In October last year Faurecia announced the acquisition of the seat comfort division of Hoerbiger of Germany. This gave Faurecia control over a series of high value-added seat technologies such as massage, shoulder, lumbar, and lateral and side supports. Hitherto, Faurecia was largely reliant on outside suppliers for these technologies. Then in December, Johnson Controls (JCI) announced it was acquiring Michel Thierry, the French fabric company, followed by the frame business of C Rob Hammerstein and subsequently Keiper Recaro which brings substantial expertise in the mechanisms area. Earlier in 2010, JCI had also acquired a leather company, Benoac, also in Germany.
According to Detlef Juerss, vice president of engineering seating, interiors and systems at Johnson Controls Automotive Experience, these acquisitions – of which there may well be more in 2011 – are part of a deliberate strategy to increase the degree of vertical integration in seat production. Put simply, JCI wants to control, through ownership, as much of the technology which goes into its seats as it can.
Put simply, JCI wants to control, through ownership, as much of the technology which goes into its seats as it can.
The drive for increased vertical integration and control over the technology content of a given system is in contrast to the scale and geographic drivers which have traditionally underpinned many Tier 1 suppliers’ growth strategies. For example, Autoliv has recently publicly stated it wants to make a series of acquisitions worth up to US$1bn in Japan (a clear example of the geographic driver); however, it has also indicated it wants to buy major parts of its rivals Bosch, Continental and Denso. This suggests that the company is looking at increasing its degree of technology control and vertical integration, similar to the recent European acquisitions by JCI.
Autoliv’s Japanese approach is reminiscent of the scale and geography-driven strategies followed by JCI and others since the early 1990s at least. Undoubtedly there will be other companies following the geographic/scale approach, but the recent JCI approach will be indicative of a change in direction at the Tier 1 component suppliers. Faurecia’s acquisition of Hoerbiger is a small move in the same vein as JCI’s several moves, to increase the degree of vertical integration.
For companies like JCI, Faurecia and others to retain control over their margins and the value chain, vertical integration and bringing the control of technology in-house will be an increasingly common way forward.
The underlying push factor behind the new JCI strategy is the message from the car companies that they want their major systems suppliers to become more vertically integrated and to increase the degree of technology which they own. Several Tier 1 clients have told us that they need to integrate vertically or be told who to use as sub-suppliers at prices determined by the vehicle companies. For companies like JCI, Faurecia and others to retain control over their margins and the value chain, vertical integration and bringing the control of technology in-house will be an increasingly common way forward.
So which will be the next sectors to exhibit the vertical integration route? Most likely these will be systems which involve a multitude of distinct parts and technologies in their value chain; it will also depend on the power and financial strength of the leading players in each sector, and their ability to finance future acquisitions. It seems reasonable to envisage dashboard/IP/cockpit suppliers adopting the same approach, buying up suppliers of instrumentation, bezels, air vents, chrome and other high-value trim parts; other systems which could well see similar vertical integration include lighting, where the main lighting companies do not make all of the constituent elements of the light assembly. We certainly expect 2011 will see the start of a new wave of consolidation and vertical integration.
Ian Henry is a director of AutoAnalysis, an independent automotive research and consulting company based in London.
The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.