EUR 850.00 For Business Accounts Only

Morningstar | Magna Is One of the World's Largest, Most Diversified, Publicly Traded Auto Parts Suppliers

Magna is one of the largest, most diversified auto-parts suppliers in the world. However, as exemplified by formerly bankrupt Delphi and Visteon, large and diversified is no guarantee of success, nor is it a guarantee of returns for investors. While breadth in product and services can be advantageous with regard to cross-selling--commercial activities that bolster content per vehicle and market penetration--we see only limited evidence that Magna's diversified strategy has benefited investors in the form of higher margins and returns on invested capital.Many suppliers focus on a particular area of the vehicle. In sharp contrast, Magna's capabilities are so broad that the company could nearly design, develop, supply, and assemble vehicles all on its own. Diversifying into so many areas increases the risk that management resources become spread too thin, allocation of capital resources may be less than optimal, and the firm becomes less effective at developing expertise in any one area.We would be more confident in Magna's ability to generate long-term excess returns on invested capital if its products were more focused but its customer base and geographical manufacturing footprint were better diversified. We would also like to see more disclosure regarding research and development, especially with certain parts of the business focused on powertrain electrification and autonomous technologies. Even though we believe Magna will benefit from these industry disruptive technologies, the degree of Magna's product diversity dampens consolidated top-line growth and ROIC expansion potential from electric powertrain and vehicle autonomy.The company has grown rapidly through acquisition since 2000, following a decentralized organization strategy that encourages and rewards entrepreneurialism. We think the company has become so large and decentralized that any moatiness developed in individual business groups from innovation or cost advantages from scale gets diluted in the consolidated results. Even so, the company's healthy liquidity and balance sheet are able to support operations through severe industry downturns.