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ANALYSIS-ZF's pursuit of TRW a race to build autonomous cars expertise

FRANKFURT, Aug 21 (Reuters) - For German car parts maker ZF Friedrichshafen its attempt to buy U.S. rival TRW will take the company to the front of the grid as the race to make cars ever more intelligent and connected splits the industry into those making commoditised components and system providers which put the driver in the back seat.

ZF, the 99-year-old maker of transmissions and other components, wants to buy TRW because of its know-how in sensors and electronic components to control steering, braking and safety systems.

Tighter safety and anti-pollution rules have forced carmakers to make their products more intelligent, so that engine management systems become more fuel efficient, and cars get better at avoiding accidents.

"Successful suppliers can use innovation to set industry standards, creating economies of scale for themselves by selling to several auto makers," said Juergen Reiner, a partner specializing in the auto industry at consulting firm Oliver Wyman.

And with auto makers focused on keeping down costs, they are paring back spending on research, leaving the field to suppliers.

In 2012 suppliers spent 37 billion euros ($49 billion) on research and development, akin to 69 percent of global automotive research and development spending, Oliver Wyman said.

As a result, suppliers' share of overall value creation in the automotive industry is expected to rise to 81.1 percent by 2025, from 77.3 pct in 2012, according to the firm.

NEW RULES

Tighter emission rules will force up to 30 percent of cars in Europe to include hybrid or electric powertrains by 2025, experts say, a move which shrinks the market for components like pistons, spark plugs and fuel pumps. It has already led to a shift away from hydraulics toward more lightweight electronics in areas like steering.

"Suppliers that do not offer electronics are in danger of falling down the value chain," said Marcus Berret, a Partner at Roland Berger Strategy consultants.

ZF, which already helps carmakers develop hybrid-powered drivetrains, decided to start talks with TRW after they analyzed which skillsets they want to acquire between now and 2025. Talks with TRW are continuing and a deal could be reached as soon as mid September, people familiar with the matter told Reuters.

The push to create larger suppliers with more sophisticated product portfolios will continue, but further large takeovers are tough to pull off, executives and bankers say, because of a lack of available targets, or because a combination would be discouraged by antitrust regulators or car companies themselves.

Smaller and mid-size companies will nonetheless feel the pressure to add economies of scale or new technologies, investment bankers and executives say.

The biggest companies like Robert Bosch and Continental AG will continue dominating the industry and keep making small bolt-on deals to round out their portfolio.

ZF's move to broaden its expertise follows a raft of similar consolidation deals by suppliers like Schaeffler's <IPO-SHF.F> move to buy a controlling stake in Continental.

And in June, Mahle Group the Stuttgart, Germany-based maker of pistons and cylinders bought a majority stake in Letrika, a Slovenia-based maker of electric motors and electrical drive systems.

INTELLIGENT CONTROLLERS

A key growth area is in so-called megacontrollers which combine signals from individual electronic control units (ECU) to intelligently network engine management, steering and radar signals, to enable automated and semi autonomous driving.

And the move to network individual ECUs within a vehicle is about to take another step: connecting cars with each other. This opens the door to telecom companies, chipmakers and software makers entering the auto supply industry.

"In this decade, the car will seamlessly connect to the Internet, its owner, its infrastructure, and to other vehicles" said Ricky Hudi, head of electronics development at Audi.

A key catalyst for this shift is the European Commissions' push to introduce eCall by 2015, a system which notifies emergency services about the location of a car after it has been in an accident.

Car manufacturers are also quietly adding software know-how.

Earlier this year, Volkswagen bought a research facility run by QNX Software, a unit of Blackberry, and in 2012, BMW hired software developers from Nokia's networks business and Daimler's. Meanwhile Mercedes has expanded its premises in Sunnyvale, California to develop multimedia software. (1 US dollar = 0.7539 euros)

(Editing by Greg Mahlich)