Consolidation accelerating on the automotive paint market

The AkzoNobel-Axalta merger will create a giant with $17 bn. in revenue. Dutch shareholders will hold 55% of the shares, while American shareholders will hold 45%. The new entity will have 173 production sites and 91 R&D centres, with annual investments of $400 million. Grégoire Poux-Guillaume, current CEO of AkzoNobel, will head the new entity, while Chris Villavarayan will serve as deputy CEO. Meanwhile, over at BASF, the German giant is selling a majority stake to Carlyle while retaining 40% of the capital.

The return of this fund raises questions: it was Carlyle that created Axalta by acquiring DuPont Coatings in 2013 before selling it. “They will optimise this and sell again in a few years”, industry insiders predict. Before another takeover? “Twenty-five years ago, there were nine premium manufacturers. The market has shrunk to four groups and now to three”, sums up Guillaume Grucy, an industry expert with thirty years of experience.

“In a merger, there are three distinct stages”, says Grucy. First, the announcement effect. “It's staggering, but nothing will change overnight. Next, there's the adjustment of the scope.” This sometimes involves the sale of businesses or subsidiaries. A recent example is the sale of AkzoNobel India Limited (ANIL) to JSW Group, however limited to liquid paints and coatings, with powders remaining in the hands of the Dutch manufacturer, the world n°1 in the sector ahead of... Axalta!

“The third stage comes much later: reorganisation.” The two groups are banking on $600 million in synergies, 90% of which will happen in the first three years. “What will this change in the market? Initially, nothing, since they will first focus on what is furthest from the customer: HR, finance, purchasing, logistics...” Another observer confirms: “The commercial side will not be the first to be impacted.”

The two groups together will now have five premium brands (Cromax, Spies Hecker, Standox, Sikkens, Lesonal). “They must retain them and capitalise on them. A body shop that buys Cromax or Sikkens is very attached to its brand”, insists G. Grucy. The operation is also justified by geographical complementarity. “Then there is the complementarity of the “routes to market”. One may be approved by a manufacturer, the other may not”, analyses the expert. Another major advantage is access to original data. The new entity will have a privileged position in OEM thanks to Axalta. “They will be at the forefront of access to vehicle data from the moment of production, which will reduce the time to market for a colour”, points out an industry insider. Axalta also brings its expertise in private labels. “It's always been a dream of car manufacturers to have private labels, and Axalta is a leader in this area”, notes an industry insider.

We will probably never know who was at the negotiating table, but it is surprising that the world leader in all activities, the American company Sherwin-Williams, remained on the sidelines. This is especially true given that it also lacks the OE expertise needed to leverage its billion-euro refinish turnover. “One wonders whether they will end up selling the automotive business”, opines an expert. As for the Japanese giant Nippon Paints, which could have finally found an opportunity to enter the collision repair market, “they are not comfortable with the aftermarket and are letting opportunities pass them by without jumping on board”.

“Distribution groups will hope to maximise their discounts with more brands. But this can also create dependency and less flexibility in negotiations. The new group may impose price increases that will generate an outcry,” adds the same observer. “However, the rationalisation of the product range and marketing comes much later in a merger. Distribution networks are attached to brands. There are different product positioning and marketing support strategies”, points out Guillaume Grucy, recalling PPG’s 1999 takeover of ICI Autocolor.

It also remains to be seen which distribution model will prevail between partnerships with independent distributors and branch offices, which Axalta and AkzoNobel cultivate, even though only the American company applies this to the refinish market.

Significant synergies may also be in store for the repair networks of the two manufacturers. “There is great potential for collaboration between Acoat Selected and Axalta's various networks, particularly Five Star”, it is suggested. Guillaume Grucy remains cautious: “Will they form a single network? We are not there yet.”

Repairers could even benefit from this: accelerated innovation, sharing of best practices and improvements to the supply chain. “If they make savings in production, that doesn't mean they'll lower their prices”, the expert cautions. Cost reductions will primarily benefit shareholders in an industry where growth remains moderate but margins and profitability are more than attractive.