Modularity Motivates More Than Motor Companies

Author:Mr David Armitage
Profession:Hammonds
 
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In the 1980s the world of corporate finance prospered as entrepreneurs built conglomerates. In recent years conglomerates fell out of fashion and sector focus came into fashion, leading to spin-off of non-core businesses. But now, driven by the US motor giants, the automotive sector is metamorphosing to a new tune: modularity.

In many sectors, but particularly automotive, the concept of modularisation is gaining support. Modularisation refers to the process of supplying ready assembled sets of components straight to the assembly line. Its increased use is being driven by numerous factors but predominantly OEM (Original Equipment Manufacturer) desires to improve their balance sheet, increase outsourcing and implement true BTO (Build to Order) systems.

Merger and acquisition activity in the automotive sector over the last three years has been driven by the desire to win integrated systems and modular business. Schroder Salomon Smith Barney reports 125 acquisitions and 65 joint ventures and alliances in the last three years as suppliers reposition themselves.

So who benefits? OEMs reduce their cost base and increase flexibility, essential in today's market of many variants and sub-sectors. The number of niche vehicles is growing, and while the number of modules is actually shrinking, they are becoming more complex as the number of components increase. Benefits for the supplier include increased volumes, although suspicion continues that return on capital employed could be weakened by the extra capital committed to additional facilities.

Modularisation also offers opportunities for engineering firms to impress the City, divest non-core businesses, or both. By its nature modularisation requires a number of components to be integrated; owning many of the relevant components is often more efficient than relying on external suppliers.

Increased demand for modules, not individual components, does provide an avenue for players under pressure to sell to others in the sector who have complementary processes. For example: cockpit modules encompass four major technologies: electronics, dashboards, heating/air-conditioning and wiring. A fifth technology might be the rapidly growing navigation systems market. If a supplier has three of the processes, the missing fourth technology becomes an attractive purchase in the drive to provide modules.

Some areas, seating for example, are already consolidated, but opportunities still exist in other sectors...

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