Where Are We Now
Updated on: 11/7/2021
If you drive a car, you likely have countless Magna parts in your car whether you realized that or not. Although Magna is a key provider of auto parts to major auto manufacturers, it continues to expand its global presence and product arsenal that appeal to these manufacturers. Magna’s valuation appears to be fair today considering the cyclical nature of the industry.
Sales decreased 13% as global vehicle production and semiconductor chip shortages disrupted demand for auto parts. We believe shares of Magna are currently reflecting these weaknesses.
Over the long run, we believe production of cars will increase and the semiconductor chip shortage will be alleviated. Demand for Magna auto parts will return but we cannot be certain when.
Magna is the third-largest automotive parts supplier that has a relentless drive to innovate and produce the greatest next-generation products and systems for vehicles worldwide.
Magna’s high-quality parts and systems are what make up a car – the customers to which it sells (automakers) are “assemblers” of these parts. Magna is essentially the source of the innovation even though automakers get all the credit.
Its decentralized management structure and local focus underscores the company’s focus to serve the world. Each plant runs like a separate business with one thing in mind – win business, and lots of it.
The electric vehicle (“EV”) and autonomous driving megatrends present great opportunities for Magna to capitalize on. Magna has been focused on these areas for many years and has been partnering with electronics and EV manufacturers to bring new technologies to market.
The company is just as focused on innovating within its own operations as it is on innovating for marketable products. Magna has been investing heavily to streamline its operations, improve productivity, and engineer the best products and systems in the world.
Magna is one of the largest international suppliers of automotive parts.
It designs and creates vehicle exteriors, interiors, seating, roof systems, body and chassis, powertrain, vision and electronic systems, closure systems, and electric vehicle systems. Magna also engages in tooling and engineering and contracted vehicle assembly services.
In sum, these products and services are grouped into four main operating segments:
Body Exteriors & Structures
Power & Vision
Body Exteriors & Structures and Power & Vision products generate Magna about two-thirds of revenues while Seating Systems and Complete Vehicles make up the balance.
Magna Segment Revenue Split (Q3 2021)
Source: Magna Investor Relations
Magna has a global focus, reaching every single original equipment manufacturer (“OEM”) with its systems and components offerings.
An OEM in the automotive industry refers to the official parts produced directly by a vehicle manufacturer, such as Toyota or GM.
Most of Magna’s revenues are generated from six of the world’s biggest and well-established automakers – GM, BMW, Daimler, Ford, Fiat Chrysler, and Volkswagen.
What may seem like risky revenue concentration is actually a strength – Magna works closely with the most popular and marketable car brands to get them the parts they need to sell vehicles and uphold their global reputations based on quality and reliability.
Magna is also agnostic to its customers' successes — if one large customer takes share from another, Magna would experience little to no change in its financial profile or future outlook.
Magna's 2020 Revenue by Customer
Source: Magna 2020 Annual Report
The systems and components are not meant to be compatible with every vehicle, nor does Magna keep the pricing consistent between parts made for one vehicle model versus another.
These factors lead to some revenue variability. However, these decisions are made at the plant level to do one thing – win business.
Substantially all of Magna’s revenues are generated in North America and Europe.
The Asia-Pacific region makes up a fraction of Magna’s total sales. Other continents outside of North America, Europe, and the Asia-Pacific region contribute little to the overall revenue pie.
Magna operates in an industry and under a business model that historically has experienced muted growth over the last decade.
Magna’s revenue profile, therefore, appears to have a tight correlation to global light vehicle (i.e., passenger cars and light commercial vehicles) sales.
Since 1998, these sales have averaged 18.5 million sales in North America with little variation up or down, except when the economy was in a recession (2008 and 2020).
Magna Historical Revenue (Q3 2021) (US$M)
North American Light Vehicle Sales ($M)
Source: Wards, CIBC World Markets Inc.
The only way for a company in this industry to stand out and be great is to work closely with customers and provide value – great parts and systems that get ahead of the competition at a reasonable price. This is precisely the strategy Magna uses to win customers and keep them.
Free cash flow (“FCF”) has grown a fair amount over the last decade and looks rather appealing for a low-margin engineering business like Magna.
Although a sizable chunk of FCF recently is derived from changes in working capital (short-term assets less short-term debts and other liabilities) – and inorganic cash flow source – Magna is still in a strong financial position to expand its operations, reinvest through researching and developing outstanding products and systems, return capital to shareholders, and conduct acquisitions.
Magna Historical Free Cash Flow (Q3 2021) (US$M)
Magna’s journey to becoming one of the largest global parts manufacturers and service providers started in 1957 when Frank Stronach opened his first “tool-and-die” shop in Toronto called Multimatic. Stronach was Multimatic’s only employee and he operated the business out of a rented garage.
After operating for about two years, General Motors (“GM”) contracted Multimatic to produce metal-stamped sun visor brackets. GM was Multimatic’s first contract, an iconic arrangement for the company that set out its path to achieve great things.
The 1960s marked an important decade for Multimatic. It opened and operated 8 manufacturing plants in the late 1960s. It also merged with a public aerospace and defense company, Magna Electronics Corporation, in 1969 to take the company public. The name of the merged company became known as Magna International in 1973.
After the “foundational” years in the 1960s, the 1970s brought a massive milestone — $100 million in sales. The company also diversified its product offerings and opened its second US plant.
The 1980s saw Magna sell off its aerospace and defense business, focusing the company solely on the automotive market. The company continued to execute and eventually went public on the New York Stock Exchange in 1992.
The rest is history — the company continued to expand throughout the 1990s, evolved into a global company with a diversified product portfolio exceeding $20 billion in sales in the 2000s, continued to expand its global presence in the 2010s, and is now focusing on the undergoing transformation in the automotive industry.
Sum of the Parts
Whether you know it or not, you probably drive a car with Magna parts. Magna supplies 58 OEMs across the globe and its parts and systems can be found on two-thirds of vehicles around the globe.
Magna has built a strong reputation based on being the only automotive supplier in the world that equips every aspect of a vehicle. The biggest car brands in the world – Volkswagen, Toyota, and Daimler – contract Magna as a trusted provider of products and systems for their reliable, reputable cars.
Thousands of engineers and tens of thousands of manufacturing and assembly workers come together to build exceptional products that beat the competition almost every time.
Magna’s focus on taking a “holistic” view of each vehicle separates it from the pack and delivers an edge over its closest competitors – Robert Bosch, Denso Corporation, and Continental AG. After all, the OEM is simply an “assembler” of the auto parts it chooses to purchase from auto parts and systems innovators like Magna. Each car is worth the “sum of its parts”, and Magna’s high-quality, next-generation parts and systems make an OEM’s finished product stand out among others.
Economies of Scale
As crucial members of the vehicle manufacturing supply chain, it is critical to OEMs that its parts and systems suppliers are as close as possible to their own manufacturing facilities.
Magna has built out a global presence, having established almost 350 manufacturing facilities and around 90 product development, engineering, and sales centres across 28 countries to serve its customers.
The massive global scale and proximity to customers allows Magna to take advantage of economies of scale and the ability to serve its customers to the best of its abilities.
When Magna first establishes a plant in a new local market, the plant is not yet full-sized. As volume and demand increase, Magna builds out capacity at these first-generation plants with smaller incremental investments.
Therefore, Magna enters a market with smaller capital investments, gains customers, and efficiently builds out capacity to satisfy rising demand. We believe this exemplifies Magna’s lean approach to gaining economies of scale.
Given the size of Magna and the number of customers it serves along with their unique needs, target markets, and regions served, managing all these locations through centralized management could lead to poor decision making that may conflict with customers’ needs.
For this reason, Magna operates under a decentralized structure. Paul Bellack, Magna’s Chief Information Officer, said that although Magna is worth more than $30 billion, the company is operated “more like 300 $100 million companies”.
In running each plant as a separate business, the general manager focuses on winning business for his or her own plant. Each plant is its own profit centre and corporate incentives are derived based on the profits it can generate. Each plant and its decentralized management team, therefore, is focused on growing as big as possible by winning as many customers as possible.
Decentralization allows Magna to enter new markets and penetrate expansion opportunities quickly and aggressively. In this highly competitive industry, it also helps Magna get to and support its customers quicker than its competitors.
Magna has inherently built out a moat through its global expansion and decentralized management. The barriers that back up this moat through high customer switching costs and impenetrable barriers to entry from new competitors can be briefly and intuitively summed up as follows:
A 60-year history of working with the world’s largest OEMs as a trusted provider with a strong brand name in the auto manufacturing business makes Magna the supplier of choice to the world’s top car companies.
Magna’s maintenance and growth capital requirements are substantial – it is highly unlikely smaller customers can put up initial investments to match or surpass Magna’s scale especially when considered with the fact that Magna is the third-largest parts and systems supplier in the world.
Magna is still a top supplier despite having long-term supply agreements with customers that can be terminated by the customer at any time. OEMs continue to choose Magna, which alludes to the idea that Magna is a global, reputable, and customer-centric provider of parts and systems.
Enormous EV Opportunity
Magna believes it has been immensely clear in its mission over the past few decades – it is on the forefront of the mobility transformation, keenly focusing on electrification and autonomy.
In 2020, LG Electronics (“LG”) and Magna teamed up to form a joint venture (“JV”) called LG and Magna e-Powertrain JV. LG, as a leading electronics provider, makes for a great teammate that should help propel Magna into a leading position as an EV parts provider. Together, Magna and LG will manufacture e-motors, inverters, on-board chargers, and complete e-drive systems for select car manufacturers.
Magna also produces the eBeam propulsion system, which presents a major growth opportunity for Magna as pick-up trucks are also undergoing electrification.
The eBeam product makes things easy for truck manufacturers who produce diesel-powered trucks but also want a line of electric pick-up trucks. The eBeam is compatible with any existing frame, providing maximum convenience. Truck manufacturers can produce the same frames and core components for both fuel-, hybrid-, and electric-powered vehicles.
We believe the eBeam is an extremely compelling product that presents the tip of the iceberg for what’s to come and what Magna can create.
The auto part maker has also made a slew of announcements recently to inch towards its electrification goals and capture a piece of the EV megatrend:
Magna has a platform-sharing and manufacturing agreement with Fisker Inc. (“Fisker”), an American electric vehicle automaker, to build its Ocean SUV and provide driver assistance technology.
Partnerships with Innoviz Technologies and REE Automotive expand on Magna’s EV portfolio.
A $70-million investment into a 345,000 square-foot facility in Michigan called the Magna Electric Vehicle Structures will build out Magna’s North American capacity to build electric vehicle parts. This particular plant will build battery enclosures for GM’s new GMC Hummer EV.
Magna is focused on the prize and wants to capture every ounce of the EV opportunity to attain it.
Magna expects its electric powertrain business to expand from $2 billion in sales in 2023 to about $4 billion in 2027. Looking at this holistically, we believe this should help management achieve sales between $43 billion and $45 billion by 2023.
There are two major forms of innovation opportunities a company could tackle – internal and external.
While innovating products and services for sale results in exciting top-line growth opportunities, innovating to streamline operations and expand margins can also move the (profit) needle.
Magna is investing into a few initiatives to cut down on unnecessary costs and dedicate these funds to where they matter most – maintaining (or improving) its global competitive position. Some of these investments include:
Each of these investments reduce costs and optimize operations. For example, advanced robotics will reduce floor space by 50%, result in 10-20% higher operating efficiency, and pump up production volumes. Similarly, Magna’s data analytics investments have been paying off – it has optimized its paint colour change process, reducing waste and costs.
We believe these efforts should help expand Magna’s competitive position. It will streamline its operations and invest more for growth organically and through opportunistic business acquisitions.
Additionally, Magna will be able to compete more efficiently on a global scale and consequently build on its strong global reputation as it builds on its offerings and contracts with customers.
Broadening Beyond “Just” Cars
The mobility transformation is creating many opportunities in vertical markets with tons of optionality.
Urban delivery, fleet monitoring, data, and autonomous driving are some of the areas that Magna’s management is looking for collaboration and build-out opportunities.
Magna has shown the ability to build on its current product lines to create explosive opportunities time and again.
In 2017, Magna released the MAX4 driver-assistance system, a fully autonomous driving platform that can, yet again, be integrated into any vehicle frame without requiring the manufacturer to change the design or core components. The MAX4 system allows for level 4 automation, close to 100% autonomy with minimal driver intervention requirements.
Magna also has a LiDAR product that it manufactures in partnership with Innoviz, called the InnovizOne. The InnovizOne uses beams of light to measure distances from a car to help it map out and navigate its way on the streets.
LiDARs are typically bulky and expensive, but Magna has created a smaller, more inexpensive model that could be perfect for mass-produced autonomous vehicles.
Magna’s LiDAR is exclusively manufactured for BMW vehicles today, but we expect to see the customer list expand as self- and autonomous-driving technology gradually hits the broad consumer market.
We believe Magna’s efforts to exercise optionality will prove to be meaningful in the near future.
These vertical markets provide tons of growth opportunities for Magna to expand and gain customers in the future.
Not only that, but Magna also tends to create products that are increasingly gaining functionality and compatibility with any car frame or model.
This gives it a unique edge over competitors – as parts are getting more complicated, Magna is finding ways to make them simple, and at a low cost.
Magna is a fair bit concentrated in some markets, and we are not talking about sales. Almost half of Magna’s plants are in North America, and its Canadian plants can only be found in the province of Ontario.
Ontario’s economic outlook looks dire to some, who cite a high cost of living, skills shortages, and high input costs. Ontario has some of the highest industrial electricity rates in all of North America, making the region particularly expensive to operate in and make a healthy profit.
Similarly, Magna’s customers in Ontario face the same risks. GM, Honda, and Ford are among some of the major global OEMs that manufacture vehicles in Ontario.
Rising costs to these manufacturers hurts demand for Magna’s products and could force them to eventually move their operations away from Ontario.
In the latter scenario, there would be uncertainties around which auto part manufacturer would serve them best in the new locations they settle in.
Slow Market Growth
Light vehicle sales have experienced very little growth over the last two decades. Meanwhile, Magna is spending tons of money on expanding capacity and streamlining operations.
There is a risk that these investments improve Magna’s margin profile, growth capacity, and market position, but ultimately do not help Magna as slow sales offset these efforts.
We also see a risk that growth in EV sales is simply offset by a drop-off in fuel-powered vehicles over the long run.
While EVs present a solid growth opportunity, EV sales could closely track the low-growth sales numbers similar to light vehicles today when it becomes a mature market.
As a heavy goods manufacturer, Magna is at the mercy of the global economy and geopolitical risks. In any recession, car sales drop and demand for car parts and systems closely follow.
Magna could experience whipsawing in its revenue and growth profiles if North America, Europe, or both experience recessions and general economic slowdowns.
Nascent EV Industry
Magna is making promising moves in the EV space, partnering with legitimate businesses to create great products.
However, the EV industry is still at a nascent stage in its growth story. With this comes loads of uncertainty.
Magna’s relationships with these EV OEMs may not be the same as its traditional customers.
Also, technologies could quickly evolve and may expand at a pace that Magna cannot keep up with. A high-growth megatrend does not guarantee success for every player within it.
Magna must execute, but it also depends on EVs actually selling to end users based on expectations set out by the market.
Magna is a top auto parts supplier contracted by every major OEM in the world to some capacity. In a highly competitive, low-margin business like this, Magna has an impressive competitive position that allows it to stand out, create new and exciting products and systems for its customers, and win contracts.
Magna’s successes can be traced to the corporate culture. They have an innate focus on quality and innovation, as well as tackling the newest challenges like autonomous driving and EVs.
This drive translates into success with the foundational competitive advantages the company has built out. Economies of scale, a global reputation, and massive scale allow Magna to be the number three — and potentially the soon-to-be number one — car parts manufacturer in the world.