PRTM Automotive Study

Bankruptcy & Consolidation in the Global Automotive Supply IndustryA PRTM Study of the Winning and Losing Auto Suppliers

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 fi nancial and quali-tative criteria, Bankruptcy & Consolidation in the Global Automotive Supply Industry assesses trends within the sector and identifi es 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 signifi cant shift in the automotive supply chain. Our fi ndings indicate:

■ The number of automotive supplier bankrupt-cies has grown signifi cantly since 2007 and is continuing to grow.

■ 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.

■ Global 100 European suppliers and Chinese suppliers will be among the top global consolidators.

■ Several large Global 100 North American suppliers are currently at risk of going bankrupt.

■ Only one U.S. supplier is among the top 10 potential global consolidators, while two Chinese suppliers are on the list.

■ The chassis and electronics sectors will experience the strongest bankruptcy and mergers and acquisi-tions activity.

■ 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.

2 |

bankruptcy & consolidation in the global automotive supply industry

Regional Factors

European and Chinese suppliers will be the major industry consolidators. Based on our analysis of various fi nancial and qualitative criteria, companies from these regions scored, on average, the highest and are in the best position to become buyers (Figure 1).

By contrast, North America’s 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. China’s auto suppliers grew at an average compounded rate of about 20% from 2004 to 2008—more than double the rate of Indian, Japanese, and European suppliers, and nearly seven times that of North Amer-ican suppliers (Figure 2).

The fi 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 outfl ow.

Current and predicted global vehicle sales volume paints a clear backdrop of how badly car makers have been hit—and 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 year—a 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. China’s vehicle sales, for example, are estimated to increase by more than 50% from 2008 levels of approximately 9.5 million units within the next fi ve years. Given the incred-

ible growth during the last few months—more than 30%—it’s 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 signifi cant scenarios point to:

■ An accelerated pace of bankruptcy fi lings

■ An industry-wide consolidation led by large Euro-pean and Chinese suppliers

■ A noticeable shift in winners and losers on a regional level

Industry Backdrop

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FIGURE 1: Supplier Scores by Region

FIGURE 2: Supplier Financial Results by Region

RegionNumber of

CompaniesBuyer 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

CAGR

‘04–’08

Avg. 2008

($B)

CAGR

‘04–’08

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

4 |


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 PRTM’s 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 likely consolidation front-runners.

Chinese suppliers, operating in a booming market and, in some cases, benefi ting from central govern-ment support, have consistently improved their global market share in recent years and are displaying improved profi tability. Some are now strong enough

to acquire other companies. Guangzhou Automotive Components, a division of the highly profi table 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 defi ned as companies that have the fi nancial wherewithal to lead consolidation and buy weaker companies or competi-tors’ assets. Losers are companies that will fi le for bankruptcy, divest assets because of fi nancial troubles, or go out of business.

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0

2

4

6

8

10

Co

nso

lid

ati

on

Sco

re*

Guangz

hou Autom

obile

Group

Denso

Toyota

Boshoku ZF

Johnson M

atthey

SKFBASF

PPG

Weic

hai Power

Tata G

roup

Aisin Seik

iHell

a

Cumm

ins

Mag

na Int’l

Nifco

Aichi M

achine I

ndustry

NSK

TS Tech

Bentel

er

DuPont

Alps Elec

tric

Tomkin

s

Gentex

Federa

l-Mogu

l

Mah

le

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 0–10. See Study Methodology.

has also formed joint ventures with Toyota Motor Corp. and Honda Motor Co. Ltd. in China, giving it more infl uence 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 FAWER—which 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 profi table company. It has access to modern technology via FAW’s 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 diversifi ed 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 are Toyota 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 signifi -cant way.

FIGURE 3: Top 25 Suppliers by Consolidation Score

6 |


The study also found there is likely to be an increase in bankruptcy fi 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 fi lings in 2008 were roughly double the number seen in 2007. And, by our estimate, 2009 fi lings will surpass 2008 levels signifi cantly, since 2009 year-to-date bankruptcies have already reached prior-year levels. We anticipate that large North 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 fi nancial positions.

Prominent large North American suppliers currently in bankruptcy—Visteon Corp., Metaldyne Corp., Hayes Lemmerz International Inc., and Lear Corp.—also appear on PRTM’s 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 face potential bankruptcy risk include: American Axle & Manufacturing Holdings Inc., ArvinMeritor Inc., TRW Automotive Holdings Corp., Flex-N-Gate Corp.,

0

5

10

15

20

25

30

35

40

Nu

mb

er o

f B

ankr

up

tcy

Filin

gs

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 Supplier Bankruptcies, 2005–2009

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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 fi rms that have fi nancial diffi culties stemming from the downward slide in consumer electronics purchases may decide to shed their automotive businesses. This includes compa-nies such as Clarion Co., Ltd., Alps Electronics Co. Ltd., and Koninklijke Philips Electronics NV.

Schaeffl er KG, a German producer of bearings and many other components, is a special case. Previously in good fi nancial health, Schaeffl er encountered fi nancial diffi culties as a result of acquiring Continental AG. It is likely that Schaeffl er will try to divest several busi-nesses, like Conti’s 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

Ban

kru

ptc

y S

core

*

Delphi

Ameri

can A

xle

Visteo

n

Hayes

Lem

merz

Acerte

c

Kumho Tire

Chasys

Diamond Elec

tric

Lear

Brembo

Clarion

ArvinM

eritor

Faurec

ia

Schae

ffler/C

onti

Wilh

elm Karm

ann

TRW

Cie Auto

Flex-N

-Gate

Kasai

Kogyo

Meta

ldyne

Tennec

oShilo

hVale

oBeh

r

EDAG

10

9

8

7

6

5

4

3

2

1

0

60

50

40

30

20

10

0

US companies

Others

Supplier currently or recently in bankruptcy

*Company's risk of bankruptcy, based on score of 0–10. See Study Methodology.

8 |


Chassis Electrical Interior Powertrain Exterior Body

Companies in sector

Companies in strong acquiring position

120

100

80

60

40

20

0

Nu

mb

er o

f S

up

plier

s

Str

eng

th a

s a

Co

nso

lid

ato

r

Toyota BoshokuDenso

ZFHella

BASFSKF

PPG

Alsin SeikiCummins

Magna Int’lTS TECH

NSK Benteler

Du PontFederal-Mogul

Hyundai MobisSaint Gobain

MarneBayer

TimkenSumitomo Electric

Magneti Marelli

JTEKTEaton

JCI

MetaldyneMahle

Alpine ElectronicsTI Group Auto.

Freescale SemiconductorBrose Linamar

Flex-N-Gate BehrClarion

Schaeffler Conti Valeo

TennecoLear

Wilhelm KarmannFaurecia TRW

Martinrea 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

Sen

siti

vity

Sco

re

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 confi gurations. In 2010, electrical and electronics will account for 40% of a car’s 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 buyers—M&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% were chassis 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 specifi c consolidation scenarios that play out will be very closely tied to the following factors: strategies of the specifi c 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 fi 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

mb

er o

f C

om

pan

ies

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 fi 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. Delphi’s 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-dyne’s chassis business was similarly purchased by private equity fi rm The Carlyle Group as part of the troubled company’s Chapter 11 restructuring in August. Strong potential buyers include Chinese fi rms like Guangzhou Automotive and FAWER, as well as Sona Group Ltd., India’s 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 fi rst wave of restructuring and the rate of bankruptcy fi 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&A—the next phase of industry consolidation.

In our view, European and Chinese suppliers will gain 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 PRTM’s expectation of increased activity in these areas.

As part of the study, PRTM identifi ed 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 fi nancially-troubled suppliers and the potential buyers are shown in Figure 10. In the tires subsystem, for example, Schaeffl er 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

Div

esto

r S

core

10

8

6

4

2

0

12 |


The 2009 PRTM study included 357 global suppliers from North America, Europe, South America, China, India, Japan, and South Korea. The study took into account more than 20 fi nancial and qualitative criteria in eight main categories. Based on these criteria, a score was developed to rate each company’s 1) risk of bankruptcy or 2) ability to acquire other companies. The categories are as follows:

■ 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)

■ Capital structure and health (a measurement of a company’s short- and long-term capital struc-ture, market solvency, and degree of corporate distress)

■ Commodity structure (an assessment of the company’s commodity portfolio)

■ Business health (an evaluation of EBITDA growth, cash fl ow, sales and profi ts relative to assets, union participation, litigation, and environmental issues)

■ Business fl exibility (measured against R&D and capital intensity and manufacturing fl exibility)

■ Customer base (a review of non-automotive business, regional sales, business with bankrupt OEMs, and percent of revenue from car vs. truck business)

■ Ownership structure and manage-ment (evaluation of the company’s historic acquisitiveness, senior management strategy, and the favorability of structure to acquisi-tion, divestiture, and/or sale)

■ Pricing (EBITDA multiple and price/earnings ratio)

Stu

dy

Meth

od

olo

gy

Inc., which is a good fi 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-à-vis their competitors will be well positioned to prevail in the years ahead.

Since 1976, PRTM has created a competitive advantage for its clients by changing the way companies operate. PRTM’s management consultants work with senior executives to develop and implement innovative operational strategies that deliver breakthrough results. The fi rm is a leader in operational strategy, supply chain, product development, and customer value management. PRTM has 19 offi ces worldwide and serves major industry and global public sectors.

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PRTM Automotive Study

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