PricewaterhouseCoopers' Global Automotive Deal Survey 1998, contact Rebecca Herr at 248.723.3678, or by e-mail at rebecca.herr@us.pwcglobal.com.