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Auto Suppliers Face Major Revamping Amid Industry Changes

Bill Koenig
By Bill Koenig Senior Editor, SME Media

ACME, Mich. — Auto suppliers are likely to revamp as the industry shifts to self-driving and electric vehicles, two consulting firms said in separate reports.

“This is not about economic cycles,” said Neal Ganguli, a managing director at Deloitte Consulting LLP.

For suppliers, he said, “It’s been a fairly linear value change. The linear value change as we know it is changing.”

Ganguli was one of four authors of a Deloitte study about stresses faced by auto suppliers. The study was released ahead of this week’s annual Management Briefing Seminars near Traverse City, Mich. Ganguli commented during an interview at the conference.

Overall, suppliers benefited from increasing vehicle deliveries since 2009, when both General Motors Co. and Chrysler went bankrupt and received U.S.-backed bailouts.

Auto suppliers have created $510 billion “in shareholder value since the last recession,” Deloitte estimated in the study.

“However, the top one-third of performers have accounted for more than 99 percent of that total value created,” the consulting firm said.

Now, vehicle sales are slowing in addition to the move to self-driving and electric vehicles.

‘Converging Forces’

“As a result of converging forces and macroeconomic headwinds, some automotive supply segments will face commoditization and decline, while others will experience significant growth,” Deloitte said in its study.

Auto suppliers have never had it easy. For example, automakers frequently squeeze suppliers for price cuts.

“The supply base is always under price pressure,” Ganguli said.

What makes this era different, he said, is that “a number of different forces” are affecting suppliers with the development of self-driving vehicles, electric vehicles and ride-sharing services. “It’s very different creating a platform for change,” Ganguli said.

Major auto suppliers are assessing their lineup of products, evaluating which to keep and which to divest.

Suppliers “are focused on the product rationalization of their portfolio,” the Deloitte executive said.

“Clearly, this is not the time to twiddle thumbs,” the Deloitte study said. Executives “can establish which businesses they should be in, which businesses they should harvest or divest, and which ones they should fund for growth.”

Supplier M&A

Another consulting company, PwC, said at an MBS lunch event that major industry shifts are spurring an increase in mergers and acquisitions among suppliers.

PwC estimates in its own study that supplier deals will total $44 billion this year. The norm used to be about $20 billion in a year, said Dietmar Ostermann, a principal of PwC US, who spoke at the lunch meeting.

But deals have increased starting in 2015, he said, with about $50 billion in value recorded that year. Ostermann was one of the authors of the PwC study.

The consulting company said in its study that Japanese suppliers “have the strongest capability to undertake strategic acquisitions” and are likely “to remain active buyers.” Chinese companies, on the other hand, “have lost their appetite for investments into foreign targets,” PwC said.

Meanwhile, funding for deals remains available. “Big private equity funds are flush with cash,” Ostermann said.

Large, Tier 1 suppliers face pressure to boost their size, Michael Simonte, president of Detroit-based American Axle & Manufacturing, said at the PwC lunch.

American Axle, a maker of drivetrain parts and systems, in 2017 acquired Metaldyne Performance Group Inc. for $3.3 billion. Simonte said his company probably will do other deals in the future. But he also urged caution.

“Don’t get seduced by the deal,” Simonte said. “Remember, you run it.”

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