Chinese carmakers expanding through European takeovers and getting more competitive

• Suppliers have overcome the car crisis with little consolidation
• Number of mergers and acquisitions among suppliers is on the rise again and is already back at pre-crisis level
• The proportion of purely financial transactions has continued to fall since the crisis – strategic investors becoming more important
• Investors from emerging markets – mainly China – are entering the European market in droves
• Chinese suppliers are boosting their international competitiveness by taking over sound companies

Although some 350 car suppliers worldwide filed for bankruptcy during the car industry crisis of 2008 and 2009, the industry has seen little consolidation. The market is now shifting into higher gear mainly thanks to Chinese investors, who are no longer interested only in buying hard-hit companies cheaply. Strategic investors from China are looking specifically for Western companies that can help them improve their own technological competitiveness. These are the findings of the latest Roland Berger study "Chinese appetite – Emerging market players are buying into the European auto supplier industry".

After the crisis-hit years of 2008 and 2009, the global market for suppliers has recovered substantially and the number of insolvencies has fallen sharply. While around 100 car suppliers in Europe filed for bankruptcy in 2009, only 25 did so in 2010. In the US, the number of insolvencies in the industry fell from 55 companies in 2009 to just 10 the following year. In the same period, bankruptcy filings in Japan fell from 70 to around 25.
"Now that car markets worldwide have stabilized, more and more companies are entering the market which were not bought on the cheap after going bust," explains Marcus Berret, Partner at Roland Berger Strategy Consultants. Suppliers that became insolvent last year tended to be those already owned by financial investors and dependent on support from carmakers.

Insolvencies but no market streamlining

Even suppliers that had to file for bankruptcy during the crisis mostly stayed in business and were then sold. There was little consolidation in the sense of streamlining the market. "The carmakers are mainly responsible for that," explains Berger expert Berret. "Their strategy is to keep the market share of each individual supplier under 40% maximum, depending on the project segment. An overly large market share in a particular market segment would give the supplier too much power. They would therefore be able to set product prices themselves, to the detriment of their customers."

A game with new rules

Overall, the number of mergers and acquisitions among suppliers worldwide is still on the rise. In 2009, 302 suppliers worldwide were taken over; in 2010 the figure was 341 – and the upward trend continues. "The market for mergers and acquisitions has recovered and is now back at pre-crisis level. This is mainly because the general market conditions for takeovers have gotten a lot better," explains Berret.
There is a clear trend visible in the transaction market: before the crisis, financial investors were the main players in the transaction business, but during the crisis the focus shifted to industrial, strategic investors. "This was partly due to the carmakers' bad experience with financial investors," says Dirk Kohlen, Principal at Roland Berger. "The shaky financial structures of many suppliers also played a major role. These were caused by the high debt burden of purely financial transactions prior to the crisis."

Asian investors crowd into the market

Strategic investors from Asia – China in particular – are increasingly interested in taking over Western suppliers to secure market share and gain technological expertise. The OEMs are putting few hurdles in their way, as they are keen to see the Chinese supplier base improve. At the same time, there are hopes of combining Chinese low-cost approaches with Western engineering prowess.
Although takeovers by Chinese investors before the crisis often failed because of a lack of willingness to pay or a lack of professionalism, things are different now, explains Kohlen: "Chinese investors now know that good companies cost a lot and they are willing to pay. They have also made their takeover processes much more professional."

Chinese suppliers' expansion into the European market is also partly due to the Chinese government's economic policies: according to the current five-year plan, Chinese companies aim to improve their technological position by investing abroad and thus becoming global market leaders in their specific segment. The Chinese car industry aims for annual growth of at least 10%. By 2012, car production in China is set to be 22% higher than before the crisis, in 2007.

Change in the global supplier industry

This development will change the face of the supplier industry worldwide. Firstly, the companies created by takeovers will need to be integrated with some effort: suppliers will have to overcome stark cultural differences and adapt their management methods. Secondly, these companies have the potential to gain a substantial competitive edge, explains Berret: "Chinese investors usually have large capital reserves with which to finance corporate growth. The car industry hopes that Chinese suppliers will combine low costs and the high standards of Western engineering in the future. They will thus hone their competitive edge and greatly increase their market share."