Suppliers looking for strategic alternatives for low margin interior business

Automotive interiors are becoming less appealing for global suppliers. In less than a month, two leading North America suppliers, Johnson Controls and Visteon, entered into separate agreements to sell majority stakes in their interior business, albeit through two different approaches.   

Last week, Johnson Controls entered into an agreement with China-based Yanfeng Automotive Trims Systems, a subsidiary of Huayu Automotive Systems Co. (HASCO), the component unit of SAIC Motor, to merge most of assets of their interior business via a joint-venture. Yanfeng will have controlling stake of 70% in the yet to be named JV while Johnson Controls own the remaining 30%.  

Earlier this month, Visteon sold majority of ownership in its global interior business to an affiliate of private equity firm Cerberus Capital. The company also completed sales of its 50% stake in a Korean joint-venture Duckyang Industry. Visteon has struggled to sell its entire interior business to one buyer and was left with no option but to sell the business in pieces. Last year, the company sold its 50% stake in its Chinese joint-venture, Yanfeng Visteon Automotive Trims, to HASCO, the parent company of Yanfeng.

Last year, Johnson Controls disclosed its intention to explore various strategic options for its interior business, which makes instrument panels, cockpits, floor consoles, door panels and headliners & overhead systems. The business unit had been struggling for the past few years, with declining sales and financial losses, weighing down the margin of its entire automotive business that includes seating and batteries. In the financial year ended 30 September 2013, the interior business generated sales of USD4.2 billion and made a loss of USD13 million.

In February this year, Johnson Controls sold its headliner and sun visor business to an affiliate of private equity firm Atlas Holding. Meanwhile, the company continued to look for various options for the remaining interior business including divesture or sale. Johnson Controls also started talks with Yanfeng, its longtime partner in automotive seating in China, looking at a potential partnership. Yanfeng had just completed the takeover of Visteon’s 50% stake in their interior joint-venture Yanfeng Visteon, which catapulted the company to one of the biggest interior suppliers in China. The discussions culminated in the agreement announced by the two companies last week.

The merger creates the world’s largest interior supplier with global market share of 15%, including 25% in China where vehicle sales have more than doubled in past five years. HS Automotive forecast vehicle sales to exceed 30 million units in the country by end of this decade. The JV is expected to have revenue of USD7.5 billion and become profitable from the very first year of its operations as it is estimated to have pre-tax margin of 5 to 6% in 2015. It is forecast to grow at as much as 8% for the next five years.

Merging most of the assets seems to be a smart move by both suppliers, more so for Johnson Controls. This allows the US supplier to consolidate its struggling business with that of Yanfeng. By retaining minority control, Johnson Controls is expected to continue to benefit from growth of the interior business in coming years. Yanfeng has seen its revenue growing tenfold in past 10 years. The merger will provide the Chinese company access to Johnson Controls’ products and technologies as well as its international presence and global customer base.   

The JV partners complement each other well and have very little overlap. While Yanfeng is major interior supplier in in China, Johnson Controls’ interior business boasts a strong global presence, including Europe and North America. In term of target market too, there appears little overlap; with Yanfeng catering to customers at the lower end of the market and Johnson Controls customers are premium carmakers.      

Johnson Controls is fairly diversified, at least compared to its major rivals such as Magna, Delphi, TRW or Lear. The company has strong presence in building efficiency which provides energy-efficient systems for office and industrial buildings. Still, the company is focusing on further diversification with an aim to build a multi-industry portfolio. This is expected to further reduce its dependence on the volatile automotive industry.

Last year, Johnson Controls announced its decision to sell its automotive electronics business though in parts as it failed to get buyer for entire business. The company first sold its HomeLink® products business to Gentex and later its automotive electronics business, comprising instrument cluster, infotainment, display and body electronics products, to Visteon for USD265 million.

Going forward, Johnson Controls still retains the automotive businesses of seating and batteries. The company will focus on strengthening presence in high-margin building efficiency business, and with that in mind, acquired Air Distribution Technologies for USD1.6 billion last month.

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