DACH Automotive Industry
here is a rift tearing through the car supplier landscape, and it is getting wider and wider: large enterprises versus medium-sized businesses, internal combustion engine champions versus CASE (connected, autonomous, shared and electric vehicles) converts, Triad countries versus China, established companies versus start-ups. The dynamic force driving forward the transformation of numerous companies, and indeed the whole industry, is breathtaking.
Bosch has sold its turbocharger (BMTS, 2017) and starter-generator (SEG Automotives, 2018) businesses. Honeywell spun off its turbocharger unit, Garrett Motion, in 2018. GKN, which was sold to the financial investor Melrose, also in 2018, is separating off single units step by step (for example Powder Metallurgy, 2019). Delphi has been divided up into two companies, Aptiv (automobile electronics and advanced safety technology) and Delphi Technologies (electric vehicles and combustion engines). Continental is planning the spin-off and sale of its powertrain division for mid-2019. FCA has pulled out of the supplier business completely with the sale of Magneti Marelli to Calsonic Kansei (2019).
Since the sale of Federal Mogul to Tenneco, the company has been divided into two units: aftermarket/ride performance and powertrain technology. After the sale of its internal division (Yangfeng Automotive Solutions, 2015) and the spin-off of Adient (2016), Johnson Controls has now sold its last automobile segment, Power Solutions (2018). Nearly every 10th supplier from the Top 100 (based on sales) has gone through a dramatic change in the last two years. What lies behind these carve-outs, spin-offs, divisions and IPOs?
The so-called “tipping point,” from where there will be no more growth in the production of components for combustion engines, is getting nearer. The peak will be reached between 2023 and 2025. At the moment, the large car industry suppliers can still exit their combustion engine and transmission businesses and get a solid price for them. Prices being obtained currently stand at an EBIT multiple of 5 to 6 (for comparison, car suppliers without combustion engine business stand at an EBIT multiple of 10 to 12, so twice as high).
This separation from the combustion engine business is almost comparable with the spin-off of “bad banks” carried out after the financial crisis: “toxic” business areas are removed and so can no longer damage the remaining part of the company. If complete withdrawal from internal combustion engines (ICEs) is actually to take place by 2050, as announced by many national governments, Conti, Bosch, Magneti Marelli and co could be gradually leaving this risk-laden business behind them. However, if ICEs continue to play a part in the more distant future, an attractive investment opportunity could emerge. In this case, a similar rule applies for the ”last man standing” of the ICE business as for some digital business models: the winner takes it all.
The anticipated downfall of the combustion engine is being exacerbated by the total focus on CASE technologies. Traditional innovation fields for car interiors, exteriors, powertrain or chassis are disappearing from public discussion. Anything without the attributes associated with artificial intelligence, cybersecurity, Big Data, autonomous driving features or blockchain is hardly noticed. It seems that the development and survival of the car industry will only be possible with the help of digital solutions.
The following comparison shows just how big the difference between “digital” and “traditional” has grown. In the years 2017/18, the start-up WayRay, a manufacturer of holograph-enhanced reality technologies and user interfaces, was able to raise venture capital amounting to $98 million. The company currently has 50 employees and a turnover of $3.5 million. Last year the supplier Proseat (seat cushion maker, turnover of €291 million and 2,100 employees) was sold to a Japanese competitor and valued at around €45 million. Based on the sales multiple, WayRay was valued at a factor of 180 times higher than Proseat. The rift between CASE or start-ups and traditional modules or suppliers could hardly be wider.
For years now, large supplier groups have been earning higher returns than medium-sized businesses (8 percent EBIT margin in comparison with around 6 percent) and they show stronger growth. The consolidation process for the whole car supplier industry is continuing. In the Global Top 100 survey, Berylls estimates that a 60 percent share of total sales will go to the 100 largest suppliers by 2025. The share is currently just over 50 percent. The large supplier groups have a more global structure and easier access to the capital markets. They also have more competitive cost structures because they have sites in low-cost countries, and they invest large sums of money in the development of CASE technologies or buy themselves the necessary skills through company takeovers.
Medium-sized businesses, meanwhile, have their agility and entrepreneurship, their specialization in niche areas and their cost awareness to enable them to hold their ground as suppliers.
Will the fractures running through the auto supplier industry be made more permanent in the next few years – will the differences between the two groups of companies increase? From what we know today, traditional and digital business models are moving away from each other with increasing speed. But this does not mean that traditional business models are heading for immediate disaster; rather that new opportunities are presenting themselves for the remaining market participants in traditional areas.
On the one hand this is because the number of competitors is reducing through market exits, and the remaining cake, although smaller, will be shared between fewer people. On the other hand it is due to continuing high numbers of combustion engines being made in the medium and long term: those condemned to death might live longer than expected after all.
Dr. Jan Dannenberg (1962) has been a consultant for the automotive industry since 1990 and became a founding partner of Berylls Strategy Advisors in May 2011. Until spring 2011, he worked with Mercer Management Consulting and Oliver Wyman in Munich, Germany, on international projects – for five years as Associate Partner, and another three years as Partner. He is a recognized specialist in innovation and brand management in the automotive industry, and primarily advises suppliers and investors on strategy, M&A and performance improvement. In addition he is Managing Director at Berylls Equity Partners, an investment company that specializes on mobility enterprises.
Bachelor of Arts in economics at Stanford University, USA; business administration and doctorate degree at the University of Bamberg, Germany.
