automotive erp, mergers, acquisitions, emerging trends

The current climate of the automotive supply industry is inspiring companies to initiate strategic, groundbreaking mergers and consolidations in order to get ahead.

Emerging trends like electrification are disrupting the automotive industry and leading to massive changes, not only for manufacturers, but also suppliers. In fact, automotive suppliers stand to be impacted most severely by the increasing importance of battery electric and autonomous vehicles. While the full force of these market adjustments won’t be felt for at least 15 years on a global scale, some automotive suppliers are making strategic decisions now to ensure they’ll continue to win in a quickly evolving market landscape.

Old Company vs. New Company

There are two major categories of these automotive suppliers we must take into account: The first can be called Old Company (OldCo.), the business unit that relies on the production of mechanical products related to the internal combustion engine; and the second can be called New Company (NewCo.), the business unit that is strategically adopting new products and business models relevant to the future of the automotive industry. The automotive suppliers who will not only survive the onset of electrification, but also thrive in spite of it, are those who understand exactly how to properly invest their precious capital and human resources into OldCo. and NewCo. businesses.

In a shrinking market, large OldCo. businesses will be the primary drivers of industry consolidation or the act of merging two or more organizations into one. The goal is to create financial synergies and competitive advantages in rapidly shrinking markets. Examples of recent consolidation mega-deals include American Axle’s $1.5b acquisition of MPG, Tenneco’s $5.4b acquisition of Federal-Mogul, and Dana’s rejected $6.1b acquisition of GKN (GKN shareholders later chose a bid from Melrose, a private equity firm, to take the company over).

Strategies for Long-term Success

Don’t get me wrong — traditional automotive suppliers who specialize in manufacturing are still the backbone of the auto industry. Long-term, however, these businesses are facing a challenging horizon in terms of sustainability and profits. Demand for the products they provide is projected to sharply decrease over the next 15 years as battery electric vehicles become more readily available. For example, by 2023, the top 12 OEMs will launch 182 new EV nameplates.

New Company (NewCo.) businesses, on the other hand, will drive more transformative strategies. Business transformation, which has the aim to align people, processes, and technology initiatives more closely with a new strategy and vision, will be instrumental in helping NewCo. businesses gain a competitive edge. Examples of recent transformative mega-deals include Hanon’s $1.2b acquisition of Magna Powertrain’s Fluid Pressures and Controls group, Samsung’s $8b acquisition of Harman, Intel’s $15.3b acquisition of Mobileye, and Qualcomm’s failed $47b acquisition of NXP (which fell through when Chinese regulators rejected the proposal).

Room to Grow

There is tremendous space for growth in the market for NewCo. businesses, especially those who are actively looking for transformative, strategic opportunities. Acquiring smaller tech, software, and other related companies that are likely to share a piece of the growing battery electric and autonomous vehicle boom could mean the difference between suppliers who survive and suppliers who thrive.

Think about this: In 2017, the global semiconductor market hit $400 billion for the first time. This market growth has started to slow down, as the advance of electronic devices such as smartphones, flat-screen monitors & LED TVs, and computers starts to mature. Now consider what autonomous vehicles could mean for the semiconductor market.

Today, advanced driver systems utilize about $2-3 billion of semiconductors, but this market has the potential to skyrocket to $65 billion as vehicles migrate from level 1 to level 4 autonomous vehicles. Where else can the major semiconductor market players find this kind of growth other than the rapidly changing automotive market? Intel (who spent $15.3b for Mobileye in 2017) and similar companies know they have the opportunity to claim a whole new level of relevance in the automotive market, as software and automation claims a greater share of the future automobile — NewCo. suppliers must be quick and strategic if they want to compete.

Consolidation Creates Challenges

It’s no secret that mergers tend to fail — historically, about two-thirds lose value on the stock market. The motivations that drive mergers to take place, such as the arrival of new technological developments or a fast-changing economic landscape, often result in quick hit acquisition plans that lack foresight. When mergers happen, the decision is typically based on a plan for a good product or market fit, but employee differences, organizational cultures, operating principles and policies are rarely taken into account.

Executives who move too quickly run the risk of driving their businesses into the ground for lack of strategy. In order to successfully navigate mergers and acquisitions, companies need to exhaust all available resources, both internal and external, to provide thorough due diligence and refined operating systems. It can’t simply be about getting the best deal or maximizing synergies — in order to sustain and increase the results they once enjoyed, companies must approach consolidations carefully.

The Drive to Thrive

The automotive supply landscape is indeed changing faster than many originally anticipated, which is driving many suppliers to consider mega-mergers, consolidations and acquisitions in order to stay relevant. As demand for traditional parts decreases and an entirely new supplier environment emerges in the light of battery electric and autonomous vehicles, suppliers will no longer be able to sustain operations at the same level for the long haul. Truth be told, making these kinds of strategic moves may be the single biggest thing suppliers can do to keep themselves afloat in the new automotive market. If suppliers do nothing, they will undoubtedly be left in the dust of their more intrepid peers.

Paul Eichenberg
Paul Eichenberg has had 25 years working with Fortune 500 automotive suppliers, most notably eight years as the global VP of Corporate Development and Strategy for Magna Powertrain & Magna Electronics. As the Chief Strategist, Paul oversaw all strategic planning, product management and merger and acquisition activities. During his tenure at Magna, Paul successfully repositioned the business to focus on technologies for the optimization of the internal combustion engine, EV/Hybrid technologies, ADAS, and autonomous vehicles. Paul manages his own automotive consulting firm called Paul Eichenberg Strategic Consulting. Paul’s clients include hedge funds, investment banks, private equity investors and automotive suppliers.