Published in Manufacturing
Burke Porter Group, whose products are shown above and at right, has leveraged the backing of China Everbright Ltd. to buy up technology companies and expand its global reach. Burke Porter Group, whose products are shown above and at right, has leveraged the backing of China Everbright Ltd. to buy up technology companies and expand its global reach. COURTESY PHOTO

Auto suppliers push into tech deals to mitigate disruption

BY Sunday, May 13, 2018 07:00pm

Manufacturers in the automotive supply chain are scooping up acquisitions in emerging technologies to break into new markets before their competition. By moving into alternative powertrains, connected car technologies, artificial intelligence and predictive analytics, suppliers want to position themselves to get ahead of disruptions as the industry shifts to the “car of the future,” according to Jeff Zaleski, U.S. automotive deals leader at PricewaterhouseCoopers LLC, a global consulting firm.

“Although electric and autonomous may be several years away, companies are investing today, and all types of companies are looking at aggressive cost management in order to free up capital,” Zaleski told MiBiz. “Because these auto-tech deals are expensive and a lot of these technologies are unproven, the investments are a bit more risky.”

Already, West Michigan-based manufacturers are taking chances in a competitive market.

Among them is the Grand Rapids-based Burke Porter Group, a manufacturer of dynamometers and other industrial equipment. Since 2010, Burke Porter has completed 11 acquisitions, including many deals focused on technology. Just this month, the industrial equipment manufacturer acquired Van Hoecke Automation, a Belgium-based supplier of production automation for the food and automotive industries.

“It’s not only in … auto, but outside of auto you see a lot of that,” Dave DeBoer, president of Burke Porter, said of the current deal-making environment. “Of course (with) auto, the ultimate intelligent machine is probably an autonomous driving vehicle. All of the talk right now is about sensors and making critical, real-time decisions. … It is a collision between Silicon Valley and Detroit’s automation alley, and we’re kind of in both.”

At the time of the Van Hoecke acquisition, DeBoer said “the pace of technology advancement in manufacturing … created significant opportunities for us to address customer demands of today and well into the future.”

According to PwC’s Zaleski, automotive investments were up in the first quarter of 2018, with deal value rising 272 percent from the fourth quarter of 2017 to $29.8 billion, double the threeyear historical average.

Zaleski notes that financial buyers like Burke Porter, which is owned by Hong Kong-based investment firm China Everbright Ltd, are continuing to “chase yield” and pursue “tech-oriented companies and startups looking to provide solutions to the emerging auto-tech scene.”

“If you look at investments that Michigan companies are making, whether it’s Michigan companies or Michigan universities or even the government trying to make Michigan an attractive place for the car of the future, Michigan is well positioned to lead in this auto-tech trend going forward,” Zaleski said.

In part, the elevated deal values stem from the “predictability” that automotive companies have when it comes to new vehicle launches, according to Zaleski.

“No one can predict the ups and downs of the recessions,” he said. “One thing you can predict is that there are lots of studies, lots of analysis around how many vehicles are going to be made (this year), and when you tie in your investment and your product into these vehicle launches … it gives you a certain level of predictability around those cash flows.

“We continue to see a tick-up in auto-technology deals nationally and globally, (and) when we think of auto-tech, we think of investments in mobility, connectivity and electrification.”

POISED TO ACCELERATE

As the automotive market continues at a strong pace, industry watchers expect deals to increase at a 2.8-percent compound annual growth rate through 2024.

Despite growth in the volume of deals, foreign markets continue to dominate M&A activity, especially in Asia and Oceania, which have the largest share of deal value and volume.

No U.S. transactions ranked among the top 10 automotive deals in the first quarter of 2018, a fact that surprised Zaleski.

“Given what we are seeing in the economy right now, given the impacts of U.S. tax reform, which is expected to make more capital available to U.S. companies, I expected more deals in the top 10 to be in the United States,” Zaleski said. “I think that will right-side itself in the remainder of the year as there are a lot of companies that are trying to figure out what to do with the tax reform benefits they received.”

In North America, companies completed 61 deals valued at $200 million. That compares to Asia and Oceania, where firms closed 65 deals at a value of $16.1 billion.

Despite having a relatively “quiet first quarter,” Zaleski said the U.S. “is poised to come out of the chute the second half of the year with some big-time merger and acquisition news.”

He added that industry consolidation and federal tax reform will play a pivotal role in the M&A market later this year.

“We are continuing to see consolidation in the industry to obtain cost synergies so they can free up additional capital for these (auto-tech) investments,” Zaleski said. “That’s why the tax reform is a big player because (when) you move the tax rate from 35 percent to 21 percent, you inherently are going to free up capital to make investments.”

For example, Zeeland-based Gentex Corp. (Nasdaq: GNTX) took an equity stake in Boulder, Colo.-based software-as-a-service provider Yonomi. The move expanded Gentex’s vehiclebased HomeLink technology to work with home automation devices.

Locally, some automotive suppliers have made bets on technology companies in the last year.

DENSO International America Inc. also acquired Holland-based startup InfiniteKey in December 2017 in a move to improve its technology portfolio. InfiniteKey’s phone-as-a-key technology eliminates the need for physical automotive keys.

As well, Faurecia Ventures, the Silicon Valleybased investment arm of global automotive supplier Faurecia SA, invested an undisclosed sum in Holland-based AlSentis LLC, a developer of touchcontrol technology, as MiBiz reported in December.

RUSHING INTO THE TECH FIELD

To get ahead in a competitive market, Zaleski said manufacturers must be willing to take risks. If that means targeting a Silicon Valley tech startup with no finished products, then so be it.

“I think what we are seeing from our reports is companies focusing on the aspects of value creation in these deals,” he said. “There’s more due diligence being done on finding out where the value is being created, so they can understand … the culture of the acquisitions that they make.”

As an example, Zaleski said companies nationwide are adjusting to meet the needs of all industries and to become global companies.

At Burke Porter, DeBoer said recent company acquisitions are all part of a global portfolio to create “intelligent machines.”

“Van Hoecke is global and they make machines and automation, so they fit our desired strategy,” DeBoer said. “We’re receiving opportunities, and you see a lot of technology trends favoring sensor-based machine control, where you use data to vary the way a machine runs rather than going to discrete locations.

“If you guess wrong (on the acquisitions), then you’re dealing with a long-lasting problem, and you don’t want to let people down when you make commitments.”

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