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Pressure to consolidate grows on auto parts suppliers

The theme of the Tavolo Canada conference theme was transatlantic partnerships, where Canadian and Italian companies would work together to crack the supply chains of Fiat-Chrysler and its global rivals in an industry where the big are getting bigger and the weaklings – Saab went bankrupt last month – are hurtling into the ditch.

Alessandro Bianchi/Reuters/Alessandro Bianchi/Reuters

Maurice Tuff, chief executive officer of Newfoundland's tiny Lemur Vehicle Monitors, a maker of wireless communications devices for cars, is thrilled that Fiat SpA and Chrysler Group LLC are coming together to form the world's seventh-largest automotive group.

While Lemur so far sells its products only to car owners, Mr. Tuff hopes that, one day, the manufacturers themselves will offer Lemur's gadgets as optional equipment on new cars; dealing with Fiat and Chrysler as one would open up a transatlantic market. "We would have the ability to sell into Europe," he said. "For small companies like us, it's better to work with a few big customers than a lot of smaller ones."

Mr. Tuff was one of a couple of dozen Canadian companies at the Tavolo Canada – Canadian Table – auto parts suppliers' conference, hosted by the Canadian embassy in Rome and the chamber of commerce in Turin, home to Fiat, Chrysler's controlling shareholder. The theme was transatlantic partnerships, where Canadian and Italian companies would work together to crack the supply chains of Fiat-Chrysler and its global rivals in an industry where the big are getting bigger and the weaklings – Saab went bankrupt last month – are hurtling into the ditch.

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The consolidation of the global auto industry has been expected for several years. Sergio Marchionne, the Italian-Canadian boss of both Fiat and Chrysler, has said repeatedly that only six mass-market auto groups will survive (implying that Fiat has one more deal to do). When the auto companies get bigger, they want their suppliers to do the same.

Their goal is to have a small number of big suppliers who can deliver the most dependable and advanced products to the car assembly plants. The car companies don't have the patience or money to deal with small armies of mom-and-pop shops. Another conference delegate, Peter Frise, director of automotive research at the University of Windsor, said that it costs as much as $5,000 a year just to maintain a simple product number alone in an auto maker's IT system. "Every corporate relationship that can be eliminated saves money," he said.

As the auto industry whittles down its supply chain, there will be as many, or more, losers than winners for the simple reason that not everyone can become a big parts supplier. "It's increasingly difficult for small, private, thinly capitalized companies to survive," said Bliss White, the Blake Cassels & Graydon auto industry lawyer who attended the Turin conference. "Suppliers who lack the capability to expand to meet auto makers' requirements for supply on a global basis have become casualties and I think this trend will continue."

He said that "a number" of small parts suppliers have gone under in Ontario's automotive heartland since the dark days of the General Motors and Chrysler bankruptcies.

Sating the auto makers' desires for fewer but bigger suppliers is only one of the extreme pressures heaped on the parts industry in the past couple of years. The other is meeting the tight new regulations on fuel economy on both sides of the Atlantic.

In the United States, U.S. President Barack Obama wants a big jump in the corporate average fuel economy (CAFE) standard that has dictated mileage since 1975, shortly after the Arab oil embargo sent oil prices soaring. The latest CAFE standard covers the 2012 to 2016 model year and will ultimately require average fuel economy to reach 35.5 miles a gallon (6.6 litres per 100 kilometres), up from the current average of 25.

The CAFE figure is expected to keep rising, meaning that the auto companies will have to re-engineer cars entirely to make them smaller, lighter and much more fuel efficient through the use of electric and hybrid drive systems. "The pressure on suppliers is really accelerating now," Mr. Frise said. "All of a sudden, price is not the only issue. If your car seats cost $12 more, but weighs four kilos less than the competitors', price would have won 10 years ago. Now, the more expensive light seat will win."

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One area where the Canadian and Italian parts suppliers hope to make a splash is in "connected" cars, that is, cars that become more and more like iPads or iPhones on wheels. Through "telematics," cars will be connected to the Internet and will be able to "speak" to other cars.

The possibilities are endless, said Turin conference delegate Amir Khajepour, director of the WatCar automotive technology research program at the University of Waterloo. Infotainment – back-seat screens connected to YouTube – is one obvious service. Connected cars would allow drivers to use voice-recognition software to send e-mails or learn about a traffic jam from cars stopped five kilometres down the road, allowing followers to find another route.

Cars equipped with sensors would be able to travel closer together at high speeds. Ultimately, a connected car might be able to drive itself while passengers sleep or watch TV. "We see a multi-billion-[dollar]emerging market in connected cars in the next 10 years," Mr. Khajepour said.

Some of these services may not fly. One member of the audience in Turin asked whether a car owner would want to pay twice – once for the electronic device, again for the Internet service – for gimmicks. And by Mr. Khajepour's own admission, the industry won't take off unless governments are willing to spend small fortunes to fund research and development.

Canadian and Italian parts companies plan to attack the nascent connected-car market, and their strategy, largely untested, is to join forces through partnerships so they can combine size with the most promising technology.

"Partnerships are the key word for us," said Paola Carrea, the telematics director at Italian auto parts giant Magneti Marelli. "We really want to enlarge our co-operation with Canadian companies."

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More

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