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All Conglomerates, Exit: Stage Left

Remember the days when huge, monolithic conglomerates like ITT Automotive, United Technologies and AlliedSignal ruled the automotive supply landscape?

Remember the days when huge, monolithic conglomerates like ITT Automotive, United Technologies and AlliedSignal ruled the automotive supply landscape? These huge corporations balanced their cyclical automotive businesses with equal or greater holdings in various industries such as aerospace, aviation, defense, specialty chemicals, and even casinos. By the mid-1990s, events conspired to drive these companies away from the global automotive industry. What happened and why?

With the advent of "Lopezesque" purchasing policies and the associated dwindling component profit margins during the early to mid 1990s, corporate management within these companies questioned their participation in the automotive industry. Here are a few examples.

Base Case #1— AlliedSignal Automotive
A former disciple of and executive under Jack Welch of General Electric fame, Larry Bossidy took the reins of AlliedSignal during this period of turmoil within the automotive industry. Bossidy's adopted corporate philosophy of leadership in each market that it participates in along with a mandatory 15+% profit margin did not match AlliedSignal Automotive's lagging market share position and single-digit profit margins.

Consequently, AlliedSignal sold its braking division to Robert Bosch and its safety restraints division to Breed Technologies. After a recent merger with Honeywell, the company has recently announced that it has put its Aftermarket division (FRAM oil filters, Prestone anti-freeze and Autolite spark plugs) on the market. The sale of this last division will close a chapter on one of the automotive industry's old-guard suppliers.

Base Case #2— ITT Automotive
As one of automotive's leading producers of braking systems, switches, sensors, and fluid handling components, ITT Automotive's departure from automotive was also based on declining profit margins and slipping market share.

In 1998, ITT sold its Brake & Chassis division to Continental AG for $1.93-billion and its Electrical Systems division to Valeo SA for $1.7-billion. The company still holds a spot in the automotive industry through its Fluid Handling division, but its days as a "megasupplier" to the global automotive industry are over.

What led to the dismantling of ITT Automotive? Some experts suggest that its acquisition of several large GM contracts with little or no profit margins led to the eventual sell-off of the Brake & Chassis and Electrical Systems divisions.

Base Case #3— United Technologies Automotive
Once one of the largest automotive suppliers, UTA completely exited the automotive industry after jettisoning its Interiors, Motors and Electrical division to Lear Corp. in 1998. Lear immediately resold the UTA Electrical Motors division to Johnson Motors after the acquisition.

Known as a key supplier of mirrors, electrical motors, wire harnesses and interior components, UT left the automotive industry amid a massive merger and acquisition binge by Lear and Johnson Controls and the spin-off of Delphi Automotive and Visteon from General Motors and Ford, respectively.

Next to Depart: TRW & Textron?
What happens to the last remaining conglomerate titans—RW and Textron—should be interesting to watch. Will TRW's new leader David Cote, a former General Elec-tric executive, decide that larger profitscan be had in other industries besides automotive? TRW Inc. has a track record of spinning-off or selling non-core businesses (remember its former credit division? Now it's Experian). The Cleveland-based brass may just decide that the continuing automotive merger and acquisition mania combined with declining margins and increasing responsibilities from OEMs are too much to bear any longer. Several clues exist that may predict TRW's future.

  • The assimilation of the LucasVarity divisions has taken longer than expected.
  • Several divisions are reporting single-digit profit margins.
  • Lack of synergy between TRW's safety products, steering/suspension systems, and brake systems divisions.
  • The "commodization" of safety products, steering/suspension systems and brake systems.
  • Expected retirement of automotive industry loyalist and TRW chairman Joe Gorman.

All of these reasons combined may spell the end to one of the automotive industry's greatest supplier dynasties.

Textron's perch is more precarious. A producer of such well-known name brands as Bell Helicopters, Cessna aircraft and E-Z-Go golf carts, Textron is truly a diversified company. Textron Automotive represents 25% of the company's revenue, while its Aircraft (32%), Industrial (39%), and the newly formed Finance (4%) divisions make up the rest of the company. Textron's president and COO, John Janitz, has a strong automotive management background but also orchestrated the dismantling of Wickes automotive holdings in the late 1980s.

Can Textron Automotive keep up with interiors giants like Magna, Visteon, Lear, Delphi, and Johnson Controls? Without major acquisitions in the automotive interiors market, Textron may soon be relegated to shipping modules to its Tier I competitors for integration into complete automotive interiors. To catch up, it may have to pursue two to three mid-size acquisitions to keep pace with the other companies.

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