Plans for Brazilian production by global automakers such as BMW and Audi AG (NSU) are spurring the country’s best-selling parts supplier, Autometal SA (AUTM3), to hunt for acquisitions in a market poised for consolidation.
Autometal is eyeing takeovers from among eight to 10 midsize rivals that lack the expertise to work with premium brands and that haven’t been able to profitably meet demand as domestic auto output rises to a record this year, Chief Financial Officer Fernando Mearim said.
“Not all companies will continue operating in this market,” Mearim said at a seminar with automaker and partsmaker executives in Sao Paulo on Dec. 5. “The pie is staying the same size, it’s just going to be divided into smaller pieces.”
Brazilian suppliers are being strained as companies such as Daimler AG, maker of Mercedes-Benz luxury models, and Chinese small-car producer Chery Automobile Co. rush to the world’s seventh-largest economy. While domestic sales have slowed in 2013, the market grew at an average annual pace of about 10 percent from 2002 through 2012, data compiled by Bloomberg show.
Smaller partsmakers with little financial clout are struggling to keep up with the increasingly technical demands of manufacturers and are becoming acquisition targets as asking prices fall, Mearim said.
There are almost 700 auto-parts companies in Brazil. Mearim wouldn’t identify any potential targets for Diadema, Brazil-based Autometal, only saying he wasn’t interested in “anything less than 20 million reais ($9 million).”
“Many of them aren’t efficient in terms of cost control and management,” Gustavo Perez, a Sao Paulo-based analyst at Fator Corretora SA, said in a telephone interview. “There is a movement towards consolidation.”
Some smaller suppliers won’t survive the industry slowdown this year, Perez said. Brazil vehicle sales fell 2.8 percent in November from a year earlier, and were down 0.8 percent through the first 11 months of 2013, according to automaker trade group Anfavea.
At the same time, potential car buyers are being eliminated by banks tightening credit requirements after facing a slew of defaults, and families carrying larger debt loads. Companies are faced with labor costs rising ahead of inflation and unemployment of 5.2 percent in October, a 10-month low. In the third quarter, Brazil’s economy contracted 0.5 percent.
Autometal fell 2 percent to 17.15 reais at the close in Sao Paulo, dragging its 2013 slide to 18 percent. While that trailed the 16 percent drop in Brazil’s benchmark Ibovespa index, sales grew at a rate of 36 percent, about three times as much as the average for its peer group, according to data compiled by Bloomberg. The company is a unit of Spain’s Cie Automotive SA. (CIE)
“Car stocks are high, manufacturers have stopped production and given workers leave announced for mid-December,” Mearim said. “It’s not such an optimistic short-term scenario.”
New nationalization measures that include a 30 percent tax on imported cars go into effect in January, and local auto-parts sales are expected to rise, Paulo Butori, president of the Brazilian Association of Autoparts Manufacturers, said at last week’s event. The group forecasts an increase in car production to 4.8 million vehicles in 2018. Last year’s total was 3.36 million, according to data compiled by Bloomberg.
By 2016, the number of factories will grow to 42 from 29, including plants built by Bayerische Motoren Werke AG (BMW) and Jaguar Land Rover Automotive Plc, Butori said. Audi said in September it would resume making cars in Brazil next year.
Those factories will make some models that can be exported, Autometal’s Mearim said, and will require a higher level of technological skill that many auto-parts companies won’t have.
“I see an interesting future for those that invest, that have technical capacity,” he said.
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