Crisis as a catalyst for change: How M&A, partnerships and focused divestitures can create a competitive advantage in an evolving automotive ecosystem of traditional and nontraditional players

In many respects, the automotive supplier landscape is undergoing the same massive disruption as the industry Itself. Brought about in large part by new technologies that are affecting everything from the plant floor to the customer experience, connectivity, autonomy, share mobility and electrification (CASE)—enabled by the cloud, 5G, analytics and other technologies—are creating new opportunities for traditional suppliers, attracting nontraditional suppliers and serving as a catalyst for mergers and acquisitions, joint ventures, partnerships, divestitures, spinoffs and more. The result is an increasingly competitive environment where savvy suppliers may have an opportunity to create a strategic advantage, while those caught flat-footed may not survive.

Previous articles in this series, developed in a partnership between FTI Consulting (FTI) and the Automotive News Data Center, examined the financial performance between 2010 and 2019 of 404 suppliers and explored how financial discipline and investments in innovation affect long-term growth and profitability. FTI segmented the companies analyzed into four categories: Performers, with above-average revenue and EBITDA growth; Defenders, with above-average EBITDA growth; Growers, with above-average revenue growth; and Contenders, with below-average revenue and EBITDA growth.

This last article explores the evolving automotive value chain and how M&A, divestitures, strategic partnerships and consolidation might help create a competitive advantage for companies wherever they fall in FTI’s analysis.

Despite the slowdown of auto sales that started in 2017 and the collapse that followed as a result of COVID-19, transformative CASE trends will continue to change the automotive value chain and continue to reshape the supplier landscape. More than likely, it will be driven by M&A, the consolidation of certain segments, divestitures and spinoffs that help focus portfolios, and nontraditional players looking to leapfrog automotive incumbents.

As evidence and much like the plateau and decline of automotive sales starting in 2017, the total number of M&A deals in the traditional automotive supply base also began to plateau in 2017, then declined starting in 2018. However, total number of deals focused on automotive technology along with the valuation of those tech deals saw steady increases throughout the same cycle (Figure 1). It illustrates how suppliers throughout the business ecosystem had increased focus on emerging areas of value creation despite economic headwinds that started in 2017.

While some deals naturally focused on acquisitions that complimented core competencies or consolidated some traditional segments (e.g., interiors and internal-combustion engines), traditional and nontraditional suppliers and many OEMs were making moves—including spinoffs and divestitures—that focused on having the technologies and talent needed to compete in evolving areas of the value chain. OEMs had started creating new and interesting partnerships, often between competitors, and invested in tech companies like LG and Amazon. On the supplier side, tech companies like Samsung, Intel and Amazon acquired traditional automotive suppliers and startups, while some suppliers, such as Lear, invested in and acquired startups to enhance their value proposition in new areas.

Interestingly, partnerships in the auto industry have traditionally been led by OEMs, primarily to share cost and accelerate speed to market. There certainly have been examples of suppliers entering into partnerships and collaborations among themselves, but not to the extent OEMs have leveraged partnerships as a competitive strategy. Moreover, existing supplier-led partnerships may increasingly be at risk as a result of the coronavirus pandemic, as illustrated by the recently announced dissolution of the advanced lighting partnership between suppliers Continental and Osram.

Still, as is often the case when crisis creates a catalyst for change, many of the nearly 20 executives interviewed for this effort thought the volume of deals and partnerships in the automotive supply base would increase in 2021-22 despite the shock of the coronavirus pandemic. More than one C-level executive leading a traditional automotive supplier noted that while the 10-year growth cycle coming out of the 2008-09 recession was good, investors had been waiting for a downturn to help finance and fund traditional suppliers’ strategies into new areas of value.

For traditional and nontraditional suppliers looking to take a competitive advantage in the evolving value chain, FTI recommends establishing strategies that clearly define the areas of the business ecosystem where they want to play. Doing so will create financial discipline and focus investments in innovation, as discussed in previous articles, and increase the opportunity for suppliers to leverage their investments.

FTI also sees four scenarios on the road to a post-pandemic “new normal” and believes that for each, there are key areas where suppliers need to prioritize their efforts as they navigate the rapidly changing supply base and prepare for this new normal brought about by the COVID-19 crisis (Figure 2).

FTI believes, and executives interviewed for this effort concur, that the automotive value chain will continue to evolve over the next several years as a result of COVID-19 and as transformative CASE trends accelerate the ongoing race to capture and deliver value in emerging advanced technology domains. Overall, suppliers will need to look beyond just being a Tier “X” supplier in a linear value chain and proactively define the areas of the ecosystem where they want to play.

Well-capitalized players should take advantage of distress in certain segments across the supply chain and acquire attractive assets, thereby enhancing competitiveness while gaining scale and know-how. Incumbents will need to continue optimizing product portfolios to focus on core businesses and enable better capital allocation. Divestitures and spinoffs by certain players will also continue to provide strategic opportunities for suppliers.
And despite a lot of uncertainty, one thing is certain: Regardless of where suppliers fit in today’s value chain, they need to be thinking about how value will be created tomorrow if they are to thrive in a new post-pandemic normal.