Automotive Study Report Final

8/3/2019 Automotive Study Report Final

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Bankruptcy & Consolidationin the Global Automotive

Supply IndustryA PRTM Study of the Winning and Losing Auto Suppliers


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Executive Summary...1

Industry Backdrop...2

Regional Factors...2

Winners and Losers...4

The Road Ahead...11

Study Methodology...12

Authors:

Dietmar Ostermann, Barry Neal

Table of Contents


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a prtm study of the winning and losing auto suppliers

Executive Summary

This report highlights the results of a recent

PRTM study of more than 350 global automotive

suppliers. Based on more than 20 nancial and quali-

tative criteria, Bankruptcy & Consolidation

in the Global Automotive Supply Industryassesses

trends within the sector and identies possible

winners and losers (see sidebar, page 12).

The study reveals that the economic crisis and the

resulting downturn in the global auto industry have

caused a signicant shift in the automotive supply

chain. Our ndings indicate:n The number of automotive supplier bankrupt-

cies has grown signicantly since 2007 and is

continuing to grow.

n These bankruptcies will be followed by a period

of consolidation, which will intensify as the global

credit markets continue to loosen within the next

12 months.

n Global 100 European suppliers and Chinese

suppliers will be among the top global consolidators.

n Several large Global 100 North American suppliers

are currently at risk of going bankrupt.

n Only one U.S. supplier is among the top 10

potential global consolidators, while two Chinese

suppliers are on the list.

n The chassis and electronics sectors will experience

the strongest bankruptcy and mergers and acquisi-

tions activity.n Chinese suppliers will play a top role in consoli-

dating within the interior systems segment. North

American and European suppliers will be the

biggest consolidators in powertrain systems.


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bankruptcy &consolidationin theglobal automotive supply industry

Regional Factors

European and Chinese suppliers will be the major

industry consolidators. Based on our analysis of

various nancial and qualitative criteria, companiesfrom these regions scored, on average, the highest and

are in the best position to become buyers (Figure 1).

By contrast, North Americas Global 100 suppliers

fared worse than the population overall, and will

constitute the largest percentage of bankruptcies

and divestitures.

Regional growth may explain, in part, why some

geographies have better-performing companies.

Chinas auto suppliers grew at an average compoundedrate of about 20% from 2004 to 2008more than

double the rate of Indian, Japanese, and European

suppliers, and nearly seven times that of North Amer-

ican suppliers (Figure 2).

The nancial crisis has left an indelible mark on

the automotive sector. The housing bust, followed by a

severe worldwide recession, has resulted in mortgage

defaults, a tight credit lending market, massive job

losses, reduced compensation, and a drop in consumer

spending. Without cash and borrowing clout,

consumers have stopped buying high-ticket items like

cars in an effort to limit cash outow.

Current and predicted global vehicle sales volume

paints a clear backdrop of how badly car makers have

been hitand how they must adjust planning and

supply chain processes to account for continued weak

demand. To date, sales volume in several major geogra-phies, except for China, has dropped about 40% from

2007. Although the economy may be improving, PRTM

predicts sustained lower vehicle sales volumes for most

regions going forward, particularly in North America,

where it is estimated that longer-term light vehicle

sales volumes will mature around 13 million units per

yeara far cry from the 16.5 million units that were

common during the earlier part of the decade.

However, there is another side to this picture.

China and emerging markets like Brazil are experi-

encing an uptick in auto demand. Chinas vehicle sales,for example, are estimated to increase by more than

50% from 2008 levels of approximately 9.5 million

units within the next ve years. Given the incred-

ible growth during the last few monthsmore than

30%its possible that this progress may be realized

much sooner.

The sharp disparities in business conditions have

left automotive suppliers on shaky ground, and in the

last year, have forced many into bankruptcy. As the

industry begins to assess the impact of restructur-

ings and bankruptcies, sizes up near-term demand

and production capacity, and refocuses on emerging

markets, PRTM anticipates even more bankruptcy and

M&A activity among the global auto supply base.

To better understand what is happening in the

industry and to identify which companies may fare

better or worse than their competitors, PRTM studied

more than 350 global suppliers from North America,

Europe, South America, China, India, Japan, and

South Korea. Our analysis shows several scenarios

likely to unfold in the coming quarters. The most

signicant scenarios point to:

n An accelerated pace of bankruptcy lings

n An industry-wide consolidation led by large Euro-

pean and Chinese suppliers

n

A noticeable shift in winners and losers on aregional level

Industry Backdrop


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FIGURE 1: Supplier Scores by Region

FIGURE 2: Supplier Financial Results by Region

RegionNumber ofCompanies

Buyer Seller Divest Fail

Global 93 5.4 3.2 4.1 4.2

Global North America 31 4.9 3.3 4.6 4.8

North America 30 5.1 4.1 3.7 4.2

Global Europe 38 5.5 3.4 4.1 4.5

Europe 52 5.1 4.0 3.7 4.4

Japan 97 5.0 2.9 3.1 3.3

Brazil 10 5.0 3.0 3.6 3.3

India 33 4.5 3.7 4.1 4.1

China 24 5.2 3.6 4.2 4.4

South Korea 35 4.5 3.2 3.3 3.8

Total/Average of All 355 5.0 3.4 3.7 4.0

CAGR0408

Avg. 2008($B)

CAGR0408

Avg. 2008($B)

EBITDA %of Sales**

Global 100* 8% $17.2 6% $1.9 11%

North America 3% $9.9 4% $1.1 12%

Europe 9% $12.4 5% $1.5 12%

India 8% $0.5 10% $0.1 15%

China 22% $2.0 37% $0.2 10%

Japan 9% $6.7 10% $0.7 10%

South Korea 8% $0.9 -3% $0.1 15%

Brazil 19% $0.4 16% $0.1 15%

sales ebitda

* Global 100 companies also counted in regional numbers

** Average sales per company compared to average EBITDA per company


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Winners: European and Chinese Suppliers

Winners and Losers

Our study found that large European and Chinese

suppliers, on average, will be the biggest winners.

They will be in a dominant position to lead consolida-

tion globally, which will gain momentum as credit

markets loosen.

Various European companies, particularly

German suppliers, appear on PRTMs top 25 potential

global buyers list (Figure 3). Companies such as ZF

Friedrichshafen AG (transmissions, steering), BASF

SE (paint), Hella KGaA Hueck & Co. (lighting), and

Benteler AG (body and chassis) are the most likelyconsolidation front-runners.

Chinese suppliers, operating in a booming market

and, in some cases, beneting from central govern-

ment support, have consistently improved their global

market share in recent years and are displaying

improved protability. Some are now strong enough

to acquire other companies. Guangzhou Automotive

Components, a division of the highly protable 51%

state-owned automobile manufacturer Guangzhou

Automobile Industry Group Co. in Guangzhou, China,

and Weichai Power Co. Ltd., a state-owned diesel

engine manufacturer in Weifang, China, are consid-

ered to be among the top 10 potential global consolida-

tors. A third Chinese supplier, FAWER Automotive

Parts Limited Company, the parts maker partially

owned by state-owned auto maker First Auto Works

(FAW) in Changchun, China, is in the top 30. Guang-

zhou and FAWER are the components divisions of two

of the largest state-owned automobile manufacturers.

Chinese suppliers have already taken steps toward

consolidation, suggesting they will continue down this

route in the immediate future. Guangzhou has actively

been buying automotive assemblers and suppliers. It

By all indications, the next several quarters will mark an increase in bank-

ruptcies, divestitures of non-strategic business, and supplier mergers and

acquisitions. As a result, the winners and losers on the worldwide stage

will also change. Winners are dened as companies that have the nancial

wherewithal to lead consolidation and buy weaker companies or competi-

tors assets. Losers are companies that will le for bankruptcy, divest assetsbecause of nancial troubles, or go out of business.


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Consolidation

Score*

GuangzhouAutomobile

GroupDenso

ToyotaBoshoku

ZF

JohnsonMatthey

SKFBASF PP

G

WeichaiPower

TataGroup

AisinSeikiHella

Cummins

MagnaIntlNifco

AichiMachineIndustry NS

K

TSTech

Benteler

DuPont

AlpsElectric

Tomkins

Gentex

Federal-Mogul

Mahle

10.0

8.0

6.0

4.0

2.0

0.0

US-based companies China-based companies Other

*Potential of company to make acquisitions, on score of 010. See Study Methodology.

has also formed joint ventures with Toyota Motor Corp.

and Honda Motor Co. Ltd. in China, giving it more

inuence with and access to key modern manufac-

turing and product development capabilities. Likewise,

Weichai Power recently bought Moteurs Baudouin SA,

a French maker of diesel engines and gearboxes. And

FAWERwhich last year changed from a state-owned

company to a holding company recapitalized at one

billion Chinese yuan renminbi (about $146 million)

is a solid protable company. It has access to modern

technology via FAWs two established vehicle assembly

joint ventures with Volkswagen AG and Toyota, as

well as one recently-formed joint venture with General

Motors for light trucks.

North American suppliers, longtime industry stal-

warts, generally did not score as well as potential buyers.

Only one of the top 10 potential global buyers is from

the United States: PPG Industries Inc., a Pittsburgh,

PA-based diversied glass and paint supplier. Four other

U.S. suppliers also rank among the top 25 potential

buyers: Cummins Inc. (diesel engines), El DuPont de

Nemours (paint), Gentex Corp. (exterior, electrical), and

Federal-Mogul Corp. (powertrain and seals).

Japanese suppliers are also not expected to be

consolidation leaders, even though they have strong

buying scores. Eight Japanese suppliers made the top

25 potential global buyers list, several of which areToyota Keiretsu companies lead by Denso Corp. and

Toyota Boshoku Corp. Based on their histories and

our industry experience, however, we believe they will

not engage in mergers or acquisitions in any signi-

cant way.

FIGURE 3: Top 25 Suppliers by Consolidation Score


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The study also found there is likely to be an

increase in bankruptcy lings and divestures of non-

strategic business units. These events will add greater

risk and instability to the automotive supply chain over

the next few months.

Bankruptcies. The number of supplier bankrupt-

cies is accelerating (Figure 4). The lings in 2008

were roughly double the number seen in 2007. And,

by our estimate, 2009 lings will surpass 2008 levels

signicantly, since 2009 year-to-date bankruptcies have

already reached prior-year levels. We anticipate that largeNorth American suppliers that are part of the Global

100 suppliers will constitute a larger percentage of bank-

ruptcies, since the downturn in the U.S. auto industry

was so much stronger than in most other regions and,

according to our analysis, many of the North American

suppliers are in weaker nancial positions.

Prominent large North American suppliers

currently in bankruptcyVisteon Corp., Metaldyne

Corp., Hayes Lemmerz International Inc., and Lear

Corp.also appear on PRTMs list of top 25 global

bankruptcies (Figure 5). On the basis of our analysis,

we believe these companies will go through reorgani-

zation, will be auctioned or sold, or will divest certain

businesses. The North American suppliers that facepotential bankruptcy risk include: American Axle

& Manufacturing Holdings Inc., ArvinMeritor Inc.,

TRW Automotive Holdings Corp., Flex-N-Gate Corp.,

Numb

erofBankruptcyFilings

2005 2006 2007 2008 2009

Actual bankruptcies

Projected bankruptcies

40

35

30

25

20

15

10

5

0

Losers: North American Companies

FIGURE 4: Automotive SupplierBankruptcies, 20052009


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Tenneco Inc., and Shiloh Industries Inc. These compa-

nies all have three things in common: they provide

capital-intensive subsystems, have close ties to the

former Detroit Three automakers, and maintain a U.S.-

intensive footprint.

Divestitures. Several North American and European

suppliers may try to escape the threat of bankruptcy

by divesting certain assets or businesses (Figure 6).

According to our analysis, electronics rms that have

nancial difculties stemming from the downward

slide in consumer electronics purchases may decide toshed their automotive businesses. This includes compa-

nies such as Clarion Co., Ltd., Alps Electronics Co. Ltd.,

and Koninklijke Philips Electronics NV.

Schaefer KG, a German producer of bearings and

many other components, is a special case. Previously in

good nancial health, Schaefer encountered nancial

difculties as a result of acquiring Continental AG. It

is likely that Schaefer will try to divest several busi-

nesses, like Contis tires or rubber products, to mitigate

the situation.

Major Developments by Vehicle System

Within the six main vehicle systems (exterior,

interior, chassis, electrical/electronics, powertrain,and body), two segments face the greatest consolida-

tion pressures. Based on the number of total suppliers

by vehicle system and the number of possible strong

FIGURE 5: Top 25 Suppliers by Bankruptcy Score

BankruptcyScore*

Delphi

AmericanAxle

Visteon

HayesLemmerz

Acertec

KumboTire

Chasys

DiamondElectricLear

Brembo

Clarion

ArvinMeritor

Faurecia

Schaeffler/Conti

Wilhelm

Karmann

TRW

CieAuto

Flex-N-Gate

KasaiKogyo

Metaldyne

TennecoShilohValeo Be

hr

EDAG

10

9

8

7

6

5

4

3

2

1

0

60

50

40

30

20

10

0

US companiesOthers

Supplier currently orrecently in bankruptcy

*Company's risk of bankruptcy, based on score of 010. See Study Methodology.


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Chassis Electrical Interior Powertrain Exterior Body

Companies in sector

Companies in strong acquiring position

120

100

80

60

40

20

0

NumberofSuppliers

Strength

asa

Consolidator

Toyota BoshokuDenso

ZF

Hella

BASFSKF

PPG

Alsin Seiki

Cummins

Magna Intl

TS TECH

NSK Benteler

Du PontFederal-Mogul

Hyundai MobisSaint Gobain

MarneBayer

Timken

Sumitomo Electric

Magneti Marelli

JTEKTEaton

JCI

MetaldyneMahle

Alpine ElectronicsTI Group Auto.

Freescale SemiconductorBrose Linamar

Flex-N-Gate BehrClarion

Schaeffler Conti Valeo

TennecoLear

Wilhelm KarmannFaurecia TRWMartinrea International

Hayes Lemmerz

ArvinMeritor

Visteon

American Axle

Delphi

9.0

8.5

8.8

7.5

7.0

6.5

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

Top Buyers Top Divestors Top Sellers Top Bankruptcies

FIGURE 6: Global 100 Selected Winners and Losers

FIGURE 7: Potential Supplier Consolidation by Main Vehicle System


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Chassis

Sensitivity

Score

Powertrain Interior Body Exterior Electrical/Electronics

Risk Level High Medium Low40

35

30

25

20

15

10

5

0

buyers in each of these systems, PRTM forecasts that

the intensity of bankruptcies and consolidation will

be strongest in electrical/electronics (wire harnesses,

switches, door systems, etc.) and chassis (brakes,

steering, axles, suspensions, etc.) (Figure 7).

Electrical and Electronics. The electrical and

electronics vehicle system has a large number of total

suppliers and strong possible buyers, which suggests

the segment is ready for consolidation. The M&A

activity will take place among system-level players

and across systems. In the latter category, suppliers

from main vehicle systems will look to buy electrical

and electronics companies to increase their electronic

content know-how. This trend will be driven by the

increasingly important role of electrical and electronics

components in system-level congurations. In 2010,electrical and electronics will account for 40% of a

cars overall value, up from 25% in 2000.

Chassis. This segment is ripe for consolidation, with

120 chassis suppliers of relevant size globally and 24

strong potential buyersM&A pressures will almost

certainly increase in the future. Capital-intensive

chassis systems providers have been severely affected

by declines in demand, so companies in this sector will

have a hard time meeting performance expectations

in the current market (Figure 8). Of the most recent

wave of supplier bankruptcies, roughly 30% werechassis system suppliers, including Metaldyne, Hayes

Lemmerz, CONTECH, and J.L. French Corp.

Within the main vehicle systems likely to experi-

ence a high degree of consolidation of the supply base,

M&A activity will take place unequally. For example,

within the chassis system, the suspension, axles, and

steering subsystems will undergo the greatest amount

of consolidation. Each has relatively high numbers of

suppliers and several strong potential buyers (Figure 9).

The specic consolidation scenarios that play

out will be very closely tied to the following factors:strategies of the specic companies, product and

technology portfolios, customer bases, manufac-

turing capabilities, and so on. In steering systems, for

example, 68% of the volume is controlled by ve large

suppliers, and most auto manufacturers generally

have a go-to supplier. This has created an unusual

FIGURE 8: Automotive System Sensitivity to Volume Risk


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Fuel Tank Suspension Axle Steering Pedals Wheels Brakes Exhaust

40

35

30

25

20

15

10

5

0

Companies in sector

Companies in strong acquiring position

Nu

mberofCompanies

FIGURE 9: Forecasted Consolidation Within the Chassis Subsystem

degree of stability on the M&A front in this subsystem.

However, key new trends are emerging: the rapid

growth of Indian and Chinese players; the develop-

ment of low-cost country steering subsystem manufac-

turing footprints by several participants; a near-term

shift from hydraulic to electrical power-steering; and

a mid-term shift to steer-by-wire total chassis control

systems. These trends will encourage suppliers to form

new partnerships with other companies. Suppliers will

use these alliances to ll in gaps in their technology

portfolios and more closely link steering to braking,

acceleration, and suspension control.

Two of the weaker companies in the steering

subsystem have already begun the consolidation

process. Delphis Saginaw Steering System was sold

into a GM temporary trust in July, but will soon be

back on the block as part of Old GM assets (assets

being sold in the GM bankruptcy proceedings). Metal-

dynes chassis business was similarly purchased by

private equity rm The Carlyle Group as part of the

troubled companys Chapter 11 restructuring in August.

Strong potential buyers include Chinese rms like

Guangzhou Automotive and FAWER, as well as Sona

Group Ltd., Indias largest steering subsystem supplier.


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Over the next few quarters, the global automotive

supplier industry will come under greater pressure to

consolidate. The current number of suppliers engaged

in the six main vehicle systems could be reduced by

25% or more. Supplier bankruptcies constitute the

rst wave of restructuring and the rate of bankruptcy

lings will continue to accelerate in the near term. As

credit becomes more widely available and companies

are able to secure liquidity, there will be a wave of

M&Athe next phase of industry consolidation.

In our view, European and Chinese suppliers willgain ground during this intense shakeout and emerge

as top potential buyers. North American suppliers,

however, will have to watch their already weak footing;

several more are likely heading towards bankruptcy

and divestiture.

The chassis and electronics segments are likely to

face the most intense bankruptcy and M&A pressures.

The high number of total suppliers and number of

possible strong buyers reinforces PRTMs expectation

of increased activity in these areas.

As part of the study, PRTM identied the consolida-

tors and distressed suppliers for several subsystems,

predicted bankruptcies, and developed consolidation

scenarios on a vehicle subsystem level. The more prob-

able divestitures of nancially-troubled suppliers and

the potential buyers are shown in Figure 10. In thetires subsystem, for example, Schaefer will need to

shed assets to generate cash after purchasing Conti.

Potential buyers include Pirelli & C. S.p.A. and the

Michelin Group, both of which have shown interest

in Conti tires in the past, or Veyance Technologies,

The Road Ahead

FIGURE 10: Top Divestors and Potential Buyers

Subsystem

PotentialBuyer

Delphi

Thermal

Behr

Visteon

Lighting

Hella

Valeo

Wipers

GuangzhouAutomobile

Group

TRW

AutomotiveComponents

Division

Mahle, IAC

Faurecia

Front-EndModules

Hella, Behr,Omnium(HBPO)

Lear

WireHarnesses

Yazaki

ArvinMeritor

Chassis

Benteler

Schaeffler/Continental

Tires

Pirelli

DivestorScore

10

8

6

4

2

0


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The 2009 PRTM study included 357 global suppliers fromNorth America, Europe, South America, China, India, Japan,and South Korea. The study took into account more than20 nancial and qualitative criteria in eight main categories.Based on these criteria, a score was developed to rate eachcompanys 1) risk of bankruptcy or 2) ability to acquire othercompanies. The categories are as follows:

n Size and criticality (the measure

of the relative size of the supplier,in terms of revenue, and its OEM

criticality, based on an assess-

ment of supply chain and tech-

nology)

n Capital structure and health (a

measurement of a companys

short- and long-term capital struc-

ture, market solvency, and degree

of corporate distress)

n Commodity structure (an

assessment of the companyscommodity portfolio)

n Business health (an evaluation of

EBITDA growth, cash ow, sales

and prots relative to assets,

union participation, litigation, and

environmental issues)

n Business exibility (measured

against R&D and capital intensityand manufacturing exibility)

n Customer base (a review of non-

automotive business, regional

sales, business with bankrupt

OEMs, and percent of revenue

from car vs. truck business)

n Ownership structure and manage-

ment (evaluation of the companys

historic acquisitiveness, senior

management strategy, and the

favorability of structure to acquisi-tion, divestiture, and/or sale)

n Pricing (EBITDA multiple and

price/earnings ratio)

StudyMethodology

Inc., which is a good t for ContiTech. In the thermal

subsystem, Delphi, emerging out of Chapter 11 U.S.

bankruptcy protection under new ownership, may

decide to focus its business activities even further

and shed its thermal division. Behr GmbH & Co. KG

and CalsonicKansei North America, Inc. are potential

buyers, using those assets to expand their geographic

and customer reach.

The automotive supplier industry is in the early

stages of what will prove to be a major industry restruc-

turing. Companies that understand how they rank vis-

-vis their competitors will be well positioned to prevail

in the years ahead.


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Since 1976, PRTM has created a competitive advantage for its clients bychanging the way companies operate. PRTMs management consultants work with

senior executives to develop and implement innovative operational strategies that

deliver breakthrough results. The rm is a leader in operational strategy, supply

chain, product development, and customer value management. PRTM has 19

ofces worldwide and serves major industry and global public sectors.

ABOUT PRTM MANAGEMENT CONSULTANTS

PRTM

Beijing+86 10.6808.0296

Bengaluru+91 80.4010.0900

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Automotive Study Report Final