Necessity will drive auto industry tie-ups

Michael Wayland
The Detroit News

After a near-record year for supplier consolidation, insiders and executives expect automotive industry tie-ups to continue in coming years.

PricewaterhouseCoopers reports that the global automotive industry last year engaged in nearly 500 deals, including mergers and consolidations, totaling $63 billion. That includes 69 deals involving automakers that represented $6 billion; and the auto components and supplier industry with 190 deals that equaled $33 billion — $2 billion less than the record set in 2007 for suppliers.

“There is a lot of consolidation activity going on,” Pwc Global Automotive Leader Richard Hanna told The Detroit News. “There’s just so much focus on integration of product lines and electronics ... and innovation occurring in the industry.”

The pressure to develop new technologies — combined with consumer demand to update systems in cars and trucks as frequently as smartphones — are driving traditional auto companies to spend billions to expand research and product portfolios. Increasingly they are looking to smaller tech companies and startups for ideas, partnerships and even acquisitions.

The steep cost of research and development for new cars and trucks, and a shift for automakers to become mobility companies is essentially what drove Fiat Chrysler Automobiles NV CEO Sergio Marchionne last year to call for consolidation and seek a potential merger with General Motors Co.

Fiat Chrysler’s overtures were rebuffed, and Marchionne said this week at the Detroit auto show that the automaker has ceased its efforts because it can’t find a suitable partner — but still believes future consolidation is necessary.

“This industry in its current state is not in a position to withstand the capital requirements associated with running the business,” Marchionne said. “It just can’t.”

He said consolidation would save billions in development of technologies that are fundamentally similar between all automakers.

Traditional automotive suppliers have been aggressively merging, consolidating and acquiring each other for years to save capital, as automakers demand more from them.

Suppliers are looking to expand into new markets and industries as more active safety and autonomous features become standard. Record auto sales have given some auto suppliers enough cash to make big deals.

“All of us need to be open to partnering with new entrants in the industry and to consider new non-traditional verticals,” Julie Fream, president and CEO of the Original Equipment Suppliers Association, said Tuesday in Detroit at the Automotive News World Congress. OESA is a voice for more than 450 suppliers that represent 70 percent of North American automotive supplier sales.

The number of automotive suppliers in Michigan — home to 63 of the top 100 North American automotive suppliers — dropped from 886 to 790 from 2009-13, according to the Michigan Economic Development Corp.

“We’ve seen a re-consolidation particularly in research and engineering, and development work,” said Gov. Rick Snyder. “You can find some industry consolidation which can actually lead to more growth in Michigan in some fashion.”

As the physical number of suppliers shrink, investment has grown: Automakers and suppliers announced investments of $16 billion in the state from 2009 through second-quarter 2015, representing nearly 20 percent of investments in the industry that were announced for North America, according to the MEDC.

One of the most high-profile consolidation efforts recently in the state was the acquisition by German auto supplier ZF of Livonia-based TRW Automotive in 2015 for $12.5 billion.

ZF CEO Stefan Sommer earlier this week told reporters the company continues to look for more opportunities to partner with or acquire companies that add to its portfolio of advanced safety and vehicle features.

“We will not stand still,” he said, declining to disclose any possible companies.

Sommer said he sees the need for consolidation in two ways: global expansion and bringing together technologies: “I’m seeing, of course, some areas of technologies which become commodities — that’s very much the Marchionne side of it.”

Dr. Elmar Degenhart, chairman of the executive board for Continental AG, concurred that consolidation in the supplier industry will be an “ongoing subject.” He said the supplier is always looking to acquire new companies, and said they’re likely to do so in 2016.

“We have lots of ideas,” he said. “Over the last 50 years we’ve acquired more than 100 companies of different sizes.”

Degenhart said it’s crucial for suppliers to not only be able to offer technologies at a faster rate than before, but compete globally as automakers move into emerging markets.

Carlos Ghosn, chairman of the Renault-Nissan Alliance, said consolidation is likely to occur in different ways than it historically has.

“Without a doubt consolidation is on the move,” he said at the North American International Auto Show. “Consolidation is not going to be A buys B, or B eats C.”

Instead of such failed efforts as the transatlantic Daimler-Chrysler deal, he envisions partnerships that more closely resemble the tie-up of Renault SA and Nissan Motor Co., enabling the distinct cultures to co-exist amid joint development of mutually beneficial projects.

Marchionne has put his merger efforts on the back burner, that could re-emerge following the company’s five-year plan through 2018.

“The achievement of the plan in ’18 will create a car company that is fundamentally different than the one we are looking at today, and it will put it in position to have a different type of dialogue with people who may have been otherwise not interested,” he said. “It will give us the credibility, which I think is important, in being able to reopen the discussions.”

Detroit News staff writers Daniel Howes and Michael Martinez contributed.