Motherson Sumi’s New Overseas Buy To Fuel Push Into North America
Motherson Sumi, an auto component manufacturer, is again using its timetested method for successful overseas acquisitions — buy a foreign company with slender margins laced with legacy problems, but offering significant potential of scalability, both in margin expansion and revenue growth. This approach is evident in its recent acquisition of the wiring harness business of Ohio-headquartered Stoneridge for $65.7million. A wiring harness is a bunch of cables used to transmit signals or electrical power in an automobile. Motherson Sumi is the largest manufacturer of integrated wiring harnesses in India and the business model of the newly acquired company complements its existing business.
The company successfully turned around two European companies, Samvardhana Motherson Reflectec (SMR) and Samvardhana Motherson Peguform (SMP), by adopting the above strategy. The acquisition of the wiring harness vertical of Stoneridge will bring synergy benefits to Motherson Sumi. The prime motive for acquiring the wiring harness vertical is to make inroads into the high potential North American markets, where the company has limited presence. The acquired vertical will give the company access to six manufacturing plants in Mexico and the US.
Secondly, the gross margin at the wiring harness segment of Stoneridge is nearly 18%, which can be scaled up significantly by the new management. SMP and SMR witnessed manifold margin expansion after being taken over by Motherson Sumi. In the March quarter, SMR recorded an operating margin of 10.6% and SMP 4.6%, compared with a low single-di- git margin for SMR and a negative margin for SMP when they were acquired in 2009 and 2011, respectively. “Our focus for this acquisition is to get more customers and let more vertical integration happen, which would give us more revenue growth and enough room of margin expansion potential. In the long run, when we will undertake in-sourcing arrangement, this would lead to more margin expansion,” said GN Gauba, chief financial officer, Motherson Sumi. Third, the revenue of the acquired vertical stands at $300 million and it has a minuscule market share in the wiring harness business. The management is confident it can ramp up volumes on the back of demand from existing and new customers. Under the previous owner, the wiring harness vertical was not performing well as the management was focused on the electronics business.