The ability to create a credible gap between rivals through acquisition will be increasingly difficult for automotive semiconductor vendors with the market share ROI (return-on-investment) from M&A (merger and acquisitions) effectively coming to an end. The Strategy Analytics Powertrain Body Chassis and Safety (PBCS) service report, “From Supply Chain to Value Network - the Changing Face of Automotive Competitive Landscape Dynamics (http://sa-link.cc/1pV),” analyzes the largest and most significant mergers and acquisitions in the automotive industry, with particular focus on semiconductor vendors, as well as looking at some of the major Tier 1 activity.

The Renesas-NEC merger started the last decade, allowing Renesas Electronics to command the top spot for several years before NXP’s acquisition of Freescale changed the rankings in 2015. Moving into the next decade, Infineon’s acquisition of Cypress will again change the rankings at the top. With each of these deals, the resulting entity has been able to leapfrog rivals to the number one spot, but the ability to create a credible gap between rivals through acquisition will be increasingly difficult.

Effectively, the market share ROI from M&A has dropped to zero for automotive semiconductor vendors.

We shouldn’t expect the current round of M&A activity, e.g. ADI buying Maxim, to result in a demonstrable shift in the top tier of automotive semiconductor vendor share rankings. They do validate a focus on capturing capabilities to capitalize on automotive industry trends related to connectivity, electrification, autonomy, infotainment and mobility services. From an M&A perspective, the challenge will be to identify companies that will provide strategic value and be able to successfully execute deals.

There is an opportunity for a break away from the traditional automotive supply chain.

Automotive OEMs have been traditionally heavily reliant on Tier-1 and 2 suppliers for the development and manufacture of vehicle sub-systems. The move towards a value network is dictated by moves towards new architectures and technologies, which in turn is being influenced by the aforementioned trends towards autonomy, electrification, ADAS, infotainment and telematics, and the connected vehicle.

The decision of an OEM to move towards a value network topology as opposed to a traditional supply chain will also be influenced by whether or not the OEM is an established player. In such cases, a company has a legacy of relationships that can be leveraged effectively to maintain a status quo which does not involve the OEM having to become a systems integrator.

On the other hand, new players in the automotive industry that do not have a legacy of relationships to worry about are much more open towards incorporating flexibility in sourcing arrangements to establish differentiation in their products which will in most cases be naturally focused on autonomy, electrification, ADAS, infotainment and telematics, and connectivity.

Software is starting to change the make-up of the traditional supply. Tier 1 companies would traditionally incorporate the software development as part of their hardware offerings with little to no monetary value assigned to these efforts. A trend towards decoupling hardware and software development is adding an additional layer to the traditional supply chain.

This does not mean that the traditional Tier 1/2 company will disappear, however. We can expect to see closer cooperation between Tier 1s and OEMs in the areas of powertrain, body, chassis and safety, with Tier 1s looking to provide more specialized capabilities.

The transformation from an automotive supply chain to a value network is evidenced by OEMs looking to work directly with companies that can provide strategically vital capabilities, and this will now be the focus for future M&A activity. Whether the transformation from an automotive supply chain to a value network becomes a permanent fixture will dictate which future partnerships, mergers, acquisitions and divestments create the next major seismic shift in the automotive competitive landscape. 

Check out the report “From Supply Chain to Value Network - the Changing Face of Automotive Competitive Landscape Dynamics” (subscription required) for the full analysis and thanks for reading!

Feel free to contact me to discuss this post and the underlying questions raised. For more information on Strategy Analytics’ extensive coverage of the automotive industry, take a look at the PBCS (Powertrain, Body, Chassis & Safety), AVS (Autonomous Vehicles Service), AIT (Automotive Infotainment and Telematics) and ACM (Automotive Connected Mobility) services.