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Rpt-MergerTalk-Auto parts sector faces renewed consolidation

By Arindam Nag

NEW YORK, Sept 18 (Reuters) - Change is blowing in the world of nuts and bolts. The automobile parts sector, whose fortune depends on a handful of global car-making customers, is once again at the crossroads of consolidation.

Under constant pressure from automakers like Ford Motor Co. General Motors Corp. and Toyota Motor Corp. to cut costs and adapt new technologies, parts suppliers see mergers as a way to meet their customer's needs, experts say.

Economies of scale is driving consolidation, as is the move by automakers to a broader platform or "architecture," in which a group of basic parts is used to build a number of models.

For example, makers of connectors are likely to expand into wire harnesses or instrument paneling, experts say, as companies look for complementary products rather than just go for size, as they did in the 1990s.

"There will be a lot of complimentary acquisitions with suppliers filling up product portfolios," said Wilbur Chung, a former Ford executive and currently management professor at University of Pennsylvania's Wharton School of Business.

Mike Burwell of PriceWaterhouseCoopers' automotive group said 16 percent to 18 percent of the world's vehicles come from similar platforms, and by 2006 this number would rise to 40 percent. This calls for suppliers that can supply a broader range of products.

The recent entry of private equity firms like Blackstone Group, Bain Capital and Carlyle Group, with billions to spend, is also driving consolidation. Carlyle alone announced three deals this year: UIS, Breed Technologies and Edscha AG.

TIER II MARKET

As the auto industry has shrunk over the years -- nine auto groups today account for most of the worldwide vehicle output -- its members have become more global. And they prefer to deal with suppliers that have a global footprint too.

"Suppliers have been forced by their customers to become global, and to supply a full range of products," said Jonathan Rouner, head of Credit Suisse First Boston's global automotive group.

Economies of scale drove a round of consolidation among the prime suppliers to the automakers, or original equipment makers as they're known, during the 1980s and 1990s.

It created a handful of giants like Lear Corp. and Johnson Controls Inc. in North America and Faurecia in Europe. Over the past 20 years, the number of suppliers to OEMs, also called Tier I manufacturers, have dropped to a little more than 200 from more than 2,000.

While Tier I consolidation is expected to continue in drips, experts see the main action among the next level of suppliers, or Tier II, which mainly sell to their larger brethren. There are an estimated 2,000 Tier 2 suppliers worldwide.

Henry Ford pioneered the concept of making everything "in house," a strategy that played well when there were scores of automakers. But over time, automakers were forced to focus on nonmanufacturing aspects such as finding new markets and planning fuel-efficient cars, leading to the outsourcing of making chassis, car seats, steering wheels and interiors.

Meanwhile, the companies that jumped at this opportunity have seen their destinies dictated by the automakers. The rise of the Japanese automakers, mainly Toyota and Honda Motor Co. , cast the spotlight on quality and more scientific methods of production. This called for ever greater financing and capital investment, and led to heightened M&A activity.

PAST CONSOLIDATION WAVE

In the U.S. alone, about 1,000 auto parts deals were announced between 1990 and 2003, nearly 70 percent of them between 1994 and 1999, according to Ernst & Young Corporate Finance. In the last 13 years, nearly 2,500 auto parts deals have been announced globally.

"Some Tier II suppliers are not able to meet the needs of the $30 billion Tier I customers, because they cannot finance capital expenditure programs and are forced to look for partners," said James Carter, an automotive specialist and senior managing director at Ernst & Young Corporate Finance.

Wall Street bankers are now scanning the landscape for potential deals, the pace of which is expected to pick up as the economy turns around. While few expect more consolidation in automotive interiors, deals are seen in the highly fragmented segments of stamping and casting.

Dura Automotive Systems Inc. on Tuesday extended a hostile bid for electronic components maker Methode Electronics Inc. , while Automotive News said the name of Intermet Corp. , a maker of cast-metal components, has been bandied about.

"As in the past, consolidation will be driven by strategic, operational and financial objectives. Suppliers consolidate to develop a global reach, broaden product offerings, and achieve economies of scale," Rouner said.