Automotive Global Value Chain

The Rise of Mega Suppliers

Wilson Kia Onn Wong

• Publisher: Taylor & Francis
• Year: 2017
• Print ISBN: 9780367374723
• eBook ISBN: 9781315300979
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Today, some suppliers have grown increasingly powerful and in certain cases, earn revenues that rival or even exceed that of their automaker clients. In the pre-globalisation period, automakers wielded absolute power over their significantly smaller suppliers. This book reveals the upending of this relationship, with the gradual shift in the balance of power from automakers to their suppliers in this era of globalisation.

The book examines how suppliers in the global tyres, seats, constant velocity joints (hereafter 'CVJs'), braking systems and automotive semiconductor industries have evolved into powerful oligopolies through a mix of acquisition and organic growth strategies. It also highlights how joint ventures could be strategically deployed as springboards to acquisition, as they enable firms to familiarise themselves with their partners' markets and operations. Moreover, the book analyses the disruption stirred by the entry of well-resourced technology titans into this industry and their inevitable clash with the traditional incumbents.

This book is an invaluable reference for anyone interested in learning more about the automakers' and now their suppliers' relentless quest to create market-dominating intelligent driving systems.

1 Introduction

1. Research objectives

The arrival of the automobile has been one of the defining hallmarks of the twentieth century. With the proliferation of the automobile through the pioneering mass production efforts of Henry Ford, industrial titans such as Volkswagen, Ford, Toyota and General Motors (hereafter ‘GM’) have emerged in this relentless race to move the world’s growing masses. After decades of consolidation, these firms have become the leaders of an exclusive coterie of automakers (also known drolly as ‘assemblers’), churning an approximate 90.1 million vehicles annually (International Organization of Motor Vehicle Manufacturers, 2015). Despite the generally misperceived mature nature of this industry, the global production of vehicles is expected to reach a staggering 110 million by 2021; as this book unfolds, it would become apparent that the industry is on the cusp of a major technological revolution, incorporating while concurrently advancing the development of the various emerging electronics, networking, communications, artificial intelligence and microchip technologies. Today the automotive industry is valued to be in excess of US$2 trillion and is directly and indirectly responsible for the employment of at least 50 million people worldwide (PwC Autofacts, 2015; Reuters, 2009; First Research, 2015).

The automotive industry’s value chain also stretches far beyond public perception, as it extends from gargantuan automakers headquartered in affluent developed countries to the humble rubber suppliers spread across Indonesia, Thailand and Malaysia. This industry is at once associated with our immediate future (e.g., hyper-efficient intelligent electric vehicles, impeccable driverless technology and artificial intelligence powered safety systems) yet firmly rooted in our past through the seemingly backward rubber industry. In the past few decades, a great deal of research and media attention has been focused on the global automotive industry and their leading brands (i.e., Volkswagen, Ford, Toyota and GM) whose products now choke the world’s ever-increasing roads and expressways. However, relatively scant research has been done on the automotive components industry, which over the decades has become the bedrock of the industry. Today, there are about 16 automakers that sell more than a million cars annually. However, these 16 carmakers procure their parts from about ten global suppliers, which are expected to provide unrelenting support to their increasingly multinational empires, with their ever-expanding production and R&D facilities that bestride the globe.

Over the past 30 years, the automotive components suppliers have steadily assumed ownership over the actual vehicle making process, reducing the automakers to mere assemblers, more focused on what they perceive to be higher value-added activities such as branding, marketing and international business expansion. This trend has resulted in the automotive components players becoming responsible for 85 percent of the value of today’s automobile (up from 65 percent a decade or two earlier), leaving only the production of engines in the purview of their automaker clients (Foy, 2014; Bratzel, 2011). More importantly, the carmakers by outsourcing the production of increasingly important automotive semiconductors (the ‘brains’ of the vehicle) to a few select suppliers may already have ceded the future leadership of this industry; today’s vehicles are experiencing unprecedented computerisation, spurred by the introduction of electric and autonomous vehicle technologies. These suppliers and not their automaker clients are now the primary forces driving the revolution in automotive technology.

Even non-traditional automotive players such as Intel, Apple and Google, enticed by the potentially exponential profits in driverless car systems and related technology (i.e., the microchips residing in them) are making considerable headway in the development of such technologies. The automakers are in danger of becoming mere assemblers, the ‘Foxconns’ of the automotive industry¹ (McGee, 2016). The automotive components suppliers have become irrepressible entities breaking free from the control of their automaker paymasters. Through a ruthless cycle of consolidation, many of these suppliers are now multinationals in their own right, with multi-billion-dollar revenues and R&D expenditures. For instance, the world’s leading automotive components supplier, Robert Bosch GmbH (hereafter ‘Bosch’) posted 2015 revenues of €70.6 billion, supported by R&D spend of €6.378 billion, simply overshadowing key automaker clients such as Renault in these aspects; in 2015, Renault recorded revenues of €45.3 billion along with R&D expenditure of €2.075 billion (Bosch, 2015; Renault, 2015). In a rare display of rising supplier power, a seats supplier Magna even attempted, albeit ultimately unsuccessfully, to acquire GM’s German subsidiary, Opel in 2010. The recent spate of events suggests that the automotive industry is now possibly entering the age of the mega suppliers; an age where there is a shift in the balance of power from the automakers to their suppliers.

Like their automaker clients, the automotive components industry has also undergone significant change and consolidation over the past few decades. This state of affairs is because some suppliers were able to launch international acquisitions and forge joint ventures and strategic alliances, even in once closed markets (e.g., China). Moreover, this pace of consolidation accelerated in the 1990s, with the removal of cross-border restrictions on acquisitions in most countries. Over the past four decades, the number of components manufacturers to the automakers went from over 40,000 in 1970 to less than 5,000 in 2000, and possibly less than 3,000 by 2015 (DaimlerChrysler, 2005). With the consolidation juggernaut barrelling virtually unimpeded over this stretch of business history, one would imagine an inevitable deceleration to a relatively moderate trend in recent years. However, the pace of consolidation in today’s automotive components industry is anything but moderate. From 2010 to 2015, this seeming throwback from a bygone industrial era saw the value of mergers and acquisitions (hereafter ‘M&A’) rise from a modest US$4.4 billion to a considerable US$32.9 billion; a remarkable compound annual growth rate (hereafter ‘CAGR’) of approximately 50 percent (PwC, 2015). This book aims to address the gap in the literature with regard to the institutional change that has taken place in the global automotive components industry since the 1980s. It aims to ascertain the extent and determinants of change in industry structure (i.e., the degree of industrial concentration) in the global components industry with specific reference, to the tyres, seats, CVJs, brakes and automotive semiconductor subsectors. This book is by no means all-encompassing but focuses on what are commonly perceived as critical components in today’s vehicles.

Over the last three decades, these five subsectors were not only able to grow exponentially but also managed to secure unprecedented market power. This was largely due to the ‘cascade effect’ generated by the tremendous consolidation among the global automakers which has compelled them to actively select their most competent components suppliers, in a form of ‘industrial planning’. They pick ‘aligned suppliers’ who can support their global growth strategies and meet ever-increasing requirements in quality and service standards (e.g., lean requirements,² worldwide technical support). This strategy also enables automakers to free up resources for higher value-added activities such as marketing, next-generation R&D and international expansion. Further this cascade effect generates intense pressures for first-tier suppliers covered in this book to themselves merge and acquire, and develop leading global positions. These suppliers subsequently pass on this intense pressure to their own supplier networks (Nolan, 2008). Buffeted by the powerful forces of the cascade effect, even traditionally small third-tier suppliers (e.g., rubber suppliers in chapter 3) are compelled to merge to not only augment their ability to meet the increasingly stringent quality and service demands of their first-tier supplier customers but also to bolster their position in price negotiations. In short, the cascade effect has not only led to rising industrial concentration (i.e., forming oligopolistic and even duopolistic market structures) among the first-tier suppliers but has also spilled over to the second and third-tier suppliers (Nolan, Zhang and Liu, 2008).

The five subsectors in this book were chosen for the pivotal role they play in the automotive industry. Further, for each subsector, the top two to four companies covered in this book account for 40 percent or more of their respective markets. Rapid technological progress, along with increasing safety and environmental concerns since the 1980s has led to the deployment of increasingly sophisticated technologies to the seemingly traditional tyres, seats, CVJs and brakes subsectors. This has generated tremendous cost pressures and an ever-growing demand for economies of scale and scope. The relatively recent automotive semiconductor sector is now assuming unprecedented significance due to rising electronic content across all automotive components from brakes to tyres; the average vehicle rolling off today’s production lines has between 50 to 100 microchips, capable of processing millions of lines of code. Its increasing importance is underscored by the following statement from an industry analyst: ‘it would be easy to say the modern car is a computer on wheels, but it’s more like 30 or more computers on wheels’ (Motavalli, 2010; Pagliery, 2014). This sector has witnessed tremendous consolidation, resulting in the creation of powerful oligopolists with unprecedented market power. As evidenced in Table 1.1, the oligopolists across the five subsectors have significant market shares ranging from approximately 40 percent to nearly 80 percent of their respective markets; in the case of the CVJs subsector, it is effectively a duopoly, as only two companies control nearly two-thirds of this market, with the remaining players holding negligible stakes.

Table 1.1 2015 Market shares of leading oligopolists across the five subsectors

Subsectors	Industry Oligopolists	Combined Market Share (%)
Tyres	Bridgestone Corporation (hereafter ‘Bridgestone’), Goodyear Tire & Rubber Co (hereafter ‘Goodyear’), Michelin Group (hereafter ‘Michelin’)	38.2
Automotive Seats	Johnson Controls, Inc.* (hereafter ‘JCI’), Lear Corporation (hereafter ‘Lear’), Faurecia	77.3
CVJs	GKN Plc (hereafter ‘GKN’), NTN Corporation (hereafter ‘NTN’)	65.0
Braking Systems	Continental AG (hereafter ‘Continental’), Bosch, ZF Friedrichshafen (hereafter ‘ZF’)	76.7
Automotive Semiconductors	NXP Semiconductors N.V. (hereafter ‘NXP’), Infineon Technologies (hereafter ‘Infineon’), Renesas Electronics Corp. (hereafter ‘Renesas’), STMicroelectronics (hereafter ‘STM’)	40.4

* JCI spun off its Automotive Experience (includes seats) division in October 2016, resulting in the creation of a new company known as Adient.

Source: Company Annual Reports

The seemingly humble tyres sector is not only the largest (worth US$187.2 billion) among the five sectors covered but has also witnessed one of the fiercest takeover battles in modern corporate history. In the US alone, approximately 75 percent of tyre companies (accounting for 90 percent of the value of the US tyre subsector) experienced acquisition attempts or were compelled to restructure due to such takeover bids in the period 1982–1989; this resulted in a shift of ownership across half these US tyre companies, with the majority of them falling into foreign ownership (Chapter 3) (Mitchell and Mulherin 1996; Rajan, Volpin and Zingales, 2000). Leading tyre makers, Bridgestone and Pirelli & C. S.p.A. (hereafter ‘Pirelli’) both viewed the acquisition of US tyre maker, Firestone Tire & Rubber Company (hereafter ‘Firestone’), as critical in dominating the highly profitable US tyre market and bolstering their international presence; Bridgestone emerged the victor in this bidding war. The acquisitions strategies of tyre companies such as Bridgestone and Goodyear have also made them more than just tyre manufacturers, as they now offer comprehensive tyre management services (Chapter 3). In effect, these mega suppliers have also positioned themselves as premium solutions providers to steal a march on their rivals in this era of intensifying, oligopolistic competition.

The genesis of the global automotive seats subsector was triggered by the unprecedented outsourcing by the leading automakers and the acquisitive strategies of the then emerging seat makers (i.e., JCI (now Adient), Lear and Faurecia) to build the global machinery needed to service the surging needs of this undulating subcontracting torrent. It could be argued that the demand by the automakers for entire seating systems compelled once disparate suppliers of covers, cushions and frames to embark on acquisitions to acquire the capability to develop entire seating systems on a just-in-time basis. Further, it is doubtful that JCI, Lear and Faurecia would have been able to meet the stringent demands (includes global technical, scheduling and lean practice support) of the automakers without an aggressive acquisitions strategy. The sheer pressure by their automaker clients reverberates across the entire value chain, as first-tier suppliers are now encouraged by automakers to acquire lower-tier suppliers, as they wish to deal with only a few key suppliers (Chapter 4), freeing up time and resources for the higher value-added activities of branding, marketing and next-generational research. Despite the inherent risks involved in acquisitions, they do enable first-tier suppliers to secure some control over the technologies or raw materials that go into making their products; the risks involved are significant particularly if acquisitions are heavily financed by debt (Lear’s case in Chapter 4). It is this very same desire for control that compels some tyre companies (e.g., Bri...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of figures
• List of tables
• Foreword
• 1 Introduction
• 2 The global automobile industry
• 3 The global tyres sector
• 4 The global automotive seats industry
• 5 The global CVJs industry
• 6 The global braking systems industry
• 7 The global automotive semiconductor business
• 8 Comparative analysis of the five components subsectors
• 9 Conclusion and further research
• Index