Makers of car seats and dashboards, including Magna International Inc. (MG) and Lear Corp. (LEA), are among those most likely to make acquisitions this year, as automakers seek suppliers with the scale to handle global projects.
With more than $5 billion in cash, suppliers are adding assets that help automakers develop interior features tailored to fast-growing markets such as Brazil and China. Magna, Lear and Johnson Controls Inc. (JCI) will be among the more aggressive acquirers, said PRTM, a global consulting firm based in Waltham, Massachusetts.
Vehicle interiors are key differentiators among competing vehicles, like kitchens and bathrooms are for house shoppers. Suppliers that specialize in seats, dashboards and related components are looking at distressed companies in Europe to help boost their ability to serve automakers such as General Motors Co. (GM) and Volkswagen AG (VOW) in local markets around the world.
“The average customer all over the world is buying by exterior looks and interior experience,” Dietmar Ostermann, director of PRTM’s automotive practice, said in an interview. “Significantly more vehicle manufacturers are changing the look of cars to appeal to local markets.”
Auto-parts companies may make as many as 250 acquisitions worldwide this year, compared with 268 last year, which was the second-highest total, PRTM forecast. That number may be reduced by 12 percent if Standard & Poor’s downgrade of U.S. debt increases interest rates and caution among investors, he said.
Deal value may increase this year, to about $60 billion from about $45 billion last year, PRTM forecasts in its study, which examined data and executive comments to assess the potential roles of 565 automotive suppliers as buyers, sellers or financially distressed companies.
Of the 165 companies studied that make parts for vehicle interiors, 32 are “strong buyers” and 26 are “strong” sellers or distressed, PRTM said. Magna, North America’s largest auto supplier, and Lear, both makers of seats, are among the most-improved potential buyers, the study said.
Lear may consider seat-frame makers Kongsberg Automotive Holdings ASA or Austem Co. or Mitsuba Corp. (7280), which makes electric motors for seats, PRTM said. Lear is considering $100 million to $200 million acquisitions of companies that make seat mechanisms and fabrics, Matt Simoncini, who takes over as chief executive officer Sept. 1, said in an interview yesterday.
Magna is eyeing a range of acquisitions, from smaller technology companies to joint ventures to larger buys, CEO Don Walker, said last week in an interview. He declined to comment on specific acquisition targets. Based in Aurora, Ontario, Magna had $1.74 billion in cash and $1.9 billion of an unused credit line as of June 30.
The company, which makes everything from rear-view mirrors to entire cars, probably won’t diversify further, he said.
“We’re looking at a lot of different things,” Walker said. “Nothing momentous, but we are certainly looking at utilizing the cash.”
In half the interior-parts acquisitions this year through May, North American and European suppliers were the buyers, according to the study, highlighted by Johnson Controls purchases of Michel Thierry SA, a maker of seat fabric; C Rob Hammerstein Group, a maker of metal seat frames; and Keiper and Recaro Automotive, for a combined $1.2 billion.
Automakers are increasing the amount of customization for large and growing markets, such as China, Brazil and India, and not just peddling U.S.-oriented vehicles in other parts of the world, Ostermann said.
Much of that customization has yet to reach the market, he said. GM’s Buick LaCrosse, for example, was designed in Shanghai and Warren, Michigan, near Detroit. While it is primarily used as a chauffeur-driven vehicle in China, it is sold there with standard legroom in the backseat and lacks stereo and climate controls for the rear passenger, he said.
“Why not design a Chinese product?” asks Ostermann. “The Buick LaCrosse in China and America eventually will look different. Right now they are fairly similar.”
Johnson Controls handles much of Buick’s seat design in China, Ostermann said. David Barnas, a GM spokesman, declined to comment about plans for the LaCrosse.
Automakers will sell as many as 17.5 million vehicles in China this year, PRTM forecasts. The market, already larger than the U.S., will grow 12 percent to 15 percent a year for the “foreseeable future,” more than twice that of the U.S., PRTM forecasts.
GM and Volkswagen have the strongest vehicle design and development capability in China, Ostermann said. VW’s Bora, Lavida and its new Jetta are designed specifically for Chinese car buyers and tailored for other markets, he said.
Chinese consumers want Chinese vehicles, instead of mostly U.S. and European products, Ostermann said.
“That’s why you see significantly more vehicle manufacturers changing the looks of the car so it’s significantly more appealing to local markets, like India, China and Brazil,” he said.
Johnson Controls, the biggest U.S. supplier, plans to pause its automotive acquisitions while it integrates its three European purchases, Bruce McDonald, chief financial officer, said in a June 27 interview.
Johnson Controls tried to buy part of Visteon Corp.’s interiors and electronics businesses before Visteon emerged from bankruptcy proceedings Oct. 1. McDonald said in the interview that his company is no longer interested in acquiring Visteon and hasn’t had discussions since it emerged from bankruptcy.
International Automotive Components Group, the auto-parts supplier owned by billionaire Wilbur Ross, has started work on a possible initial public offering of stock, people familiar with the matter have said. The company may be “ripe for picking,” and Magna or Hyundai Mobis (012330) may be interested, Ostermann said.
Dave Ladd, a spokesman for IAC, declined to comment.
Faurecia (EO) SA and Visteon are the most likely sellers among interior suppliers, PRTM said.
Visteon may divest its lighting and heating/air conditioning units to focus on interiors and electronics or it may be split, PRTM said. Jim Fisher, a spokesman for Visteon, declined to comment.
Faurecia, Europe’s largest maker of car interiors, might be interested in parts of Visteon to expand its Asian sales. Dongfeng or Yanfeng, two of Visteon’s Chinese joint-venture partners, also might want to invest in Visteon, PRTM said. Olivier Le Friec, a spokesman for Faurecia, declined to comment.
Among all parts makers, nine of the 25 most likely consolidators are based in North America. In addition to Magna, Lear and Johnson Controls, that list includes Cummins Inc. (CMI), Illinois Tool Works Inc. (ITW), Eaton Corp. (ETN) and DuPont Co., PRTM said.
Bigger is Better
Larger suppliers are doing best in the global recovery, PRTM found. Among the 100 largest suppliers in the study, those based in North America increased earnings before interest, taxes, depreciation and amortization by 76 percent, while those based in Europe boosted profit by 68 percent, PRTM said.
While the number of auto-parts deals may be down from last year, it will still be near the record 276 deals done in 2007, according to PRTM.
The consulting firm itself is being acquired by PricewaterhouseCoopers LLP.
The following is a list of automotive suppliers that PRTM identified as likely buyers, sellers or distressed companies:
Likely buyers: Illinois Tool Works Inc., Weichai Power Co., Michelin & Cie., Bridgestone Corp., Johnson Control Inc., Magna International Inc. (MGA), SKF AB Eaton Corp., Robert Bosch GmbH, Cummins Inc., Hyundai Mobis Saint-Gobain SA, Lear Corp., Asahi Glass Co., DuPont Co., Timken Co., Mitsubishi Electric Corp., Tyco Electronics
Likely Sellers: Continental AG, Faurecia Valeo SA, Delphi Automotive Plc, Visteon Corp., TRW Automotive Holdings Corp., TI Automotive Honeywell International Inc., ThyssenKrupp AG, Hitachi Ltd.
Potentially Distressed: Behr GmbH & Co., Freescale Semiconductor Holdings, Futabam Industrial Co., Plastic Omnium SA
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