The $20 billion merger of Johnson Controls (JCI - Get Report) and Tyco International (TYC) could create repercussions for the global automotive seating and interiors business, possibly resulting in another merger of major auto parts manufacturers.
Last week in Detroit, Johnson Controls announced that in October its seat-making operations would become a publicly traded company called Adient.
Can Adient survive long as an independent operator? Investors will decide, as will automakers, which make key long-term decisions about which companies will supply future vehicle projects.
Johnson Controls already sold a big chunk of its interiors business to China's Yanfeng Automotive Interiors in 2014. Johnson Controls kept a 30% stake in that venture, which will be transferred to Adient.
CEO Alex Molinaroli offered two reasons for divesting from seating and interiors: the automobile business's cyclical nature, and the need to invest large amounts of capital to modernize the product.
Molinaroli, who will run the combined Johnson Controls-Tyco, could have mentioned that profit margins in the automotive parts industry vary -- extremely thin for commodities like oil filters and electrical harnesses, to sizable for software and sophisticated electronic components. Delphi Automotive (DLPH - Get Report) -- a descendant of General Motors' former parts operation, which filed for bankruptcy in 2005 -- is an example of a parts maker that has achieved strong share price appreciation by steadily divesting of low margin businesses and replacing them with bigger moneymakers.
At the peak of an automotive cycle, when vehicles are selling briskly, parts manufacturers appear more attractive to investors. With U.S. consumer demand for new vehicles now appearing to run out of steam after six years of growth -- a view held by more than a few analysts and executives -- auto parts shares may suffer. By the time of the Adient initial public offering in October, a clearer direction for the U.S. new-vehicle market might influence Adient's market capitalization and, therefore, its attractiveness as a potential acquisition for Lear, Faurecia or maybe an up-and-coming player such as Yanfeng.
The merger of Milwaukee-based Johnson Controls and Tyco likely was set in motion last July when Johnson Controls said it intended to spin off its low-margin seating business, a precursor to the joining of the two companies into a $50 billion company, based in Ireland, that makes heating, cooling, industrial refrigeration and fire security systems.
The approaching conclusion of a long run of healthy sales for automotive manufacturers could be a sign of further moves by parts manufacturers beyond seats and interiors.