Suppliers shed struggling noncore units

DETROIT — At Visteon’s headquarters in a western suburb, technicians are preparing a durability test for the audio speakers in a set of four pickup doors.

The four white door panels are installed in jigs, which will jiggle every latch and handle until something breaks. This is standard test procedure for an automotive supplier, but for the workers in Building 25 it’s a new lease on life.

This year CEO Tim Leuliette announced Visteon’s electronics unit would be one of the company’s two core operations, along with heating, ventilation and air conditioning systems. Both divisions have passed two key tests: Each is profitable, and each is global.

“These are strong businesses ... with strong global positions,” Leuliette told Automotive News. Automakers “are looking for suppliers that have a global presence and the technology to bring value.”

You can boil this strategy down to three precepts:

1. Strive to be No. 1 or No. 2 in each product category.

2. Each product must be profitable; no “loss leaders” allowed.

3. If you can’t afford the r&d, sell the operation to someone who can.

Like Visteon, many suppliers no longer want to be an automotive “department store” that stocks every major component.

Companies such as Delphi Automotive and Johnson Controls Inc., behemoths once known for vast product lines, are selling noncore divisions so they can focus on their specialties.

“It’s better to be smaller and more profitable than larger and less profitable,” said Leuliette.

This trend is mostly good news for automakers. By focusing on core products, suppliers can afford bigger investments in r&d and global production.

By contrast, vendors that market a wide variety of components often offer low prices for so-so technology. In the long run, a supplier that spreads itself thin risks financial ruin — like Visteon, after Ford Motor Co. spun it off in 2000.

At the time, Visteonwas a $19 billion giant that produced seats, interior trim, batteries, HVAC systems, instrument panels, headlights and more.

Narrower focus

Saddled with high labor costs and a hodgepodge of products, Visteon filed for Chapter 11 bankruptcy protection in 2009. The company is smaller now, with revenues of $6.9 billion last year. When Visteon sells its interiors unit, it will shrink more. And that doesn’t bother Leuliette one bit.

There are other megasuppliers — such as Continental AG, Denso Corp. and Magna International Inc. — that have the deep pockets to be successful suppliers of multiple products.

But some major players are narrowing their focus. Consider the seating industry. Fifteen years ago, Lear Corp. and Johnson Controls vied to be one-stop suppliers of complete automotive interiors: seats, instrument panels, consoles, door panels, headliners and flooring.

Automakers refused to concede so much control to one supplier. So Lear subsequently dumped its unprofitable interiors unit so it could focus on seats and wire harnesses.

And now Johnson Controls is considering “strategic options” for its interiors business, and has announced plans to sell its electronics unit, which produces anti-theft devices, tire pressure monitors, instrument clusters, control modules and infotainment displays.

The electronics division is profitable — but that’s not enough, says Kim Metcalf-Kupres, JCI’s chief marketing officer. Electronics is a fast-moving segment that requires big investments in r&d, she noted.

Johnson Controls is reluctant to invest in a segment itcan’t dominate.

“We believe to be successful, we have to play to win — to be a market leader,” said Metcalf-Kupres. “Our electronics business has been quite profitable, but we are a niche player.”

In September, Johnson Controls sold Homelink — a garage-door opener mounted on the rearview mirror — to Gentex,  a company that specializes in rearview mirrors and gadgetry that can be integrated with them, such as rear-facing cameras.

By the second quarter of 2014 at the latest, Johnson Controls expects to unload the rest of its electronics operation, Metcalf-Kupres said.

And which supplier might bid on JCI’s remaining electronics business? None other than Delphi Automotive, once considered to be the auto industry’s definitive department store.

When General Motors spun off its parts operation in 2000, Delphi produced thousands of different products. After a wrenching four year-bankruptcy, the companyshrank from 131 product lines to 33.

One of its four core operations is electronics — engine control units, infotainment, collision avoidance sensors and the like.

Now, a profitable Delphi has the cash to make “bolt-on” acquisitions, says Jeffrey Owens, chief technology officer.

According to Owens, Delphi is focusing on possible acquisitions that would complement one of Delphi’s core segments.

Why do the sellers sell?

Delphi is not interested in fixer-uppers. “We want to avoid any acquisitions that would be a distraction” for Delphi’s management, Owens said.

Owens declined to confirm that Delphi is bidding for Johnson Controls’ electronics operation. But he didn’t try to discourage the rumors. “We have plenty of dry powder for a bolt-on acquisition,” Owens said.

Judging by the results of a survey of 96 suppliers in July, other companies are looking for acquisitions, too. The survey, conducted by the Original Equipment Suppliers Association, asked suppliers how likely they were to make an acquisition or divestiture in the near future.

Fifty-eight percent said there was a “high” or “moderate” likelihood that they would make an acquisition by the summer of 2014. Only 11 percent said they were likely to make a divestiture.

Of the companies that wanted to make an acquisition in North America, 37 percent said they wanted to gain customers by expanding into new geographic markets.

Nineteen percent wanted to build market share; 18 percent wanted to gain new technologies; the remainder offered a variety of responses.

Given North America’s expanding vehicle production, it’s no great surprise that there are more buyers than sellers. But why are the sellers selling?

In January, the consulting firm Deloitte published a survey of 150 executives in various industries who had been involved in corporate divestitures.

According to the survey, 81 percent of the respondents said they did so to prune noncore operations — up from 68 percent in the 2010 survey. By contrast, only 37 percent of the executives said they did so to raise cash, down from 46 percent in 2010.

The Deloitte survey confirms that Johnson Controls and Visteon have become the norm, said Bruce Brown, a principal in Deloitte’s strategy and operations practice. Companies are selling off noncore businesses — even if they are profitable — so that they can focus on what they do best.

“We’re seeing a shift” in the motivation of suppliers that are selling portions of their business, Brown said.

“They are pruning their businesses of noncore assets.”