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  • Emerging markets, emerging opportunities Strategies for automotive partnerships in today’s global marketplace

  • 1 Emerging markets, emerging opportunities 2 Automotive partnering activity remains strong 3 Today’s strategic partnerships come in all shapes and sizes 13 Contacts

    Contents

  • Increasing globalization of the automotive industry is changing the dynamics of traditional strategic partnerships, particularly cross-border joint ventures (JVs) between Western companies and their cohorts in emerging markets.1 Ten years ago there was uncertainty about pursuing business in markets such as India and China because political and business conditions were not conducive to direct foreign investment. As a result, many automotive original equipment manufacturers (OEMs) such as General Motors, Toyota, Honda and Ford, and in particular automotive suppliers like BorgWarner and Magna, viewed strategic partnerships as a way to dip their toes into the water.

    Because some governments in emerging markets require the establishment of formal relationships with domestic partners in return for market access, many companies interested in global expansion today view JVs as a required cost of entry and less of a strategic driver for justifying a strategic partnership. Outside of these basic market entry requirements, however, strategic partnerships today are becoming more focused on addressing a specific need, such as gaining access to a new technology, quickly securing a local presence to cost-effectively serve stakeholders and customers, collaborating on product development initiatives while sharing capital risk, and accessing highly skilled and/or low-wage workers.

    What do changing objectives mean for companies that are considering a new strategic partnership? What should the ownership structure look like? How should partners that are focused on developing new technologies share people, processes and other resources while maintaining barriers that protect intellectual property? How does management know when it is time to dissolve the relationship?

    Given today’s evolving business considerations amidst the rapidly changing dynamics of the global automotive industry, it is an opportune time for companies to examine the objectives and structures of their existing or contemplated strategic partnerships. The targeted end game is markedly different than it was 10-15 years ago; those companies that fail to clearly define objectives or comprehensively consider the opportunities and pitfalls associated with their strategic partnerships may find themselves in a situation similar to the now high-profile break-up between two automotive manufacturers, which was meant to bolster one company’s presence in an emerging market while giving the other access to technology it could not afford to develop on its own, but in the end did not deliver significant progress toward either objective.

    Despite the reluctance of some companies to enter into JVs in light of certain issues examined in this article, in some cases strategic partnerships are the only option available to organizations looking to grow in today’s global marketplace. In the following pages we examine how the nature and structure of strategic partnerships have changed, and discuss what executives should consider when weighing the pros and cons and evaluating the details of establishing new relationships.

    Emerging markets, emerging opportunities

    Emerging markets, emerging opportunities 1

  • 2

    While buyouts have fluctuated and exhibited little growth over recent years, automotive strategic partnerships have witnessed consistent growth — outside of 2011, which can be attributed to slowing growth in emerging markets like China and the natural disasters in Japan in March, 2011. When comparing automotive transactions from January 2007 to December 2011, strategic partnerships represented between 20-30 percent or more of the total each year (Figure 1). Further, cross-border transactions comprised 35 to 40 percent of all strategic partnerships in recent years, and ticked up slightly in 2011 (Figure 2). This history demonstrates that, despite global economic uncertainty, automotive companies continue to recognize growth opportunities and are leveraging strategic partnerships in an effort to take advantage of them.

    228

    1,062

    2007

    2007

    Strategic parterships Total deals

    Cross-border Intra border

    2008

    2008

    2009

    2009

    2010

    2010

    2011

    2011

    270

    1,046 1,070 1,018

    223 287

    959

    297

    39.5%

    60.5%

    39.6%

    60.4%

    70.0% 66.4%

    33.6% 37.3%

    62.7%

    30.0%

    Automotive partnering activity remains strong

    Figure 1: Automotive strategic partnerships vs. total deals

    Figure 2: Cross-border vs. intra-border strategic partnerships

    This history demonstrates that, despite global economic uncertainty, automotive companies continue to recognize growth opportunities and are leveraging strategic partnerships in an effort to take advantage of them

    Source: Mergermarket

    Source: Mergermarket

  • Establishing strategic partnerships has long been common practice within a number of industries. These relationships vary in type and range from informal handshakes to complex agreements that frequently result in two enterprises forming a new company (“Newco JV”). Companies participating in JVs are often able to quickly pool resources and opportunities, or capture a less-than- whole ownership stake of an existing company in an emerging market to obtain a stronger or more strategic geographic presence. While the partnership types in the automotive industry are similar to those in other sectors, the dynamics of this industry present several unique nuances. Specifically, emerging technologies in areas such as alternative powertrains (hybrids, electric vehicles, etc.) and in-car connectivity are driving convergence across a number of sectors and creating opportunities for non-traditional strategic partnerships between automotive and technology companies, or even automotive competitors. For example, Toyota and Nissan are among automotive OEMs that have recently partnered with technology companies in Silicon Valley to make vehicles safer, more environmentally friendly, and more convenient to use.2 Also, BMW and Toyota recently announced that they will work together on green car technologies, including joint development of lithium-ion batteries; BMW will also supply diesel engines to Toyota in Europe as part of the deal.3

    Generally, the most active participants in developing automotive industry strategic partnerships have been automotive suppliers, particularly companies in the interiors, electronics, and powertrain sub-segments. Examples include Johnson Controls’ JV with a Chinese manufacturer to supply interiors for an auto assembly plant being built there by a Chinese OEM and Italy’s Fiat Group Automobiles SpA, as well as BorgWarner’s JV relationship with 12 of China’s largest automotive manufacturers to supply dual-clutch technology.

    OEMs also frequently enter into JVs and alliances, which are often complex, large-scale arrangements involving a number of entities. The JVs GM and Ford have with local Chinese partners are examples of traditional OEM alliances; however, OEMs and suppliers have recently announced more nontraditional strategic alliances that may not have been considered a decade ago. For example, Ford and Toyota announced on August 22, 2011, that they will jointly develop as equal partners a new rear-wheel drive hybrid system and component technology for light trucks and SUVs.4 GM has also recently announced that they will jointly develop a new line of battery-powered vehicles with a South Korea-based electronics company.5 And on April 5, 2011, Toyota and Microsoft announced a strategic partnership to build telematics services — the fusing of telecommunications and information technologies in vehicles — on the Windows Azure platform.6 These three non-traditional examples, as well as the BorgWarner-OEM JV previously noted, clearly reflect a shift in how companies are evaluating and leveraging opportunities associated with strategic partnerships.

    Today’s strategic partnerships come in all shapes and sizes

    Story from the road BorgWarner leverages a JV to introduce new technology into the Chinese market BorgWarner, a global supplier of vehicle parts and systems, created an innovative JV in China to introduce its dual-clutch technology. By partnering with 12 of the largest Chinese auto OEMs, BorgWarner was able to accelerate adoption and acceptance of this technology in the Chinese marketplace. The OEMs each hold a small interest in the JV through an investment vehicle, while BorgWarner maintains a two-thirds stake. By providing key customers a stake in the technology’s entry in the high-growth Chinese auto market, BorgWarner spread the execution risk and moved into an active alliance with customers. As new technologies are developed, this or other JV entities may provide a similar path for BorgWarner to push faster and broader marketplace acceptance in China or other emerging markets.

    Emerging markets, emerging opportunities 3

  • 4

    Gaining access to new customers or new markets Emerging markets such as Brazil, Russia, India, and China (BRIC), as well as newer economies throughout Asia, the Middle East, and Africa, represent significant growth markets and,

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