DACH Automobilindustrie
DACH Automotive Industry
here is a rift tearing through the car supplier landscape, and it is getting wider and wider: large enterprises versus medium-sized businesses, internal combustion engine champions versus CASE (connected, autonomous, shared and electric vehicles) converts, Triad countries versus China, established companies versus start-ups. The dynamic force driving forward the transformation of numerous companies, and indeed the whole industry, is breathtaking.
Bosch has sold its turbocharger (BMTS, 2017) and starter-generator (SEG Automotives, 2018) businesses. Honeywell spun off its turbocharger unit, Garrett Motion, in 2018. GKN, which was sold to the financial investor Melrose, also in 2018, is separating off single units step by step (for example Powder Metallurgy, 2019). Delphi has been divided up into two companies, Aptiv (automobile electronics and advanced safety technology) and Delphi Technologies (electric vehicles and combustion engines). Continental is planning the spin-off and sale of its powertrain division for mid-2019. FCA has pulled out of the supplier business completely with the sale of Magneti Marelli to Calsonic Kansei (2019).
Since the sale of Federal Mogul to Tenneco, the company has been divided into two units: aftermarket/ride performance and powertrain technology. After the sale of its internal division (Yangfeng Automotive Solutions, 2015) and the spin-off of Adient (2016), Johnson Controls has now sold its last automobile segment, Power Solutions (2018). Nearly every 10th supplier from the Top 100 (based on sales) has gone through a dramatic change in the last two years. What lies behind these carve-outs, spin-offs, divisions and IPOs?
The so-called “tipping point,” from where there will be no more growth in the production of components for combustion engines, is getting nearer. The peak will be reached between 2023 and 2025. At the moment, the large car industry suppliers can still exit their combustion engine and transmission businesses and get a solid price for them. Prices being obtained currently stand at an EBIT multiple of 5 to 6 (for comparison, car suppliers without combustion engine business stand at an EBIT multiple of 10 to 12, so twice as high).
This separation from the combustion engine business is almost comparable with the spin-off of “bad banks” carried out after the financial crisis: “toxic” business areas are removed and so can no longer damage the remaining part of the company. If complete withdrawal from internal combustion engines (ICEs) is actually to take place by 2050, as announced by many national governments, Conti, Bosch, Magneti Marelli and co could be gradually leaving this risk-laden business behind them. However, if ICEs continue to play a part in the more distant future, an attractive investment opportunity could emerge. In this case, a similar rule applies for the ”last man standing” of the ICE business as for some digital business models: the winner takes it all.
The anticipated downfall of the combustion engine is being exacerbated by the total focus on CASE technologies. Traditional innovation fields for car interiors, exteriors, powertrain or chassis are disappearing from public discussion. Anything without the attributes associated with artificial intelligence, cybersecurity, Big Data, autonomous driving features or blockchain is hardly noticed. It seems that the development and survival of the car industry will only be possible with the help of digital solutions.
The following comparison shows just how big the difference between “digital” and “traditional” has grown. In the years 2017/18, the start-up WayRay, a manufacturer of holograph-enhanced reality technologies and user interfaces, was able to raise venture capital amounting to $98 million. The company currently has 50 employees and a turnover of $3.5 million. Last year the supplier Proseat (seat cushion maker, turnover of €291 million and 2,100 employees) was sold to a Japanese competitor and valued at around €45 million. Based on the sales multiple, WayRay was valued at a factor of 180 times higher than Proseat. The rift between CASE or start-ups and traditional modules or suppliers could hardly be wider.
For years now, large supplier groups have been earning higher returns than medium-sized businesses (8 percent EBIT margin in comparison with around 6 percent) and they show stronger growth. The consolidation process for the whole car supplier industry is continuing. In the Global Top 100 survey, Berylls estimates that a 60 percent share of total sales will go to the 100 largest suppliers by 2025. The share is currently just over 50 percent. The large supplier groups have a more global structure and easier access to the capital markets. They also have more competitive cost structures because they have sites in low-cost countries, and they invest large sums of money in the development of CASE technologies or buy themselves the necessary skills through company takeovers.
Medium-sized businesses, meanwhile, have their agility and entrepreneurship, their specialization in niche areas and their cost awareness to enable them to hold their ground as suppliers.
Will the fractures running through the auto supplier industry be made more permanent in the next few years – will the differences between the two groups of companies increase? From what we know today, traditional and digital business models are moving away from each other with increasing speed. But this does not mean that traditional business models are heading for immediate disaster; rather that new opportunities are presenting themselves for the remaining market participants in traditional areas.
On the one hand this is because the number of competitors is reducing through market exits, and the remaining cake, although smaller, will be shared between fewer people. On the other hand it is due to continuing high numbers of combustion engines being made in the medium and long term: those condemned to death might live longer than expected after all.
Dr. Jan Dannenberg (1962) has been a consultant for the automotive industry since 1990 and became a founding partner of Berylls Strategy Advisors in May 2011. Until spring 2011, he worked with Mercer Management Consulting and Oliver Wyman in Munich, Germany, on international projects – for five years as Associate Partner, and another three years as Partner. He is a recognized specialist in innovation and brand management in the automotive industry, and primarily advises suppliers and investors on strategy, M&A and performance improvement. In addition he is Managing Director at Berylls Equity Partners, an investment company that specializes on mobility enterprises.
Bachelor of Arts in economics at Stanford University, USA; business administration and doctorate degree at the University of Bamberg, Germany.
DACH Automobilindustrie
DACH Automotive Industry
10-year period of sustained growth and record results in the car supply industry has come to an end. The digital revolution, OEMs’ customer focus, and the expansion of automotive supply chains around infrastructure provision and mobility operations are all dramatically changing the economics for suppliers. Berylls has identified eight challenges to which every car supplier CEO needs to respond:
The car industry used to exercise tight discipline in its supply system, with clear structures along the whole chain, good planning reliability and solid forecasting, as well as reliable relationships. VUCA, or Volatility, Uncertainty, Complexity and Ambiguity, in today’s auto industry has resulted in massive disruption to the established supply system. VUCA forces are increasing significantly, making forecasting more difficult or even impossible. Management based on experience, stability and certainty is also made more difficult. Minor unplanned deviations can have a major impact on suppliers and lead to a chain reaction along the value creation process.
CEOs need to create an organizational and management model to reliably manage their companies against this backdrop of VUCA.
The years 2010 to 2018 were golden ones for the car supply industry, marked by sustained growth, widespread cost controls, strengthening of equity structures, solid financing and improved competitiveness. But the next five years will be very different, with disproportionally higher costs to contend with – the result of wage increases in the east, acquisitions in the west and rising prices for raw materials – alongside a reduction in productivity improvements. Financing will be more difficult, too – with higher interest rates and the car industry viewed by banks as a “crisis industry.” The period will see increased complexity in customer profiles, limitations on globalization (increasing logistics costs) and a requirement for high investment in innovation. The average EBIT margin of 8 percent for supply enterprises and 6-7 percent for medium-sized companies will shrink to around 5 percent by 2025.
CEOs need to switch to “sustained restructuring mode” to secure the operating efficiency of their highly complex value creation systems in an ever-changing world.
CASE (connected, autonomous, shared and electric) vehicle technologies are at the heart of change in mobility services. Because of their systemic interlinkages, strong functional improvement of the “mobility” product and high levels of intervention in existing solutions, their development, production and implementation are expensive and lengthy. CASE is expensive and up to now has delivered few – if any – financial improvements for companies in the car industry. This will not change in the coming decade; investments in the development of CASE technologies will run into double-figure billions. At the same time value is flowing out of the traditional profit sources, especially the internal combustion engine (ICE).
New developments by OEMs are being suspended, investments are not being made, financial resources are getting scarce. The balancing act between years of loss-making investments in CASE technologies and non-existent profits from the traditional business can no longer be managed. The losers in this development are ICE-dependent companies (which still represent 25 to 30 percent of value creation in the car industry), traditional low-tech suppliers and the typical medium-sized businesses which can no longer afford tough and risky business. On the other hand, the winners are the large enterprises (such as Bosch, Conti and ZF), car suppliers in the CASE field, new mobility start-ups and niche specialists.
CEOs need to leave behind former approaches, develop new business models to participate in the change in the car industry initiated by CASE, and at the same time tackle high numbers of fundamental innovations with long amortization times against a backdrop of faltering core businesses.
Competition in the supplier industry has always been merciless. Weak suppliers are rapidly sifted out according to the “survival of the fittest”. But this was happening within a stable economic system. The sustained and continuous development that has made the car industry and its suppliers highly innovative was based on a system in which any changes would be financed from the system itself. Innovations would be introduced into the market in small steps and skills would be built up gradually.
However, that system has now ruptured. A recent Berylls survey of 1,000 mobility start-ups shows over in the past five years, more than €180 billion has been invested in mobility venture capital. During the same period, only about half that amount was spent on investment in research and advance development for traditional automobile players.
Start-ups are looking more for disruptive innovations than revolutionary developments: a complete car from a 3D printer, cars which hover above ground, flying vehicles, zero-waste cars etc. These visionary business models coupled with absolutely “infinite” financial and intellectual resources are now clashing in a competition for the best mobility solution of the future, creating a clash of cultures with established suppliers.
CEOs need to assess two things: the risks posed to their business models by tech start-ups with disruptive approaches and the opportunities these bring from which their companies can profit.
In developed societies, the disadvantages of individual mobility are becoming more and more apparent: unsustainable use of natural resources, traffic accidents, time wasted in traffic jams and pollution (air, noise and water). The car is increasingly the scapegoat for all these problems and young people are turning away from it. Other industries and careers – and the companies associated with them – are gaining social prestige and attracting talent away from the erstwhile flagship auto industry.
CEOs need to make their companies, and indeed the whole car industry, attractive again to continue attracting the best talent.
The collaboration between OEMs and suppliers over the past 30 years has never been co-operative, marked by cost pressure, supplier-customer relations and tough competition. This is not going to change in the future. However, system-relevant players in specific areas, and in areas which are critical for OEMs, are the exception. Because of VUCA and the enormous upheaval going on in the sector, it is almost impossible for OEMs to maintain reliable and stable relationships with their suppliers. The once clear and – to a certain degree – predictable future is dissolving and reliability is declining rapidly. The result is that production start-ups are delayed, vehicle projects are suddenly cancelled, quantities are considerably less than planned, or they increase significantly, specifications are changed at the last minute, and commercial agreements are broken.
In parallel to this, completely new customer relationships are developing with tech start-ups or Asian start-up OEMs, who have little or no knowledge of the mechanisms of the car industry (and possibly do not even want to acquire any). The tectonic changes began a long time ago; Asian and in particular Chinese OEMs, combined with the Chinese automobile market – which has grown in importance because of its size – are bringing about a shift in the balance of power. China has replaced Europe, Japan or the US as the measure of all things for the car industry. Will Daimler, BMW or Audi become the Telefunken, Grundigs and DUALS of the 2020s?
CEOs need to adapt their companies to the new global balance of power when it comes to interacting with their customers.
The whole balance of power in the mobility industry is shifting to China and Asia more broadly. Every third car is produced in China. In future China will be growing twice as fast as the other core markets. In relation to future technology for e-mobility, growth and market penetration are already higher in China than in the rest of the world. There is also great willingness to invest in new OEM markets and mobility start-ups in China. Furthermore, China is buying out suppliers in hi-tech countries; takeovers of western OEMs are not excluded. State economic policy has defined the mobility industry as a key industry and is supporting its advancement. In short, China is set to become the “North Star” of key markets for OEMs. For the traditional car industry this means that they need to become more Chinese. And that goes for all aspects of their own business model.
CEOs need to bridge the gap between the build-up of skills in China and the securing of skills in the west.
The whole of the automotive value creation system is based on increasingly smooth and efficient processes: zero PPMs, JIT/JIS deliveries, simultaneous engineering, and so on. And this system has to work all over the world. Target prices for components are calculated on the basis of organizations functioning “perfectly.” The reality looks different: production start-up problems, quality costs, overtime caused by interface problems and high staff turnover in BCC countries. The majority of car suppliers have clear deficits in their business systems because, for the most part, things do NOT run perfectly.
CEOs need to establish high-performance organizations which are “best in class” at fulfilling all customer requirements, while at the same time ensuring profitability.
Our outlook in summary? The last 10 years were a piece of cake compared to the challenging agenda of the next 10.
Dr. Jan Dannenberg (1962) has been a consultant for the automotive industry since 1990 and became a founding partner of Berylls Strategy Advisors in May 2011. Until spring 2011, he worked with Mercer Management Consulting and Oliver Wyman in Munich, Germany, on international projects – for five years as Associate Partner, and another three years as Partner. He is a recognized specialist in innovation and brand management in the automotive industry, and primarily advises suppliers and investors on strategy, M&A and performance improvement. In addition he is Managing Director at Berylls Equity Partners, an investment company that specializes on mobility enterprises.
Bachelor of Arts in economics at Stanford University, USA; business administration and doctorate degree at the University of Bamberg, Germany.
DACH Automobilindustrie
DACH Automotive Industry
ndeterred by talk of the end of the combustion engine and the possibility of autonomous taxi fleets – and with supposedly dwindling enthusiasm for cars in Europe – the worldwide 100 largest suppliers are again looking back on a successful business year. However, new competition looms and this will ensure movement, especially in the lower rankings.
To gain an overview of the 10 largest international car suppliers of the past year, it is enough to take a look at the Top 100 of 2016: there were no promotions and no demotions among the leaders in the past year. Bosch is unchallenged in first position, with €47.4 billion in turnover (company area – Mobility Solutions), followed by Continental (€44 billion) and Denso (converted to €36.4 billion).
The top three are stubbornly defending their positions and have occupied these rankings in Berylls’ list of Top 100 suppliers for the past two years. However, compared with the previous year, the distance between them and the occupant of fourth position (€2.9 billion in turnover) has grown markedly (2016: €1.7 billion). The reason for the top three’s success is the fact that globally very few cars leave the production line without any components supplied by these leading players. And this applies whether they are budget cars or luxury limousines, electric vehicles or conventionally powered models.
A glance at the broader Top 100 table reveals a divided picture: declines in sales can be identified in many places. Eight companies out of the Top 20 show negative sales developments, particularly Asian and American companies. However, it is not poor performance that is responsible for this, but particularly severe exchange-rate effects in 2017. The results of Berylls’ Top 100 are shown in euros, and all other relevant currencies lost value significantly against this over the period. The dollar was hit especially hard, and on the reference date of December 31, 2017, it lost more than 12 percent of its value against the euro. It is very unusual for all exchange rates to fall against the euro, and this was last seen in 2013.
In the current survey, the average increase in turnover among all suppliers was only 0.9 percent. In 2016 – a year when the dollar was considerably stronger – it was about 6 percent. If the exchange rate effect is removed, the supplier industry can look back on an average turnover growth of 8.6 percent – so on that basis, turnover growth strengthened in the past year.
For German suppliers in particular, things were running smoothly in 2017. There are 18 German companies in the Top 100. Knorr-Bremse (braking systems) is represented again, at number 87, after a sales increase of 16 percent. Freudenberg is among the big winners, with a jump in position from 84 to 60 after their full consolidation of the former joint venture, Vibracoustics. On average, German suppliers moved up five places in the rankings in the past year. One reason for this is the continuing innovation power of the Germans. For an example, we just need to look back at the number of patents applied for from 2010 to 2017 for technologies associated with autonomous driving. Here Bosch reigns supreme, ranked first with 958 applications, followed by Audi with 516 patents, and Continental third with 439 patents. Neither Asian nor American suppliers are ranked among the best 10 by this measure.
If we look at the other European suppliers we see a similarly positive picture, with one exception: IAC (International Automotive Components), an interior components specialist with American roots and its headquarters in Luxembourg. The company belongs to the US financial investor Wilbur Ross, and in 2017 it fell 21 places to rank at number 66. IAC had to absorb a sales collapse of 35.5 percent. Despite this, the company was able to announce the completion of a new round of financing in April 2018 and win over a new minority shareholder, Gamut Capital Management. According to its own reports, it had bottomed out at that point. GM also named IAC “Supplier of the Year” in 2017, but this was likely not much of a comfort.
The company Grupo Antolin (ranked 52) also recorded a slight sales decline, following a significant rise the previous year. The 2016 numbers were skewed by the takeover of Magna Interiors that year.
So up until now, the traditional car industry has generated good to very good sales. The so-called tipping point for combustion engines has not actually been reached: globally, components for conventional drive systems are still in high demand. We can assume that this situation is not going to change overnight. Even if the odd established brand such as DS, Smart or Volvo turn to electric drivetrains alongside newcomers like Byton, in 2025 the majority of new cars will still be rolling off the production lines with internal combustion engines (ICEs). The development plans of the Volkswagen Group are an important indicator for this. The company plans to sell 13 million cars globally in 2025, and up to 30 percent will be electric. So around 10 million models with petrol, diesel or gas engines will still be being produced. This forecast may apply to the other mass car producers, too.
However, suppliers are increasingly adapting to the electrification of mobility. One way the major suppliers are managing to do this is by demerging whole business areas which do not belong in the portfolio in the long term, and buying where there are gaps to be closed in future production. One example is Continental’s joint venture with Osram, which is meant to work on innovative light and laser technology for autonomous vehicles. Their goal is the development of intelligent light and sensor systems for the mobility of the future. These are meant to secure the communication of robo-cars (C2C) with each other, but also with other road users (C2X).
The recent takeover of the Austrian lighting specialist ZKW by the electronics giant LG for €1.1 billion shows the future significance of light – the most important driving assistance system of all. This was the Korean group’s biggest takeover deal and more than 9,000 employees were affected worldwide.
Interestingly, companies making conventional products that do not fall within the CASE (connected autonomous, shared and electric vehicles) boom and whose importance will decline in line with the combustion engine, are still able to find buyers. Bosch had no problem finding a buyer for its starter-generators business, or for the Bosch Mahle turbo systems area. These divisions were bought by Chinese investors or suppliers.
Chinese suppliers are gaining in importance, not least through transactions like these. Their number in the Top 100 has increased to four companies. Two of them have been on the list for years: Weichai Power (ranked 17, a producer of diesel engines among other things, shareholder with KION in Linde Hydraulics) and Yanfeng Automotive Interiors (ranked 33, formerly the interiors business of Johnson Controls and a producer of interior components). These two are joined by Citic Dicastal (ranked 74, producer of aluminum die-casting components and alloy rims) and Ningbo Joyson Electronics (ranked 75).
Chinese suppliers recorded huge growth rates in the past year: Weichai increased by 68 percent and Ningbo can look back on an increase of nearly 31 percent. Both are blue-chip companies, well fueled by state programs in China.
However, behind the rise of Ningbo lies the fall of Takata. In 2016, the passenger systems specialist had a solid middle ranking at number 51 – then faulty airbags resulted in the biggest product recall of all time and insolvency for the company. So the Japanese manufacturer disappeared from the survey and Ningbo Joyson took the stage. The Chinese company, only founded in 2004, has owned the US supplier Key Safety Systems (KSS) since 2016, which then took over Takata. Joyson itself produces electronic components such as control units for air-conditioning but also charging controllers for electric cars and steering wheels; the German premium manufacturers are among its customers.
An analysis by Berylls Strategy Advisors suggests that there could be significantly more Chinese companies in the Top 100 soon. The analysis examines the Chinese supplier market, where, perhaps unnoticed, new champions are developing. Especially promising are the Wanxiang-Conglomerate (suppliers of products including steering columns, drive shafts and front axle modules), but also the Minth Group, which is already producing interior and exterior vehicle components for international customers. The rechargeable battery producers CATL and BYD are also making their way up onto the list of the world’s 100 biggest suppliers.
To join this club, companies had to achieve a minimum turnover of €2.6 billion in 2017; the threshold was only 100 million and not far above the 2016 ranking. But a company needed to have had a strong year to join the Top 100 again and Japanese suppliers did manage to achieve this feat. With 27 representatives, they are again the biggest group in the Top 100: five companies even made it to the Top 20. The profitability of the Japanese is at the same level as in the previous year, even if the group is making a considerably worse impression in the rankings. The Yen carries the main responsibility for this, as it fell by 9 percent against the euro. If we disregard any exchange rate effects, only two companies (Yasaki, ranked 19, and Calsonic, ranked 32) recorded a decline in sales.
In South Korea, the situation looked quite different in 2017. It was a difficult year for the country’s suppliers, and in the end six out of seven companies reported falling profitability. Hankook Tyres (ranked 50) and Hyundai Mobis (ranked 7) were particularly hard hit, but Hankook was able to increase turnover slightly and even improve its overall ranking by two places.
Profitability was overwhelmingly in decline for the tire producers represented in the ranking, although if turnover is drawn up in local currency, tire producers are in the black.
The US dollar, considerably weaker against the euro, masked the success of American suppliers in the past year. There were even a few cases of sales growth far exceeding the average. The past year was particularly positive for American Axle, with an increase of 59 percent and a jump in the rankings from 65 to 51. The background for this is the company’s takeover of Metaldyne (supplier of silencers, exhaust parts and drive components), with 4,000 employees.
Much of the movement among US suppliers is due to continuing portfolio adaptions to future challenges. One example of this is the splitting up of Delphi into Delphi Technologies (focused on the production of components for traditional powertrains) and Aptiv (focused on components for new mobility solutions and connectivity). So Delphi drops out of the Top 20, but the spin-off Aptiv is ranked at 21 and even the smaller offshoot, Delphi Technologies, is at 62 with a turnover of €4 billion.
The wheel of takeovers and spin-offs has again been turning more quickly in 2017 than in the previous year and there is strong evidence that this will continue in 2018. The big players’ well-filled coffers and the general push to get even more involved in the digitalization of the automobile world indicate that 2018 will also be marked by quite major spin-offs and takeovers.
Creative start-ups wanting to join in with, and make their mark on, future mobility are also growing in importance. Their turnover in euros may be far below the Top 100 threshold of €2.6 billion, but their influence in the supplier industry is increasing in leaps and bounds. The Top 10 among the Silicon Valley start-ups (including Smartdrive, Greenroad, lytx, inthinc, nuTonomy, CRUISE) specializing in camera-based systems, driver attention and autonomous driving have raised €800 million to date, according to a recent M&A survey by Berylls Strategy Advisors. The Top 15 start-ups for car sharing have raised around €700 million (source: Berylls M&A Survey).
Financial backers increasingly include Tier 1 suppliers, who used to be more reserved about participating, as well as venture capital companies. But times are changing: the well-known car suppliers are now firmly on their way toward helping to develop the car of the future. That is because they have realized that, along with the tech titans from Silicon Valley, more and more of their Chinese rivals have joined the race.
Dr. Jan Dannenberg (1962) has been a consultant for the automotive industry since 1990 and became a founding partner of Berylls Strategy Advisors in May 2011. Until spring 2011, he worked with Mercer Management Consulting and Oliver Wyman in Munich, Germany, on international projects – for five years as Associate Partner, and another three years as Partner. He is a recognized specialist in innovation and brand management in the automotive industry, and primarily advises suppliers and investors on strategy, M&A and performance improvement. In addition he is Managing Director at Berylls Equity Partners, an investment company that specializes on mobility enterprises.
Bachelor of Arts in economics at Stanford University, USA; business administration and doctorate degree at the University of Bamberg, Germany.
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