Honda, Hitachi agree to merge four car parts makers

Honda Motor Co and Hitachi Ltd agreed to merge four of their car parts businesses to create a components supplier with almost $17 billion in sales, joining a wave of partnerships sweeping the global auto industry.

Honda, Japan’s second-biggest carmaker, and Hitachi, one of the country’s biggest industrial conglomerates, said on Wednesday they will combine Hitachi Automotive Systems and Honda affiliates Keihin Corp, Showa Corp. and Nissin Kogyo Co. Following a tender offer and an interim consolidation, Hitachi will own two-thirds of the new entity, with Honda owning the rest, the companies said.

Faced with tectonic shifts toward electric vehicles and autonomous driving, automakers and their suppliers have been seeking allies to pool resources and know-how. Overnight, news broke that Fiat Chrysler Automobiles NV and French carmaker PSA Group are exploring a combination, and last month Toyota Motor Corp agreed to boost its stake in Subaru Corp. Slumping demand for conventional vehicles and uncertainty over which technologies and businesses will prevail is forcing players in the industry to find partners.

“The car and motorcycle industry is facing a once-in-a-century major shift, with pressure to reduce environmental impact, cut accidents and improve comfort,” the companies said in a statement. “There’s intensifying competition in electrification, autonomous driving and connected cars.”

Hitachi Automotive Systems began testing autonomous and connected cars in North America in 2015 in simulated urban environments, and began verification of the systems on ordinary roads in Japan last year. The company makes autonomous driving electronic control units that combine sensors and cameras that work with chassis components. It also supplies more conventional parts like power steering pumps, brake pads and ignition coils to carmakers.

Transaction details

The transaction announced on Wednesday will take place in two steps, Honda and Hitachi said. First, Honda will make a tender offer for all shares of Nissin Kogyo, Keihin and Showa and Hitachi will make Hitachi Automotive Systems a subsidiary. Then, the four suppliers will merge, with Hitachi owning about 67 per cent and Honda the remaining third. A timetable for the steps hasn’t been determined, the companies said.

Keihin supplies electrification systems for hybrid and electric vehicles along with valves and controls for fuel cell vehicles. It also makes conventional engine components including management systems for natural gas vehicles.

Showa manufactures differential gears, shafts and other drivetrain components along with shock absorbers and steering systems.

“There might be more mergers among auto component makers seeking scale,” said Koji Endo, an analyst at SBI Securities. “Small auto part makers could merge together, or big manufacturers could actively buy small ones. Clearly we will see such moves in Japan and elsewhere in the world.”

Four-way combination

The four-way combination would create a parts maker with about 1.8 trillion yen ($16.5 billion) in sales, compared with Japan-based Denso Corp., a Toyota affiliate that had sales of 5.3 trillion yen in the year ended March and Aisin Seiki Co., which had about 4 trillion yen.

Hitachi Automotive Systems had sales of 971 billion yen in the year ended March, while Keihin, Nissin Kogyo and Showa combined had about 825.6 billion yen.

Parent Hitachi, which makes everything from nuclear power equipment to telecommunications gear and construction machinery, counted on automotive systems for about 19 per cent of earnings last fiscal year. The conglomerate has been selling off and merging non-core units as it focuses on growth from information technology systems.

Nissin Kogyo and Showa count on Honda for more than half of their revenue, while also supplying carmakers including Suzuki Motor Corp., Mazda Motor Corp. and Subaru, according to data compiled by Bloomberg. Keihin is more dependent on its affiliate, relying on Honda for 85 per cent of sales, while also supplying some to Volkswagen AG, Ford Motor Co. and Daimler AG, the data show.

Both Honda and Toyota have cut their profit and sales forecasts for the current fiscal year as demand in the US and China, the two biggest export markets, has been worse than projected.

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