Magna International Inc. is exiting the highly competitive and low-profit-margin automotive interiors business as part of its strategy to narrow its product range and focus on the chunks of a vehicle that generate healthier returns.
The interiors business, which includes door and instrument panels, overhead systems and cargo management parts, but excludes Magna’s seating and lighting businesses, will be purchased by Grupo Antolin of Spain for $535-million (U.S.). The operations generated $2.4-billion in revenue for Magna last year, but no profit figures were released.
“This transaction is consistent with our strategy of refining our product portfolio to focus on certain key areas of the vehicle,” Magna chief executive officer Don Walker said in a statement announcing the deal. The sale is the second divestiture by Magna this year. The Canadian auto parts giant sold its battery business to Samsung SDI Co. Ltd., of South Korea in February.
The interiors division’s sales of $2.4-billion represented about 7 per cent of Magna’s overall revenue of $36.6-billion last year. The division, which was built up mainly through a series of acquisitions, competed against such giants as Johnson Controls Inc., Lear Corp. and Faurecia of France that are specialists in interiors as well as seating.
“It’s still very difficult in the interior of the vehicle to come up with innovative solutions,” said one industry source who has spent much of his career in the auto interiors business. “You can reconfigure the door panel, you can put the cupholder in a different position, but you’re basically still talking about a commodity item.”
That’s different from other parts of the vehicle such as the underbody, where new technologies and new processes help auto makers reduce the weight of steel parts or substitute aluminum and magnesium for steel. “In a door panel or a centre console, you’ve got so many pounds of plastic,” the source said. That became a problem when the soaring price of oil sent the price of resins used in plastics skyrocketing.
The other key issue for producers of trim panels, headliners and other components inside the car is that interiors have become a key battleground as auto makers try to distinguish themselves from one another. That means demands from car makers for price cuts by parts companies became relentless. “They were constantly trying to improve the interiors and add more quality materials, but keep the price [to the customer] the same,” the source said.
Investors have often criticized Magna for the diversity of its businesses, so this deal is likely to be seen as positive – although the price is lower than an expected range of $800-million to $1.2-billion, said Peter Sklar, who follows Magna for BMO Nesbitt Burns, in a note to clients Thursday. “The interiors business is generally considered to be a low-growth, low-return business,” Mr . Sklar wrote.
“With the business being sold, we believe investors will likely value Magna’s focus on some of the remaining potentially higher-growth, higher-return businesses.” Investors will be happy if the revenues from the sale go toward increasing Magna’s share buyback plan or are deployed in higher growth businesses, he said. The deal covers 36 Magna plants that employ about 12,000 people in Canada, the United States, Mexico, Europe, China, India and South Korea, The Globe and Mail reports.