The buzzword of the 1980s was diversification. Corporations - even the automakers - bought up remote businesses they hoped would protect them during business downturns in their core industries.
But recent years have heard a different buzzword: Divestiture.
One major U.S. conglomerate after another jettisoned or made plans to shed its auto component operations. A few more big names may do so this year.
Cooper Industries Inc., ITT Industries Inc. and AlliedSignal Inc. - all giant auto-parts players in recent years - have either left or are arranging to leave the industry. Securities analysts who track the industry predict that other diversified concerns, including TRW Inc., Tenneco Inc. and United Technologies Corp.'s automotive group, may follow them down the divestiture trail.
'We're still only maybe 60 percent of the way through this process of rationalization in the auto-parts industry,' says Harriet Baldwin, an analyst who specializes in conglomerate coverage for BT Alex. Brown in Baltimore. 'And it's already been going on for about five years.'
Cooper sold its auto products businesses, including Champion spark plugs and Wagner lighting and brake components, to Federal-Mogul Corp. last year.
AlliedSignal sold its passenger-car brake business to Robert Bosch GmbH in 1996 and sold its seat-belt and airbag business to Breed Technologies Inc. in 1997. ITT busted up its automotive group last year, selling its electrical and brake-focused businesses and retaining a few fragments of the former ITT Automotive.
The exodus stems from four main factors: global marketing, the move toward component systems, the squeeze on margins and the maturity of the industry itself.
Perhaps the most critical factor facing major suppliers is that the industry now wants them to be competitive on a global basis. Achieving that comes down to size and economies of scale, and it is forcing many suppliers to either grow larger or get off the playing field.
'In the past, if you had just a niche position in the auto industry - as long as you had a good market share in that area - you had a strong position,' says Baldwin. 'But now the idea of having just a niche in one area is very questionable.
'If you're good at it and the returns on investment are decent -and you can be a dominant player -*companies are staying in that area and buying more of it.'
John Casesa, auto analyst for Schroder & Co. in New York, says that in the eyes of Wall Street, this is a good time to put such deals together.
Many potential acquisitions, Casesa says, 'are still pretty attractive right now, so now's the time that some companies want to build their presence in a market.'
ITT Automotive's move to sell off its brake business worked out well for Continental AG, he says, because it enabled Continental to move into a 'wheel-corner' strategy. 'They already make the tires and the wheels, and they bought brake components from ITT with the intention of supplying that whole corner of the car.'
THE WHOLE CORNER
The second factor behind some divestitures is that automakers are now asking suppliers to deliver more and more parts. A supplier that cannot deliver multi-part modules and even entire vehicle systems is out of step with what many automakers are now seeking. And companies that do not have the will or the wealth to pair up with other firms to create those systems may have to sell out to someone who does.
'It takes scale to afford the investment needed to develop those modules, because they really can be big chunks of the car,' Casesa says.
Meanwhile, it is getting tougher to make a buck in the auto parts field. Margins are being squeezed in the quest for lower vehicle production costs.
'The price pressure from OEMs continues to go up, and the risk in getting financial returns from the business is going up, so it's getting tougher to make a buck,' Casesa says.
'It's a tough business,' agrees David Cole, director of the University of Michigan's Office for the Study of Automotive Transpor-tation. 'And the margins aren't as good as in many other businesses. So conglomerates figure they'll take their investment dollars and put them elsewhere.'
The fact that they are doing so now is also significant, notes Greg Salchow, auto-parts analyst for Roney Capital in Detroit. Some of those conglomerates believe the industry has defied gravity too long, and that a cyclical downturn is due.
Or just as bad, when the current growth opportunities in light trucks, emerging markets and exports are exhausted, the mature industry will stagnate. Thus, the conglomerates exit.
'In a stagnant or perhaps declining market, suppliers with relatively higher debt loads are going to find it harder to compete,' Salchow says.
Speculation about the next big divestiture centers around TRW, Tenneco and UT Automotive in part, says Casesa, 'because they haven't been definitive about their plans' for their automotive operations.
'And there are a lot of buyers out there,' he observes.
For its part, Tenneco has said it is looking at several options, including a spinoff, merger or sale. TRW Inc. President Peter Hellman has said some of its auto businesses could be sold if margins do not improve. United Technologies Corp. has said only that the company does not comment on possible acquisitions or divestitures.
Yet Baldwin believes that most of this trend has played itself out. Some of the largest remaining conglomerates in the auto-parts business, like Textron, 'have a strong presence in automotive and seem to be staying there,' she notes.
Cole agrees. 'Divestitures may slow down because the industry really is getting to a more rationalized state,' he says. 'You start taking companies off the table and there really aren't that many left at the highest levels of the business to be bought.'