IHS Global Insight Perspective
There is growing disquiet amongst Magna's tier-one automotive component customers including the likes of the VW Group and BMW over the company's intention to transform itself into a fully fledged OEM through the acquisition of Opel.
The company faces a battle to convince its components customers that client confidentiality will be maintained and intellectual property rights will be respected. Magna has gone to great lengths already to persuade its customers that it will ring-fence Opel's operations from its component supply operations.
Magna's core automotive component customers may take this opportunity not to renew existing contracts, as there are already signs that the industry to planning to take more component and module production in-house.
Magna's existing customers in terms of automotive components supply, engineering services and contract passenger car manufacturing are increasingly unhappy about doing business with a company that is about to transform itself into a direct OEM competitor. The Volkswagen (VW) Group has been among the most vocal of the critics of Magna's ambitions to become an OEM (see Germany: 21 September 2009: VW Threatens to Tear Up Magna Contracts over Opel Deal). VW's head of sales and production Detlef Wittig said that VW would withdraw from any business with Magna where technical secrets were shared. He said, "If they really do go through with it, then we will withdraw business from Magna in which our development know-how is included" adding "We cannot leave our know-how in the hands of a supplier that then uses this in his own automobile company." Other senior VW executives such as Executive Board Chairman Martin Winterkorn and Supervisory Board Chairman Ferdinand Piëch have also criticised the deal. Magna has begun discussions with its customers to assure theme that it intends to keep its OEM and component supply operations completely separate once the Opel acquisition is complete, although convincing them that this is the case may prove harder than telling them. In a press conference in Tokyo earlier this week Magna's other co-chairman Don Walker said "Most of the customers I have talked to personally want to know how we have a separation to protect technology but they have told me they are comfortable with it." He added that he was aware of VW's specific concerns and would move to meet with VW officials to work through the issue. He said, "Specifically, Volkswagen have said they are concerned so we need to finalize the internal procedures and have more discussions with them." Walker said he had yet to meet VW. "I think the next step will be to meet with them." BMW has also shared its concerns. Last week the company's head of production Frank-Peter Arndt said it would be a problem if a supplier of the company was to become a competitor. He said, "If we saw a conflict of interest we would react."
Ford may also be concerned about the implications that the Opel deal may have to the contract with Magna it recently signed to work in conjunction on a new zero-emission lithium-ion battery electric vehicle which is due on the market in 2011. The model will be a small city car with a range of up to 100 miles. Magna is providing the critical powertrain technology for the project and battery modules for the vehicle and will be involved in integrating the electrical power and other systems into the vehicle. Magna is also a major supplier to Ford of components in its existing model range. Ford has said it will work with Magna to ensure its intellectual property remains protected. Speaking at the Frankfurt Motor Show, Ford's chief financial officer Lewis Booth said, "They've given us assurances they're going to separate their businesses and make sure there's a good firewall between their new acquisition and their traditional supplier business."
Magna's acquisition of Opel comes at a time when there appears to be the beginnings of a movement for OEMs to bring an increasing amount of component and module production back in-house after decades of following the outsourcing model. Speaking at Frankfurt the President of GM Europe Carl-Peter Forster said that he believed OEMs were revaluating the extent of their reliance on external component suppliers such as Magna. He said, "We all had the vision that the OEMs [original equipment manufacturers] should just assemble bits and pieces, do a little bit of marketing, a little bit of design and all the rest would be done by suppliers. That was a nice vision. It sounds very lean, but the profit making opportunity is also shifting to the ones that have the technological knowhow. That is in very many cases now the supplier industry." This tallies with the news that VW is currently examining the case for bringing more component production back in-house, which has the double benefit of using spare capacity and manpower and transferring technical know-how and margins back to the OEM. VW's head of production Jochem Heizmann recently told German newspaper Braunschweiger Zeitung that, "We are increasingly thinking about insourcing," He added, "It's about engineering, about jobs in production and about making prototypes. We could also intensify in-house tool making. And we will certainly make more components ourselves" (see Germany: 3 September 2009: VW to Reduce Component Outsourcing). As a result, "insourcing" may become a new buzzword in the global automotive industry over the next few years.
Outlook and ImplicationsAs the world's most diversified automotive supplier, Magna can provide an almost unparalleled range of components and services to its customers, from complete vehicle platform development to contract vehicle manufacturing, which it carries out for BMW and Mercedes-Benz, among others. However, the wide-ranging scope of its capabilities has never before included being a fully fledged OEM, which is what will happen if it successfully concludes the acquisition of a 55% majority stake in Opel, along with its Russian partner and backer Sberbank. Magna will want to maintain strong cash flows form its core component, module and engineering business in order to support its acquisition of Opel, although it may prove a demanding task for the company's management to balance the demands of the two businesses while placating its existing OEM customers, which as a result of Magna's diversified operations, basically comprises the entire global industry. Magna's management will no doubt claim, with some logic and credibility, that protecting the intellectual property of its customers is something it has been doing very successfully for years, given the diversified nature of its client base. However, it appears that its OEM customers are nervous to say the least about Magna becoming a competitor. Those customers may see this as an opportunity to renegotiate existing contracts and prices with Magna or may opt to follow the VW Group's planned strategy of insourcing increased component production. Either way, it appears Magna faces a tough test in convincing customers that there is no inherent conflict of interest in its future dual role as a tier-one supplier to the global automotive industry and an OEM.