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Old October 12th, 2001, 08:35 AM   #1
Magic Mtn Dan
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Auto News - German auto suppliers set for shakeup

German auto suppliers set for shakeup

By Madeline Chambers

FRANKFURT, Oct 12 (Reuters) - A boardroom shakeup and strategic U-turn at tyre and car parts group Continental AG last month has given German auto suppliers a taste of the sector upheaval ahead in the coming months, say analysts.

Chronic overcapacity in the European auto sector combined with a new German law next year allowing shareholders to sell major stakes tax-free could spark a wave of consolidation among suppliers in a country where the automotive sector accounts for one in five jobs.

Some car manufacturers including BMW AG and Porsche are increasingly outsourcing traditional manufacturing tasks including assembly operations to suppliers whose profits are being squeezed by price cuts demands.

Other suppliers, including Conti, have tried to boost profits by developing niche roles in higher margin businesses such as electronics, say experts.

"The supplier industry is in flux becuase it is dependent on the auto industry and there are big changes happening there," said Norbert Kettner, auto supplier industry head at consultants Accenture who thinks the number of "Tier One" suppliers in Germany will halve by 2010.

Tier One suppliers are companies which make major components and modules for car manufacturers with whom they have close links. They can get involved in the development of new vehicles.

Robert Katz, general counsel Europe of Delphi Automotive Systems Corp, the world's largest auto parts maker, said recently in Frankfurt he expected there to be only 30 Tier One1 suppliers in Europe by 2010 compared with 600-800 now.

"We expect much more consolidation in the sector - suppliers will buy each other," said Accenture's Kettner.

CONTI RETRENCHES

Conti is a prime target for a takeover. It made itself vulnerable by ousting Stephan Kessel as CEO last month.

He was admired by market participants for trying to transform the company into a complete systems supplier and to move away from its reliance on the low margin tyre business.

To this end he agreed to buy 60 percent of DaimlerChrysler's car electronics unit TEMIC in April. Sources say Kessel had plans for major chassis and steering purchases but these are now on ice along with his planned sale of the ContiTech rubber unit.

Since his departure on September 11 the stock has tumbled to below its book value of about 14 euros.

"Conti is very cheap at these levels, but other tyre makers would come up against cartel problems if they wanted to buy and automotive systems companies would be getting only a couple of good businesses among a lot of less interesting stuff," said one analyst at a major German bank.

Many analysts expect Conti's strategic investors Allianz and Deutsche Bank to offload their stakes next year and avoid tax on the proceeds.

Some industry sources say Siemens may be interested in buying some parts of Conti in a move that would bolster its automotive division, enabling it to rival privately-owned Robert Bosch, the world's second largest supplier, in some areas.

Since acquiring Mannesmann's engineering and automotive activities from Vodafone in 2000 after the U.K. group bought Mannesmann for its telecoms operations, Siemens has turned its automotive business into a core activity and is still tweaking its portfolio.

The new tax laws will also affect non-listed German businesses and some experts expect companies like Siemens and Thyssen to snap up family-owned niche suppliers.

Thyssen Krupp is another potential bidder for Conti. Earlier this year it boosted its automotive activities by buying the shock absorber and suspension operations of Fiat SpA's Magnetti Marelli.

Thyssen has also said it is in talks with General Motors Europe about a cooperation in its axle systems business. GM Europe is also seeking external partners for its chassis, component and stamping businesses.

Volkswagen also still has some inhouse component-making activities but Delphi's Katz has said all such activities will be outsourced in the next few years while manufacturers focus on brand management and marketing.

OEMS AND SUPPLIERS AT LOGGERHEADS?

"Original equipment manufacturers (OEMs) will be able to shed almost all of the characteristics that make the OEMs today. What such an OEM is likely to have is a highly talented group of a few hundred designers, marketers and industry experts who can maintain an attractive brand and a high quality network of mutally beneficial partnerships," said one industry expert.

He argued that as OEMs --- a term usually applied to companies which design and develop vehicles as well as assemble them -- and suppliers end up competing head on, it is unclear who would come out on top.

"Like OEMs, suppliers are consolidating and with the blurring of traditional roles, a power struggle has emerged."

Some companies are trying to approach the new challenges in a spirit of partnership.

Luxury carmaker BMW is poised to award Steyr Fahrzeugtechnik, a unit of Canadian supplier Magna International Inc, a contract to assemble its new X3 model, the followup to its successful X5 sports utility vehicle.

BMW would follow Porsche's lead. About half of the sportscar maker's small Boxsters are made by Finland's Valmet.

The manufacturer gains greater flexibility while the supplier gets a huge amount of new business, say experts.

"The advantage of this arrangement is that a company can increase volumes hugely without paying for or taking time to build a new plant," said Lehman Brothers analyst Chris Will.

"If times are good, they can increase production and if times get bad, they are protected," he added.

He said suppliers would have the insurance of a minimum offtake either on an accumulative or annualised basis.
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