Survival is joint effort for parts suppliers

by Stuart Penson

Scores of medium-sized automotive component suppliers are either merging or forming strategic alliances in a quiet revolution at the heart of German manufacturing.

Specialist suppliers from across the country are pooling their resources as they seek to compete on a national or global basis, in a trend that reflects the recent wave of consolidation in the industry they supply.

The contraction of the German supply industry is likely to accelerate this year and continue next year, much to the surprise of some analysts, who had been expecting merger activity to slow after an initial flurry.

So far this year, merger and acquisition specialist M&A International is reported to have dealt with 26 transactions. That compares with 51 for the whole of 1998, while there were just 28 takeovers in 1997.

Several factors are driving the consolidation trend. To be successful in the global market, and to meet the increasing demands of the manufacturers, the specialist suppliers are having to build up critical mass through alliances and mergers.

Many of the traditional, family-owned firms are simply not able to offer the product development services and flexibility being demanded by global customers such as DaimlerChrysler.

Today’s shorter production cycles, along with car manufacturers’ increased emphasis on catering for the needs of individual customers, are putting new strains on suppliers to the automotive industry everywhere.

Suppliers are called upon to provide complete systems, where previously they could concentrate on individual parts.

In addition, German suppliers are facing tough competition from bigger US rivals.

Add to this equation a slowing down of the car market in Europe, global overcapacity and a resulting wave of cost-cutting by the manufacturers, and the pressure on suppliers to restructure becomes irresistible.

`Germany’s automotive supply companies are under growing pressure to consolidate,’ said Anita Davisson, a corporate finance expert in the Frankfurt office of PricewaterhouseCoopers. `The wave of mergers is continuing. In 1999, takeovers and strategic alliances will alter the structure of the industry.’

German suppliers have three main routes to future survival. First, Growth through strategic alliances or mergers can build them into global players. Second, specialisation in niche markets is a (potentially more risky) option.

And third, German companies can join the global industry by being bought by existing foreign or German `mega suppliers’.

But the motor manufacturers are keen to keep a balance in the supply industry and are concerned that the consolidation may go too far.

BMW and DaimlerChrysler, for example, are understood to want to maintain some networks of medium-sized suppliers.

After all, these are the companies that, for many years, have fed Germany’s phenomenally successful car industry with some of the most innovative and best-engineered components available.

`It’s important that we keep a balance between the mega-suppliers and the regional, innovative companies,’ said one industry expert.