Auto suppliers on track for record acquisitions

The auto industry's rush to develop self-driving vehicles, connected cars and electric vehicles has goaded suppliers into a feeding frenzy of acquisitions.

This year, suppliers are expected to complete a record $57 billion worth of acquisitions, nearly double the value of deals in 2016, according to a study by PricewaterhouseCoopers. The consulting firm added up 203 acquisitions that either closed or are expected to close this year, up from 166 in 2016.

Deal makers were motivated by self-driving vehicles, connected cars and fuel economy, said Dietmar Ostermann, leader of PwC's automotive advisory team and co-author of the report.

Those three areas "are driving a lot of this," Ostermann said. "Suppliers are trying to find out what it really means for them and to what degree they need to change."

The study included all acquisitions completed for the year to date as well as deals expected to be finalized in 2017. Several trends emerged:

• Chinese buyers initiated 17 percent of the deals, a sign they are globalizing their operations.
• The big money is in electronics, which generated 36 percent of aggregate deal value.
• Consumer electronics giants such as Intel Corp. and Samsung are making major acquisitions in a bid to establish an automotive presence.
• North American suppliers were the likeliest buyers—and also financially strongest, followed by Chinese vendors. Brazilian suppliers were the most distressed, and European vendors were the most likely acquisition targets.

The report also measured the top 100 suppliers by their deep pockets and willingness to make acquisitions. Top deal makers included Robert Bosch GmbH, Continental A.G., ZF TRW, Autoliv and Bridgestone.

While the fundamental technology trends—connected cars, self-driving vehicles and improved fuel economy—are clear, the timing of acquisition activity can be tricky. A number of auto makers have announced plans to introduce electric cars and plug-in hybrids, but sales forecasts are a crapshoot.

"Nobody is getting rich right now by focusing on electric vehicles, but some suppliers see the handwriting on the wall," Ostermann said. "If you manufacture engine blocks, it doesn't take a brain surgeon to figure out that 50 years from now, we're not going to have as many engine blocks."

While the timing of these trends is imprecise, traditional suppliers are feeling the heat. Now that auto makers are designing "smart" cars—that is, connected cars that can drive themselves—the consumer electronics industry is buying seats at the poker table. Samsung this year completed its $8 billion acquisition of Harman International, while Intel closed its $15 billion purchase of Mobileye this month.

But the biggest of all was Qualcomm Inc.'s $47 billion acquisition of NXP NV, a deal that made Qualcomm the largest global supplier of automotive semiconductors.

To gauge which supplier segments are generating the biggest profits, Ostermann's group calculated EBITDA—earnings before interest, taxes, depreciation and amortization—for each industry segment. Last year, the most profitable segment for suppliers was raw materials, with an aggregate EBITDA of 15 percent.

The least profitable segment was interior trim, with an EBITDA of 7.7 percent.

This comes as no surprise, since Johnson Controls Inc., Lear Corp., Magna International Inc. and Visteon all have sold off their interior operations. While that segment's survivors figure out how to make a profit, deal makers will pay big premiums for electronics suppliers.

"The electronics suppliers are getting very serious," Ostermann said. "These companies will play a much bigger role."