Supplier Universe Will Implode In The Wake Of Oe Mergers

Automotive Industries,  Jan, 2001  by Lora J. Bingham

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The auto industry's recent brush with "merger mania" was only the beginning according to Mike Burwell, a partner with Automotive Transaction Services at Pricewaterhouse Coopers. In fact, as the mergers and acquisitions at the big car companies enter a temporary lull, the real action is shifting to the supplier universe.

Three years ago, 23 car companies were major players in the market. Now there are only nine. Burwell projects there will be only five in 2010. This consolidation casts OEMs in the role of brand owners rather than brand manufacturers, so they are looking for more systems and modules from the suppliers, says Burwell. And it's forcing Tier 1 suppliers to focus on core competencies. As a result, Burwell predicts that only 25 to 30 global Tier 1 suppliers will exist in 2010, compared with the over 600 Tier 1s today. The Tier 2s also face massive consolidation in the next ten years. Burwell says the more than 10,000 Tier 2s will decrease to 600 to 800 by 2010.

Burwell sees a plethora of European Tier 1 and 2 suppliers facing intense competition from within the continent and abroad. This will likely result in several aggressive acquisitions on the part of big European Tier 1 suppliers in to quickly gain critical mass. "We see tremendous consolidation in Germany," says Burwell. The Germans are further along in sub-tiers and thus ripe for this type of action.

Another important M & A element affecting the supply chain is Asia's $1,000 to $2,000 manufacturing cost advantage over Europe and North America. Furthermore, the Asian-Pacific region is the most proficient in the small car market, so it can leverage a know-how advantage into price advantage in that market.

Price is critical because it's driving this consolidation. As car prices fall and the price of petroleum rises (petroleum-based resin products comprise a large portion of a vehicle's weight), OEMs are scrambling to find ways to lower costs. Million-unit vehicles (MUV) offer great economies of scale, but the capital investments required to increase the number of MUV platforms are prohibitive. Currently, only 16 percent of world market production occurs on an MUV platform. That number is expected to increase to 40 percent by 2005.

In the meantime, those platform changes and supplier consolidations mean hefty debt. Financial institutions are nervous about the liability of such loans, making it more difficult to execute transactions. Burwell sees cash-rich private equity players stepping in here, especially with the Tier 1s, which offer strong revenue streams.

As for the impact of e-business on this playing field, Burwell says the jury is still out, citing a need for a period of e-learning over the next few years. Thus, establishing a viable virtual supply chain will be gradual, measured in years, not months. "As the traditional limits and boundaries of the auto industry diminish, we will see some inventive play for the consumer market," says Burwell.

                          AUTOMAKER CONSOLIDATION
1997 23
2000  9
2010  5

TIER 1 CONSOLIDATION

2000 = 600+

TIER 2 CONSOLIDATION

2010 = 30

2000 = 10,000

2010 = 800

(*.)Numbers are approximations.

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