Magna bets big on China growth
Acquires key German supplier
TORONTO — Canadian auto parts giant Magna International Inc. is making a big bet on the growth potential of the Chinese vehicle market with a $2.5-billion acquisition of the Getrag Group of Companies, the world’s biggest independent producer of vehicle transmissions.
The German company, which counts Chinese automakers Jianglin Motors Group and Dongfeng Motor Group Co. among its joint-venture partners, is expected to grow significantly in the world’s biggest vehicle market during the next five years.
In 2014, Getrag’s Chinese sales amounted to approximately 300 million euros; by 2019, that number is expected to grow to three billion euros. Getrag’s total sales are expected to double to six billion euros over the same time period.
“We’re already in China with most of our product areas, but whenever you get more critical mass, more expertise in management and operations and relationships, I would expect that this would help accelerate our growth over there,” Magna CEO Don Walker said in a conference call with reporters Thursday.
“As part of this, we’ll be entering into joint ventures with customers so I think that will also give us an opportunity to get to know them better and hopefully sell some of our other products to them.”
Magna doesn’t break out its sales by country, but its 2014 external-production revenue in Asia amounted to $1.64 billion US, less than five per cent of the total. “We believe the transaction has considerable strategic merit as Getrag is launching a substantial ramp of new business in China,” BMO analyst Peter Sklar wrote in a research note.
The deal is expected to add to Magna’s earnings by 2017, but Sklar said the accretion will be “muted” because of several factors, including a high purchase multiple, a “modest level” of potential cost savings, the fact that Getrag is in a period of high spending, and the expectation that Magna will buy back fewer shares this year because of the acquisition, which will be funded by a combination of cash and debt.
The company has been selling off non-core assets to focus on areas where it can be a global leader, and Walker said powertrains — which include transmissions — will be a “key” part of its strategy going forward.
“We want to be global, we want to be a leader in technology, we want to be a leader in competitiveness and that was one of the driving factors behind doing this acquisition,” Walker said. Getrag produced four million transmissions in 2014, about five per cent of the global total. About 70 per cent of transmissions are built in-house by automakers, but Walker said he expects more outsourcing to independent companies like Magna in the future.
“All (the automakers) have huge competitive pressures, so to the extent that we have good products that are competitive and we can support them globally, I think you’ll continue to see a higher percentage of the vehicle being outsourced, especially as you bring in new technologies that suppliers have a lot of expertise in,” Walker said.