Lear, ZF, make big acquisition splashes as auto market consolidation looms

This past week, Lear has dropped $320mn on Xevo, a connected car software provider that is present in some 25mn cars, and ZF has bought trucking ADAS slinger Wabco, for €6bn ($6.74bn). The next three years are going to be full of similar deals, as the OEMs, and the automakers too, try to buy their way into the lead, on the back of new technologies – as the industry grapples with electrification, pollution regulations, and autonomous driving.

There is still plenty of room in the automotive sector for the kinds of massive acquisitions seen in the semiconductor market. The automakers themselves seem keen to expand into the realm traditionally governed by the OEMs that supplied them, and among the OEMs, there’s a real impetus to make oneself more attractive to the automaker by having a broader portfolio.

To this end, OEMs are going to snap up smaller startups and OEMs that could fill in the gap in its their portfolios. This runs in parallel with the automakers’ apparent desire to source from fewer OEMs, taking larger deals for components that now are not just electromechanical, but now need supporting software suites and services.

In time, this market, like semiconductors, is going to move towards a smaller number of giants that dominate the market, and then in more time, it seems likely that the wheels are going to fall off, and these giants will topple. Electrification is likely to be the biggest roadblock, as an electric drivetrain removes the need for so many of the engine and transmission components that make up so much of the current supply chain.

Similarly, more power compute platforms are going to force consolidation among the plethora of independent controller systems inside vehicles, and if the industry ever gets round to fully embracing automotive ethernet, there’s a whole lot of parts in the wiring loom that are going to fall out of favor fast. Throw in the wireless V2X connectivity that will be needed, maybe a smattering of 5G too, and the automotive supply chain is going to look radically different in 10 years.

In-car screens and sensors are going to rapidly change how the interior and cockpit/dashboard feel, particularly with regard to third-party service integrations. That’s where Xevo comes in, a Seattle-based firm with 300 staff that was founded in 2000, initially called UIEvolution but rebranding after acquiring, a machine-learning startup. Its software is now used in 25mn cars, of which there are two main products – Journeyware and Market.

Journeyware is more of a conventional in-car infotainment (IVI) system, providing a thin-client approach that brings in a host of cloud applications, mainly focused around media consumption, navigation, and mobile integration. The Xevo Context element is where the AI technologies come in, able to recommend local services based on where the vehicle is, where it has been, and where it might be going. Xevo ID handles payment mechanisms, for interacting with these services, and Xevo Mobile is the framework that lets automakers provide remote control features through a smartphone app.

Xevo Market is much more interesting, in terms of the automotive vision of the future. Vevo bills it as a way to ‘generate new user engagement and gain valuable usage insights,’ but of course, it means Xevo gets to be the middleman between the car occupants and the brands they want to interact with. It also extends the time that the automotive brand can make money from the car, as this opens up a whole post-sale and even post-first-owner ecosystem.

A recent announcement saw Xevo partner with Domino’s Pizza for example, to launch the Domino’s AnyWare pizza ordering platform. Now, ordering pizza isn’t super exciting, but it is something that a whole lot of consumers do on a routine basis. Add in a few other big-name food brands, or retailers like Amazon, and suddenly, the company that controls that marketplace mechanism can make a tidy sum from a slice of all those transactions.

That’s what will have tempted Lear, a company that has specialized in seating and electrical systems. You may well not have heard of Lear, but it’s a $21.1bn company that employs 170k people globally, and clocks in at #148 on the Fortune 500. Xevo has a strong presence in the US, but Lear points out that there’s significant expansion opportunity in North America, Asia, and Europe.

“The acquisition of Xevo broadens Lear’s connectivity portfolio, bringing together Xevo’s leading e-commerce vehicle platform technology with Lear’s expertise in electronic systems,” said John Absmeier, Lear’s Chief Technology Officer. “Xevo’s user interface establishes a connected marketplace for consumers in their vehicles, unlocking previously unrealized value from vehicle data and opening up new revenue streams.”

Elsewhere, ZF’s purchase of Wabco is a much larger deal, but a little less interesting. The German OEM, which has focused on automotive transmissions and chassis components, but is also present in rail, aerospace, and defense. With annual revenues of €36.4bn ($40.88bn), the firm employs around 146k people.

Wabco is much smaller than ZF, but a lot bigger than Xevo. With around 16,000 staff across 40 countries, the ADAS maker, specializing in systems for trucks and their trailers, reported revenue of €3.4bn ($3.82bn) and net income of €372mn ($417.82mn). Wabco and ZF have preciously jointly developed an evasive maneuvering assist system, and it seems likely that the results of this have led to the acquisition.

ZF says the purchase is the fulfillment of a long-held desire to expand into ADAS, and that vehicle connectivity and semi-autonomous systems will be big deals for the trucking and delivery sector. ZF also says that this will make it less dependent on the economic cycle of the passenger car industry, which sounds like it hopes trucking is going to be a more stable market going forward.

V2V is a necessary first step towards platooning, a way for multiple trucks to form a convoy that gets to share aerodynamic benefits for greater fuel efficiency. Part of this requires driving much closer together than is normally safe for a human driver’s reaction times, and this is where the ADAS systems come in. Away from these convoys, the ADAS systems help keep the most potentially lethal vehicles on the road out of accidents involving the squishy passenger cars, and more advanced systems will also start preventing human error accidents too – monitoring the driving and condition of the truck drivers themselves.

For trucking fleet operators, these fuel and uptime savings equate to much better profit margins, and once these trucks can legally drive themselves on highways, it should result in staff wages savings too, as one driver could be able to do the work of two drivers splitting shifts. Of course, this is much more dependent on receptive legislation than the other areas, but it could have a transformational affect on the logistics industry.

To this end, ZF has set aside a lot of cash to get a good foothold here. In 2014, it dropped €12bn on TRW Automotive, a self-driving firm, and has another €12bn put to side for e-mobility and autonomous driving investments. A quirk of ZF is that it is around 90% owned by the town that appears in its full name – ZF (Zahnradfabrik) Friedrichschafen.