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Technology Disruption to Accelerate Investor Activism and Mergers and Acquisitions in 2018 for Automotive Suppliers, Says Strategy Expert

NOVI, Mich., Jan. 11, 2018 /PRNewswire/ -- Expect to see increased investor activism, more private equity involvement and accelerated merger and acquisition activity in the automotive supplier sector in 2018, as the emerging trends of electrification, autonomous driving, connected cars and shared vehicles continue to send shockwaves through the auto industry.

That prediction comes from strategy expert, Paul Eichenberg, an automotive strategy consultant with 25 years of experience working with Fortune 500 auto suppliers.

For 2018, Eichenberg predicts the top five most important stories affecting global auto suppliers are:

1. China will announce the ban of the internal combustion engine (ICE) by 2030; Germany will follow.

In early September, Xin Guobin, China's vice-minister of industry and information technology, told a forum of automakers held in Tianjin that the government would ban the production and sale of fossil fuel cars. Most Chinese automotive insiders believe this ban will take place starting in 2030. BAIC Group's chairman, for example, said the company's goal is to stop sales of its conventional fuel-powered cars in Beijing by 2020 and stop their production and sales nationwide by 2025.

Eichenberg expects Germany to follow quickly with its own ban of ICE, as it strives shift to electrification to retain technological leadership to protect the German automotive industry.

2. More automotive supplier spin-offs.

As technological advancement creates new products and business model opportunities, suppliers will continue to refocus their product portfolios away from some of their traditional mechanical products and expand their electronic/electrical offering to position themselves for the new future. Other suppliers will follow the lead of suppliers such as Delphi, Honeywell and Autoliv who have completed or announced spin-offs, due to:

  • The different pace of technology advancement in their two business segments
  • Different market needs driving investments for growth and innovation
  • Different skill sets of people throughout the organizations (leadership, engineering, sales)
  • Different sales growth rates over the near and long-term with limited customer or operational synergies, and
  • A potentially different shareholder profile due to the timing of returns.

Eichenberg expects these challenges to potentially drive spin-offs from companies such as Continental and Valeo who have portfolios of both traditional mechanical products and new electrical, electronic or software related products.

3. Mega-mergers will continue, led by the new tech entrants.

With the advent of connected and automated cars, the consumer and industrial electronics giants and new entrants from the semiconductor industry view the auto industry as an attractive growth market. Companies such as LG, Panasonic, Samsung, Toshiba, Mitsubishi and Hitachi are bringing expertise in high-volume production of lithium-ion batteries from the consumer and industrial electronics sectors, giving them the critical scale needed to compete.

And with this market alone having the potential to grow to over $100+ billion by 2030, Eichenberg expects more large-scale acquisitions of traditional suppliers by these tech players in 2018, such as Samsung's rumored interest in acquiring Magneti Marelli.

4. Private equity firms increasingly will dominate automotive mid-market merger and acquisition activity.

As technological advancement creates new products and business model opportunities for larger suppliers, mid-size and smaller suppliers who lack global reach and scale will be continually disadvantaged in a fast-paced environment that requires increasing investment and significant business transformation. These mid-market companies lack resources required to make the necessary strategic shifts in new product/technologies to remain competitive.

For example, Eichenberg questions how a traditional mid-market manufacturer of ICE components can deal with an industry disruption like the ban of the ICE and the shift towards battery electric vehicles. This type of business transformation will require significant investment and the development of new core competencies and new products over the next several years.

Many suppliers faced with this situation will opt out and exit the business instead of taking on the risk associated with transformation. In this environment, the investors likely to have the appetite to take on these challenges will not be strategic investors, but will increasingly be financial investors like private equity firms.

5. Investor activist activities will increase within the automotive supplier space.

In late 2016, stock analysts had already started downgrading the long-term outlooks for even the world's best suppliers that have significant involvement in the ICE ecosystem, as automakers confront intense pressure to completely shift vehicle propulsion from ICE to electric.

While this shift will not occur overnight, analysts expect it could create significant risk to many suppliers' future earnings trajectories. Understanding these headwinds and the competitive challenges ahead, Delphi and some other major suppliers have already undertaken strategic spinoffs to proactively address investor concerns.

Other suppliers that are not already making strategic shifts – including many of the top 100 auto suppliers – will likely face increased pressure from activist investors who seek to unlock value and raise stock valuations.

Overall, Eichenberg said the automotive supply chain will see more challenge and change in 2018 than the industry has witnessed in the previous 50 years. For his latest insights, visit: www.chief-strategist.com.

About Paul Eichenberg Strategic Consulting

Founded in 2015 and based in Novi, Michigan, USA, Paul Eichenberg Strategic Consulting specializes in helping clients develop and execute solutions to the complex challenges facing the global automotive industry in this era of disruption. Eichenberg has 25 years of experience in strategic planning, product management and merger and acquisition activities with Fortune 500 automotive suppliers, including Magna Powertrain, Magna Electronics, PPG Industries and Dura Automotive Systems. Current clients include hedge funds, investment banks, private equity investors and automotive suppliers. For more info, visit: https://chief-strategist.com

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SOURCE Paul Eichenberg Strategic Consulting