Grow, or get crowded out

July 2018 – Europe's automotive aftermarket is undergoing radical structural change. Brisk M&A activity is still stoking cutthroat competition, especially since the North American mega-players began to aggressively tap into the European market. In the second part of their study series on the automotive aftermarket (available in German) – strikingly titled “Survival of the Fittest” – Roland Berger and HSH Nordbank have analyzed what this means for the established vendors and how they can compete in a radically changing market.

Charles Darwin had it right: “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.” This quote from the famous British scientist is no less valid today, even almost 140 years after his death. And above all, it is not only in the day-to-day world of flora and fauna that Darwin’s statement proves true, but also in the field of economics.

Around 480 million passenger cars and nearly 80 million commercial vehicles are currently on the road in Europe. The manufacture and distribution of spare parts alongside car maintenance and repairs currently accounts for a market volume of around EUR 248 billion in Europe.

For some time now, digitization and concentration have been causing a stir on the European automotive aftermarket, which encompasses all services and products for delivered automobiles, from service in the workshop, to the tire trade, to the intermediary trade and wholesale of spare parts. In a four-part study series, Roland Berger’s consultants and HSH Nordbank highlight the structural change in the European aftermarket. Part two, which has just been published, is devoted to the growth of mergers & acquisitions (M&A). Titled “Survival of the Fittest”, the name of the study is also a programmatic statement.

Deals per country in Europe since 2005

Great Britain, Germany and the Netherlands are hotspots for M&A. Great Britain is often used by North American players as an entry point to the European market.

Deals per country in Europe since 2005

Source: Mergermarket, Roland Berger, HSH Nordbank

North Americans are conquering the market

The sharp increase of cutthroat competition in Europe’s automotive aftermarket has been particularly apparent over the past two years. Concentration on the highly fragmented European market is slowly but steadily increasing, even if we are still a long way from US proportions in Europe. There, half of the market is dominated by the top 3 vendors; in Europe, the three leading players so far only have a market share of around 15 percent.

The famous economies of scale are an especially significant M&A motif: in parts wholesale in particular, these reach considerable dimensions.

“We have seen 65 deals in Europe since 2005, with M&A activity growing significantly, especially in 2016 and 2017, both in terms of the number of transactions and their volumes,” says Jens Thiele, Head of Trading Clients at HSH Nordbank and one of the authors of the studies. The market is experiencing more and more mega-deals; industry heavyweights often buy smaller players. “With these acquisitions, big players want to tighten their local network and drive their regional growth as efficiently as possible,” said Julian-Kaya Bagbasi, Vice President at HSH Nordbank and co-author of the study. The famous economies of scale are an especially significant M&A motif: in parts wholesale in particular, these reach considerable dimensions. “Obtaining market shares can achieve savings of between 10 and 20 percent,” says Bagbasi.
But “takeovers between big players are also increasing,” adds Thiele. The M&A climate is especially pronounced in Great Britain, Germany and the Netherlands.

Cross-border acquisitions and mergers are booming: Of the 65 M&A transactions since 2005, 39 are cross-border deals. The purchases are mainly made by strategic investors, but financial investors are also increasingly discovering the opportunities of the automotive aftermarket.

And ever more big North American companies can be found amongst the buyers; currently, the LKQ Corporation is aggressively acquiring market share in Europe. Headquartered in Chicago and with annual sales of 9.74 billion US dollars in the 2017 fiscal year, the corporation has been active in the European aftermarket for seven years now, following its acquisition of the British operator Euro Car Parts Limited. In 2016, LKQ acquired the Belgian Sator Holding with 15 subsidiaries and around 2,700 employees in the Netherlands, Belgium and Luxembourg. In the same year, LKQ made several shopping trips on the Old Continent and, among other things, bought the Italian Rhiag Holding – which has a presence in its home market of Italy as well as in Spain, Switzerland and many Eastern and South-Eastern European countries – for around one billion euros. Finally, at the end of 2017, the Chicagoans entered the German market and bought their competitor Stahlgruber for 1.5 billion euros. Based near Munich, the company has around 100,000 business customers as well as branches in Germany, Eastern Europe, Italy and Switzerland.

„With these acquisitions, big players want to tighten their local network and drive their regional growth as efficiently as possible.“

Julian-Kaya Bagbasi, Relationshipmanager Trade at HSH Nordbank

How can I best ride the wave?

The M&A wheel in the automotive aftermarket is turning faster and faster. But what does all this mean for the established providers? “How can industry players ride this wave of consolidation and use the transition phase for their further development? And what comes after an M&A – how can a newly-integrated post-merger integration management quickly turn newly-fused organizations into a successful unit after a takeover? There are no simple answers,” says Bagbasi of HSH Nordbank. Nevertheless, in their new study on the automotive aftermarket, the consultants Roland Berger and HSH Nordbank are trying to identify ways that one can make the market disruption work for oneself and use it for one’s own benefit.

Because one thing is very clear: no competitor will be able to stop the radical change that has begun in the market. The number of cozy market niches is getting smaller. “Grow and radically change, or be pushed aside?” is therefore the fatal question for companies in the automotive aftermarket.

„Lone combatants under a critical size will have a hard time surviving the wave of consolidation in the aftermarket. The rules of the aftermarket are being rewritten.“

Alexander Brenner, Roland Berger Partner

Simply sitting out challenges and problems in the field of economics has always been the worst possible choice.

Not least, it is the advance of assailants from the USA or Canada that unsettles domestic providers in Europe. “Lone combatants under a critical size will have a hard time surviving the wave of consolidation in the aftermarket. The rules of the aftermarket are being rewritten,” says Alexander Brenner, partner at Roland Berger.

Simply sitting out challenges and problems may sometimes work in other areas of life or politics; in the field of economics, however, it has always been the worst possible choice. “The consolidation wave is rolling; the concentration process in the automotive aftermarket will continue over the next few years. There are only two options to endure this phase: as a drifter or as a designer of structural change”, posits HSH Nordbank expert Thiele.

Cross-border deals and their developments in Europe

It is becoming increasingly important for the larger players to be present in as many European markets as possible. Their expansion focuses on regionally rooted companies.

Cross-border deals and their developments in Europe.

Source: Mergermarket, Roland Berger, HSH Nordbank

Insolvency statistics are a warning sign

However, to make the transition, many companies have to leave their previous comfort zone of small, regional markets with local customers. “Small players will be unable to make up for their growing size disadvantages with these plus points alone,” Thiele predicts. Even today, a look at the insolvency statistics in Germany shows how tight things might get for SMEs who are unwilling to change: In 2017, the Federal Statistical Office recorded 638 insolvencies in the motor vehicle industry, 9 percent more than in the previous year. This is in contrast to the rest of the economy, where the number of insolvent companies has fallen steadily in recent years, reaching its lowest level since 1999 in 2017.

“Regarding the consolidation of the industry, the increase in bankruptcies is both a consequence and driver of the concentration process, which intensifies itself. The more players that involuntarily disappear from the market, the greater the influence of the remaining players, which in turn increases the competitive pressure on smaller companies,” says the study.

„The consolidation wave is rolling; the concentration process in the automotive aftermarket will continue over the next few years. There are only two options to endure this phase: as a drifter or as a designer of structural change.“

Jens Thiele, Head of Trade at HSH Nordbank

The counselors of Roland Berger and HSH Nordbank say there is no silver bullet with regard to how one should proceed. Possible actions depend mainly on the size of the company. The authors of the study advise smaller parts wholesalers with an annual turnover of less than 100 million euros to take on the role of a “local champion”. Instead of trying to compete with industry leaders on a national or even international stage at disproportionate cost and risk, smaller companies should focus on building their regional niche strategy: by expanding their offer and service portfolio and creating ever closer ties to their customers. Management consultants call this “forward verticalization”. Other options include controlled growth by means of regional acquisitions and the expansion of online business. However, according to the authors, they should not undertake this alone at great expense, but rather via cooperation with established platforms such as Tyre24.

Concentration process in the European automotive aftermarket in selected countries

In most countries, the three largest companies still have a relatively small market share.

Concentration process in the European automotive aftermarket in selected countries

Source: Roland Berger, Harvard Business Review

What to do in this case? For one thing, these companies could emancipate themselves from the industry giants as “consulting champs”. There is the also opportunity to grow through joint ventures or acquisitions.

Medium-sized parts wholesalers with annual turnovers between 100 and 400 million euros are often stuck in the sandwich trap: too big for a niche strategy, too small to take on the big players. What to do in this case? For one thing, these companies could emancipate themselves from the industry giants as “consulting champs”. There is the also opportunity to grow through joint ventures or acquisitions. “In about half of European markets, there are one or two regional market leaders who may be interesting candidates for acquisition,” says Thiele.

The major parts wholesalers with annual turnovers of 400 million euros upwards need take only one courageous step forward to stand against the giants from North America. What is needed here is a supraregional or international expansion strategy. According to the study, while the British or Scandinavian market has already been carved up, it is worth looking into the still rather fragmented markets of South-Eastern Europe or Southern Europe. Charles Darwin sends his regards.

Our competencies - Strong for entrepreneurs