Consolidation in the global automotive supply industry: 2016 report

Executive summary

Mergers and acquisitions among automotive suppliers are running hot, according to the ninth annual “Consolidation in the global automotive supply industry” report by Strategy&, PWC’s strategy consulting business. Based on year-to-date data, we expect deals worth US$32 billion to close this year, the second-highest annual tally since 2007. This year’s projected total trails only the extraordinary $50 billion logged in 2015, a record number that included the largest-ever U.S. automotive supplier acquisition.

Such megadeals represent a growing share of auto supplier M&A. The number of transactions valued at $500 million or more has risen more than fivefold since 2013. Driving deals of all sizes are powerful forces — global vehicle production growth, auto technology shifts, automakers’ platform globalization, and supplier profitability — that show no signs of abating.

In part, strong M&A activity reflects an underappreciated fact: Automotive supply is a growth industry. Global vehicle production is expected to grow at a compound annual rate of 3.5 percent over the next seven years, with annual light vehicle assembly in North America on track to hit a record of nearly 20 million units by 2022, according to PwC Autofacts.

At the same time, suppliers are chasing the technological capabilities they need to stay relevant. Acquisitions offer quick access to new powertrain and chassis technologies required to meet stricter government fuel efficiency standards, as well as to software and electronics for autonomous driving and connected car systems.

Globalization continues to foster deal making among suppliers positioning themselves to serve automakers that are consolidating their nameplates into a smaller number of flexible global platforms. These platforms require suppliers with worldwide capabilities, leaving regional suppliers vulnerable and spurring consolidation.

Finally, the 815 suppliers in our study are reaching record profitability levels as painful cost cutting during the recession has paid off over the last few years. Rebounding production has leveraged the lower cost base to produce record margins in earnings before interest, taxes, depreciation, and amortization (EBITDA), giving suppliers extra cash for acquisitions.

Add to these factors the rise of Asian consolidators — most notably the Chinese — and increased interest from private equity firms, at a time when traditional M&A powers in North America and Europe are still going strong, and you have a recipe for sustained consolidation in the years ahead.

No time for waiting

We’re still in the middle of a consolidation boom among automotive suppliers. With more buyers emerging, M&A transaction values are likely to remain at or near their current record levels. Acquisition prices are climbing amid intensifying competition for deals, another trend we expect to continue for the foreseeable future. Should you sit back and wait for prices to come down? Not if you aim to capitalize on the trends and technologies reshaping the industry.

Advances in fuel efficiency, alternative powertrains, autonomous driving, and connected car systems require new capabilities that many suppliers lack. Building these capabilities internally may take longer than regulators and OEMs are willing to wait. At the same time, OEMs keep purging regional suppliers in favor of global players that can support simultaneous vehicle launches on several continents. Acquisitions can be a quick, efficient response to these challenges.

Not every supplier needs to launch an aggressive buyout campaign or post a “for sale” sign. The right approach for each company will depend on its industry segment and individual circumstances. But few can afford to rely on the status quo or wait to see how technology shifts play out. Change is coming to many auto supply sectors, with major implications for suppliers globally. New technologies create opportunities for suppliers of chassis, powertrains, and electronics. But over time they’ll also eliminate or greatly reduce entire vehicle subsystems, such as gasoline engine components or light truck frames.

Successful suppliers will determine how the changes affect their strategic growth priorities, and identify the capabilities they’ll need in a rapidly evolving industry. We recommend a broad review of strategic priorities and capabilities, starting with some basic questions:

How well does our product portfolio align with technology trends and the long-term strategies of our customers?

What strategies are our competitors pursuing?

How do we define our right to win in the marketplace, and do we have the differentiating capabilities to deliver on that value proposition now and in the future?

The answers will help suppliers prepare their organizations for change and build the right capabilities. Acquisitions may or may not play a role. But companies that need deals won’t win by waiting.

Methodology

The ninth annual “Consolidation in the global automotive supply industry” report is based on financial, operational, and strategic data collected by a global team of PwC’s Strategy& and management consulting automotive specialists, representing all of the major automotive markets.

We looked in depth at the top 100 global automotive suppliers as well as 715 additional suppliers from key regions such as Brazil, China, Europe, India, Japan, North America, Southeast Asia, and South Korea. Those included in the study are Tier One through Tier Three suppliers, as well as raw material suppliers. We cover both passenger car and commercial vehicle suppliers. Relying on data from publicly available sources and proprietary research — including interviews with industry observers, select suppliers, and OEMs — our team applied a model that utilizes more than 30 variables, weighted appropriately for each category. The variables assess suppliers’ strategic positioning, financial performance, and operational capabilities across eight categories: size and criticality, capital structure and health, segment commodity structure, business health, business flexibility, customer base, ownership structure and management, and acquisition history.

Scores were then developed to reflect each supplier’s vulnerability to acquisition or breakup (divestor and distress scores) and likelihood of acquiring part or all of other companies (buyer and buyer attitude scores). Although many of the companies covered as part of the study are privately held, we gathered sufficient data to score 80 percent of all suppliers in the study.