Tuesday, 26 August 2014

Looming consolidation offers transformation

Recently, the German automotive supplier ZF Friedrichshafen AG approached Livonia-based TRW Automotive Holdings Corp. about a possible takeover

Since then, ZF has initiated negotiations for a deal initiated negotiations for a deal of about $13bn in what could be the biggest auto-parts takeover in well over half a decade.

Based on last year’s sales, ZF ranks ninth and TRW ranks eleventh, generating combined sales of $ 36.8 billion. Should a deal be struck and ZF absorbs TRW, the new entity could easily become the world’s second largest auto component supplier, surpassing long standing Japanese competitor Denso Corp., which had close to $35.8bn component sales and ranks just behind its rival from Germany, Robert Bosch GmbH.

TRW is a leading manufacturer of advanced technology products for the automotive markets. Headquartered in Michigan, the company operates across 24 countries through its subsidiaries. These operations primarily involve the design, manufacture, and sale of active and passive safety-related products. Based in Southern Germany, ZF Friedrichshafen produces steering systems, clutches, transmissions, axles, and other parts for European and American vehicles, including the fuel-efficient, nine-speeds Fiat SpA (F) used in its Jeep Cherokee SUVs and Chrysler 200 sedans.

ZF Friedrichshafen is well placed in the areas of powertrain development and chassis systems but lags behind quite a bit in other areas that are growing in importance, such as active safety and autonomous driving. TRW—with decades of market expertise, technology, and products catering to a wide range of active and safety products, semi-automated driving, and automated driving—would arm ZF with the impetus to contend as a major force in the automotive supplier domain. With the possible acquisition of TRW, ZF Friedrichshafen would gain a stronger foothold in the self-driving and connected cars domain, which is seen as the future of the automotive industry. In fact, ZF would finally add to its portfolio technology from air bags to collision sensors, safety solutions that keep drivers secure and help avoid crashes. The union would result in a company that offers the most important elements necessary to have any smart-chassis assembled.

The Tier I automotive ecosystem would undergo a complete transformation if the acquisition takes place. Then, Bosch would remain the biggest supplier—focusing on electric drives and electronic controls with related sensors and semiconductors supporting the roadmap—while ZF/TRW would capture the electromechanical actuators across various vehicle subsystems, e.g., transmissions, driveline, steering, braking, suspension, active safety, and passive safety. Bosch, despite its strong portfolio as an electronic controls and electric drives giant, would need a partner similar to Magna Steyr or GKN in order to serve the automotive OEMs as a one-stop-shop. Ultimately, ZF, with the added strength of TRW, would enjoy a holistic in-house capability that allows for a market-ready offering. ZF could become self-sufficient to the extent that the company might have to rethink its joint venture with Bosch regarding ZF Lenksysteme GmbH, possibly even deciding to sell its shares to Bosch altogether.

The future of innovation within the automotive industry will be heavily dependent on electrical drives and electronic controls, thereby allowing Bosch continue as one of the biggest forces to reckon with. However, it is important to note that even a potential new entrant, rather, a disruptor, such as Google, was able to put together a vehicle that can control itself, reportedly even in urban driving environments. Yet Google depends on a certain manufacturer in Detroit to produce its vehicles. Clearly, electrical drives and electronic controls are important, yet they are no more important than the electromechanical portion of the vehicle, which tech-giants are unable to master! Notably, it is at this juncture that Bosch spun off the foundation braking business in 2012, whereas TRW and ZF have held on to their respective conventional engineering product lines. Bosch would arguably remain the biggest control system supplier, but in terms of being the penultimate system integrator, ZF along with TRW will become the preferred supplier.

Another possible result of a TRW acquisition is that whoever ultimately does take over, could well become the next half-OEM, or OEI—original equipment integrator—providing OEMs everything from just a bare chassis solution to an integrated smart-chassis with its subsystem solution. Such a scenario could become advantageous to both the OEM as well as ZF (assuming the ZF takeover of TRW materialises). That is, the OEM could channel its resources solely into powertrain and transmissions development while the supplier would channel its resources solely into chassis development.

ZF’s desired acquisition of TRW in 2014 is a sort of redemption that has been brooding for the past 9 years, since a similar situation occurred in 2005 when Delphi had filed for bankruptcy. As few well-known names stepped in back then, Delphi disintegrated into various conglomerates. In fact, had ZF acted swiftly and acquired Delphi, it would have achieved something unheard of in the automotive industry. Adding TRW along with the already acquired Delphi, ZF would have forged a conglomerate that supplies to GM, Ford, and Chrysler under the Delphi portfolio; to premium German OEMs under the ZF portfolio; and to VW and Fiat under the TRW portfolio. It would have made ZF not only the undisputed market leader in the Tier I space, but it would have also created a scenario for ZF wherein the OEMs would have been a distribution channel for its products. That is to say, OEMs would add value by merely branding the vehicles, whereas the actual make would have been ZF+TRW+Delphi at varying proportions.

The more important next-step in the automotive industry in the next years is for various other suppliers to develop their capabilities for a combined chassis-systems and active-safety expertise, in the wake of automated driving. At the moment, not all suppliers are ambidextrous in their chassis-safety integration, primarily due to a lack of exhaustive product portfolio. Almost every single major OEM group has a plan for automated driving, which is built on the foundation of chassis systems taking driving-related inputs from either a driver or from active safety systems. The dearth for suppliers with such end-to-end solution-engineering competence indicates that stronger cooperation is needed among various suppliers of chassis and safety systems. As the supply-agreements of OEM with the suppliers of chassis & safety systems is entwined, conflict of interest issues could step in. This could lead to further consolidation of certain chassis system suppliers and safety system suppliers forming very strong alliances, new joint ventures or even mergers.

So, what do you suppose the future chassis-safety ecosystem is likely to look like?