By: David Sedgwick
July 16, 2013
Despite the "bigger is better" philosophy that has fueled the consolidation of automotive suppliers, sometimes it isn't enough to be big.
Even major global suppliers are starting to spin off or sell business units that lack economies of scale, especially if those divisions produce electronics.
In March, for example, Johnson Controls Inc. announced plans to sell its electronics unit, which produces instrument clusters, infotainment systems and body controllers.
Rather than make a heavy investment to expand its electronics unit — which generates 3 percent of Johnson Controls' revenue — the company preferred to concentrate on lucrative core products such as seats.
That's a good strategy, says John Hoffecker, a managing director of AlixPartners, a consulting firm based in suburban Detroit.
"I believe suppliers should be more and more focused" on core products, says Hoffecker.
That's especially true for automotive electronics, a sector that appears ripe for consolidation. Nineteen of the industry's top 25 suppliers market electronics products, and new competitors are muscling into the sector to establish niches.
Infotainment, with its rapidly expanding menu of hardware devices and software applications, is luring companies that previously did not sell parts to the auto industry.
Sooner or later, "there will be a real reckoning," Hoffecker predicted.
Johnson Controls doesn't plan to wait for a reckoning. In March, the company confirmed that it had hired JPMorgan Chase & Co. to help find a buyer.
Last month, Reuters reported that Delphi Automotive and Huayu Automotive Systems Co., a supplier owned by China's SAIC Motor Corp., may make offers.
According to Reuters, Delphi subsequently backed out, although it reportedly may be interested in acquiring a portion of Johnson Controls' $1.4 billion electronics division.
Johnson Controls is not the only mega-supplier that wants to bail out of electronics. In December, Visteon Corp. CEO Tim Leuliette told Automotive News that he might sell the company's electronics business if it can't achieve economies of scale.
Last year, Leuliette confirmed that Visteon had won contracts to supply infotainment systems to two global automakers. But he called the company's electronics division "a work in progress" and said that it was "too early to tell" whether he would keep it or sell it.
"We have tremendously attractive technology and costs, but know we're not big enough for that business," Leuliette said.
"There are a lot of options, but the guys know we need more critical mass."
During the company's first-quarter conference call with analysts, Leuliette reiterated that Visteon's electronics business was not big enough, noted company spokesman Jim Fisher.
"Leuliette said the electronics business is very attractive, but we are not going to leverage the Visteon balance sheet" to expand the electronics operations, said Fisher in an e-mailed statement.
More global platforms
The issue of critical mass has become a make-or-break issue at a time when automakers are relying more heavily on global platforms.
Relatively few suppliers have the deep pockets to build factories anywhere in the world. And that's going to force an industry consolidation as automakers rely more heavily on global platforms.
According to a report published last month by AlixPartners, so-called megaplatforms, which provide the chassis for 1 million or more vehicles apiece, will account for 46 percent of global vehicle production in 2017, up from 30 percent in 2011.
AlixPartners' report predicts most acquisitions will involve smaller Tier 2 and Tier 3 companies, with a focus on cash-strapped companies in Europe.
The report, which was released in June, noted that there hasn't been a lot of merger and acquisition activity this year. But that seems likely to change.
Says Hoffecker: "Those who are not global will have a real challenge."