Top 100 Automotive Suppliers
"Takeovers are Booming and Inexpensive"
Jan Dannenberg and Tobias Keil of Beryl's Strategy Advisors talk about the transformation strategies of top suppliers, opportunities for weaker companies in the combustion sector and shifts in the ranking of the Global Top 100 Suppliers.
Mr. Dannenberg, Mr. Keil, lets first take look at the leaders of the Global Top 100 Suppliers: Are the usual ‘suspects’ dominating the list, or were there any surprising changes?
There were hardly any changes in the top ten last year. It noteworthy, however, that the concentration process of recent years continued in 2018: The ten largest companies in the top 100 now account for 40 % of total sales. This share has steadily increased in recent years and shows that large corporations such as Bosch, Conti, and ZF are increasingly differentiating themselves from the rest.
About surprises: Who was the biggest winner on the list? And which company performed worst compared to the previous year?
Some companies completely disappeared from the top 100 in 2018. These include Visteon (the former Ford spin-off), Aunde (German specialist for automotive textiles and seats) and the metal and aluminum processor Martinrea from Canada. The rising stars of the year are clearly two Chinese companies: Joyson was able to make a big leap forward by taking over the insolvent Takata company. And CATL - as one of the largest manufacturers of lithium-ion batteries - was able to benefit from the increasing market penetration of battery electric drives.
The suppliers operate in an environment with difficult framework conditions. What had the greatest impact on their business: the transformation pressure towards electromobility and digitalization, political disputes over punitive tariffs, Brexit or the burdens associated with the lengthy WLTP transition?
This varies greatly from case to case. Our customers with high sales shares at Volkswagen were hit particularly hard by the WLTP problem in the second half of 2018. Others, on the other hand, are clearly feeling the effects of the economic slowdown in China to a "normal" degree. As far as transformation is concerned: None of our customers is currently not affected by this topic. What distinguishes the companies, however, is the strategy they choose: It includes, among other things, the formation of new business units, the sale of parts of the companies or extensive M&A activities. The hope that the transformation of the automotive industry could be a temporary phenomenon has not prevailed.
As a reaction to the necessary transformation and to strengthen their portfolio, many large suppliers rely on M&A transactions. Did these activities have a strong influence on the ranking?
You bet. The year 2018 was marked by major upheavals due to M&A transactions, some of which, however, will not make themselves felt until next year. Among others, Magneti Marelli moves from FCA to Calsonic Kansei, LG buys lighting expertise from ZKW, Tenneco buys Federal Mogul. In addition, many major M&A issues are currently still in the making: Leoni is a potential takeover candidate, ZF bought Wabco a few weeks ago, and Conti has been discussing the split into "old Conti" and "new Conti" for quite some time now. Another interesting fact: Some suppliers have completely left the automotive industry by selling parts of their companies: Johnson Controls - still one of the ten largest suppliers worldwide a few years ago - sold BU Power Solutions to a conglomerate of financial investors, and Honeywell is spinning off Garrett's turbocharger business into an independent unit.
The purchasing managers of the OEMs emphasize that, in addition to battery cell manufacturers, large and reliable suppliers are increasingly active in China. Are they already strong enough to show up on the top 100 list soon?
For many years, the Top 100 have included several major Chinese suppliers who have nothing to do with the manufacture of battery cells, such as Weichai, Yanfeng and Joyson. Although many other Chinese suppliers meet the size criteria for a rank in the Top 100, they are captive suppliers and belong to one of the largest OEM conglomerates in China. That's why - just like some Japanese and Korean captives - they don't appear in the Top 100.
China continues to be the decisive market for German manufacturers. Does this also apply to Tier 1 suppliers? Could this market become even more important, for example, if the topic of e-mobility continues to gain momentum among the local companies?
First of all, it must be noted that many of the Chinese OEM start-ups in the field of electromobility have disappeared just as quickly as they have appeared. The reasons for this lie in excessive capital requirements, an underestimation of the complexity of the automotive value chain and increasing overcapacities in the market. Best example: Faraday Future - a once strongly hyped company, which meanwhile isn’t significant anymore. In the past, Tier 1 suppliers have mainly served OEM customers they knew from existing relationships in Europe or the USA. The more Chinese OEMs want to become internationally competitive, business with global Tier 1 suppliers will gain in importance.
Due to Volkswagen's radical e-strategy, the German automotive industry is discussing how open the future technology of the powertrain should be. What are the advantages of a broad spread, such as that favored by ZF, for example, and what are the advantages of the VW approach?
In the coming decades, we expect a great variety in the powertrain: It ranges from classic, highly charged petrol and diesel engines - possibly using synthetic fuels - to hybrid drives, battery electric vehicles and fuel cells. The current technical limitations of battery electric vehicles mean that this type of drive is not the first choice for all customer use cases. This applies in particular to long distances and to inner-city "lantern parkers". We also firmly believe that the fuel cell will experience a faster comeback than expected.
What about the traditional suppliers of combustion engines? What advice can you give these companies? How long will they be able make profits with the V-engine?
All forecasts agree that the so-called "Tipping Point” for the combustion engine will be reached in just a few years, at which point there will be no further growth in unit sales. From 2025 at the latest, you will likely be able to watch the market shrink. However, this trend also offers opportunities. Takeover targets in this field are currently available in large numbers and are significantly less expensive than companies in the CASE environment, which includes connectivity, autonomy, shared & services and electrification. This offers companies the opportunity to acquire additional market shares at relatively favorable prices and thus become a real heavyweight. Because one thing is sure: The combustion engine will continue to be built in large numbers for many years to come and will not disappear overnight.
Keyword transformation: Is the industry currently divided into tech companies and the "old world"? And how many of the current top 100 suppliers have what it takes to really reposition themselves?
We are aware of this accelerated dichotomy, particularly in the case of company disposals. While it is becoming increasingly difficult for companies that are wholly dependent on the combustion engine to develop a convincing investor story, young companies from the CASE environment are also rated with dizzying multiples, which are then also paid. Some established companies are suffering the effects for not having reacted earlier to changes in the market environment by adjusting their strategy. This results in very high "admission prices" in order to be able to participate in the CASE party. Nevertheless, we do not unconditionally join the general CASE euphoria: First of all, it must be proven that the xEV wave announced for the next few years will actually be accepted by the buyers.
The "Next Mobility" subject is also part of the realignment. Many Tier 1 suppliers are experimenting with drive and vehicle concepts, some of which are ready for series production. Is this an emancipation from the OEM and a sign for the reorganization of the value chain?
In the past, suppliers have already presented numerous studies to demonstrate their overall vehicle competence. We only know of one case of a German medium-sized supplier where one of these studies made it into series production (and failed relatively quickly). The concept studies by ZF, Conti and Bosch presented at this year's CES are therefore to be understood as proof of their technology and service competence and not as a sign that the major suppliers are increasingly developing into OEMs as a result of new forms of mobility. Take the example of Deutsche Post and Streetscooter: The product is a great success in terms of sales and has also helped the Post to achieve a completely different image. However, the Post does not see its core business in the large-scale production of vehicles in the long term.
The questions were asked by Christian Otto
This article was first published by Automobil Industrie.
Original by Thomas Günnel / Translation by Alexander Stark
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