Auto-Parts Suppliers Are Climbing Into the Driving Seat

(Bloomberg) -- Auto-parts suppliers are coming out from under the hood, and taking back some power in the process.

Take long-time Toyota Motor Corp. loyalist Aisin Seiki Co. This week, the Japanese maker of transmissions and clutches announced joint ventures with China's Geely Automobile Holdings Ltd. and Guangzhou Automobile Group Co. The deals will allow Aisin to begin manufacturing components in China by 2020, furthering domestic players' ambitions to strengthen their technology, and credibility.

A choice of aggressive partner like Geely, in stark contrast to the more conservative Toyota, means there's growth but also heightened risk for Aisin. Geely's car sales increased by more than 50 percent last year, and Guangzhou Automobile has the backing of the state.

Aisin's move to branch out is necessary. Last year, 60 percent of its revenue came from Toyota group companies, and that's been the case for many years. Chinese automakers account for about 11 percent, with European firms like Volkswagen AG and Audi AG making up the rest.

In good times, that captive relationship has been lucrative. But with large swathes of the auto market stagnating – the launch of Toyota's new Camry in the U.S. wasn't the hit expected – a rethink was crucial.

Auto-parts companies are also being squeezed as carmakers churn out models faster and demand shorter contractual pricing periods. New technologies like connected cars and advanced driver-assist systems are dislocating bargaining power in the broader auto industry, taking it away from parts suppliers and putting it in the hands of car companies.

Aisin is seeking to challenge that. Earlier this year it also established a subsidiary in San Jose to invest in electric car and artificial intelligence startups.

Costs are also key in this repositioning. Taking control of technology investments at the parts level of the supply chain could give Aisin more say on pricing with customers. Partnering also helps keep Aisin's capital spending bill under control, which historically hasn't been too high anyway, with R&D accounting for about 5 percent of sales.

The company's focus on the green-car champion of the world – China – is clear. Aisin is set to show off its one-motor hybrid system for electric cars at the Beijing Auto Show this week.

Motors are becoming the center of attention in the auto and parts world: More fuel efficient engines mean more efficient cars. While motors only account for 5 percent of Aisin's sales -- mostly to Toyota -- it's looking to other customers now.

According to Goldman Sachs Group Inc., motors can account for up to 10 percent of the cost of an electric vehicle, not as high as the 50 percent batteries command, but a significant share nonetheless. This at a time the market for such parts is expected to balloon to more than $30 billion over the coming decade.

Aisin currently trades at 11.4 times forward earnings, below the global average, and the firm's Tokyo-listed stock is down 10 percent from its January peak. To keep up with car companies that are attempting to speed off in all directions, auto-parts makers have no option but to switch gears.

To contact the author of this story: Anjani Trivedi in Hong Kong at atrivedi39@bloomberg.net.

To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net.

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