Automotive OEMs and suppliers move towards regional production

To counter the threat of global tariffs, the move towards regional automotive production and “localisation” is gathering pace. That’s the view of Tobias Schätzmüller, Managing Partner and International Head of Automotive at global corporate finance house Clearwater International, who says we are now seeing companies acquiring platforms in countries not affected by tariffs. “People are looking for supply chains which have as little transaction costs as possible, so are moving towards localisation to avoid tariffs or other trade restrictions.”

The view is echoed by Cliff Roesler, Managing Director at Clearwater International’s exclusive US partner office for the automotive sector, Angle Advisors, who says regional production is the only solution that suppliers can count on.

“With tariffs, trade wars and Brexit, slowly but surely automotive OEMs and suppliers are realising that regional production of components, and the regional manufacture of vehicles, is the only solution that has staying power. The tariff genie is out of the bottle and the direction of travel is clear.”

He adds that automation is a levelling force that is also enabling the re-shoring and regionalisation of production by offsetting low-cost labour country advantages. “Companies used to set up operations in low-cost countries for cheap labour, but that is simply no longer sustainable both economically and politically. Automation levels the playing field.”

Challenges

Schätzmüller says many factors are colliding in the global economy to put OEMs and suppliers under huge pressure. “Whether it’s US trade relationships with the rest of the world, Brexit, falling demand in China, or the technological challenges in the automotive industry, it is a mix of all these.”

you need years of investment to ensure that supply chains are working properly

Barry Chen, Managing Director of M&A Advisory at Clearwater International China, adds that because of tariffs some foreign automotive parts companies will localise production more. “We are already seeing Chinese companies thinking about setting up plants in the US to localise production, although costs are high to do this.”

However, he cautions that we are not moving to a completely localised automotive sector. “The industry is too complicated for that and there are far too many global trade relationships and internationally integrated supply chains which cannot be stopped. In a sector such as automotive you need years of investment to ensure that supply chains are working properly.”

Tariffs

That said, Roesler says tariffs are causing huge uncertainty. “A small minority of businesses are taking the necessary action to ensure productive capacity in markets where the impact of tariffs would otherwise eliminate profits, and are moving quickly to secure capacity. However, a large majority is delaying M&A completions, putting a hold on overall production strategy, and seeing how things play out.”

He says a key issue is that while tariffs may cause great pain, the ability to rapidly adapt to, or avoid, tariffs has some significant short-term obstacles. In particular he points to the Production Part Approval Process (PPAP) for automotive components. “OEMs and major suppliers need to start thinking about their PPAP. Every time you make a change to the supply chain you have to re-PPAP the whole chain. They need to be planning ahead now if they are going to start moving production into other countries.”

M&A impact

Despite these headwinds, Schätzmüller says there is still plenty of M&A activity, albeit often far more targeted than in the past.

targets have to fulfil strategic acquisition criteria

“For many years Chinese companies bought into the US and EU to acquire customer access, production and technological know-how, often outside their existing core businesses. But stricter regulations within China, and a clear strategic roadmap formulated by the government, now means that Chinese companies are only pursuing really strategic acquisitions.

“The interest on both sides is still there, but Chinese buyers have become much more selective, also given that they have achieved a technological level playing field in recent years. A few years ago it was about getting your foot in the door, now targets have to fulfil strategic acquisition criteria.”

This trend is demonstrated by a number of recent deals advised by Clearwater International including: the sale of Germany based lightweight automotive components manufacturer Finoba to Chinese state-owned enterprise Sinomach; the sale of Geiger Fertigungstechnik from KAP AG, majority-owned by Carlyle funds, to the Chinese firm Tieliu Clutch; the sale of Truck-Lite Europe to the Chinese Boao Group; and Ningbo Joyson’s acquisition of US-based Key Safety Systems.

Foreign investment

To prove the point Chen says that this year China is forecasting Foreign Direct Investment (FDI) of $100bn (€88.4bn) from foreign companies, largely from the EU and US. “The bottom line is that there is still significant inbound interest, and the Chinese economy is also still forecast to grow 6% this year. Sometimes this FDI is add-on investments by big multinationals, sometimes it is new investment from the likes of Tesla which is planning to invest $5bn (€4.4bn) in a Chinese factory.”

Examples of transactions where Clearwater International has advised Western companies on FDI in China include: the German Brose group’s JV with Dongfeng Motor Parts and Components in the area of automotive door and seat systems; Mann + Hummel’s acquisition of Bengby Haoye Filter; and the acquisition by the Spanish company Applus Idiada of Shanghai EDI Automotive Technology.

Regional production

Roesler adds that the long-term move towards regional production also spurs M&A. “Sooner or later companies will realise that regional production is the only solution they can count on. Many are already seeing this, and this is stimulating selective acquisition of capacity and modifications to global footprints.”

Schätzmüller adds that we could start seeing Chinese firms, or Western companies with operations in China, moving production out of China into other Far East countries, such as Vietnam, in order to sustain their export business. “Companies will be asking ‘how much of my product needs to be made in Vietnam so that that product is declared ‘Made in Vietnam’ rather than ‘Made in China’? Global M&A will follow as suppliers move operations into different countries.”

Future prospects

These global trends provide a challenge for many OEMs and suppliers to adapt their product and service offering, manufacturing and geographic strategies. But there remains attractive sub-segments which will fuel growth-oriented M&A activity such as components, systems and solutions in areas which are driven by the megatrends of autonomous driving, electrification, emission reduction, connectivity, and mobility solutions.

Recent examples of such deals advised by Clearwater International include the acquisition of Chinese in-car infotainment and HMI (Human Machine Interface) technology company Jiangxi Coagent by the French Faurecia group, and the majority acquisition of Chinese automotive thermal systems provider Hebei Nanfeng by Germany’s Webasto Group.

Collaboration

Furthermore, the requirement for OEMs and suppliers to invest in new technologies and mobility solutions will lead to a significant increase in collaboration and joint ventures between OEMs and suppliers in order to share know-how and development costs, and shorten time-to-market.

This is a trend we are already widely seeing, epitomised by collaborations between Ford Motor and Volkswagen with regards to autonomous and electrified vehicles, and between BMW and Daimler regards automated driving. Bosch and Daimler have also joined forces to work on a fully automated, driverless system, while Nvidia and ZF Friedrichshafen are working together in the area of AI solutions.

Other collaborations include Intel’s investment in Israel-based Mobileye, and its collaboration with Waymo to build self-driving cars. French tyre maker Michelin and automotive technology developer Faurecia have also signed a memorandum of understanding to create a joint venture to combine their fuel cell-related activities, while BMW and JLR have joined forces to develop the next generation electric drive units.

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