TOKYO — When New York investment firm KKR & Co. waded into the auto sector and engineered the creation of megasupplier Marelli Corp., it seemed to lift a burden off two troubled automakers.
First, KKR bought Japan’s Calsonic Kansei from Nissan Motor Corp., injecting Nissan with cash and completing Nissan’s divestiture of its tangled keiretsu system of parts makers. Then, KKR had Calsonic Kansei buy Magneti Marelli from Fiat Chrysler, helping FCA get that supplier off its books.
But now after three years, the combined supplier needs a lifeline of its own.
It emerged this week that troubled Marelli is asking its main financial institution, Japan’s Mizuho Bank, and other lenders for extra time to pay off debt as it scrambles to restructure.
Japanese media, which reported the development, said the company is buried in some ¥1.1 trillion ($9.52 billion) in debt. Finances at Marelli are murky because it is privately held by KKR, but the Nikkei newspaper reported that the supplier likely booked its fourth-straight year of losses in 2021.
Meanwhile, the Nikkei reported that Marelli also has asked Nissan — one of its top customers, along with FCA successor Stellantis — for emergency aid in the form of buying up inventory, commitments for future orders and sharing of costs for closing overseas factories.
Nissan spokeswoman Azusa Momose declined to comment on the report, saying “Nissan has strong relations with our suppliers, and we maintain appropriate levels of collaboration.”
A European spokesman for Marelli, which has wide-ranging business in powertrain, electronics and lighting systems, also declined to comment. Marelli ranks No. 18 on the Automotive News list of the 100 top global suppliers, with sales to automakers of $11.57 billion in fiscal year 2020.
The upheaval portends possible problems for Nissan and Stellantis, if Marelli can’t deliver parts or fails to find financing, especially as the industry struggles with semiconductor shortages.
It also underscores the bumpy road that private equity firms sometimes encounter when they venture into the often wild and wooly international auto world. Cerberus Capital Management’s ill-fated acquisition of DaimlerChrysler’s ailing Chrysler Group in 2007 is the poster child for such gambits.
In Marelli’s case, KKR brought together Japanese and Italian suppliers from automakers looking to offload. Calsonic Kansei, under KKR, bought Magneti Marelli from FCA in a debt-backed deal valued at $6.5 billion.
From the start, combining the contrasting cultures was a big hurdle. And the calculus was only complicated by the industry’s rapid shift to electrification, which is requiring a radical rethink for a combined company that had 170 locations and 54,000 employees. How to rationalize operations has been a key focus, especially in areas where the two original companies overlap: exhaust systems, electronics and electrified powertrain technology.
As a result, Marelli was already in a challenging condition when the COVID-19 pandemic and chip crisis hit.
While the pandemic has propelled auto retailers to new levels of profitability and also helped automakers strengthen their hand by getting rid of excess inventories and profit-draining sales incentives, parts suppliers have been walloped by the past two years of production disruption.
In early 2020, Marelli followed much of the industry in suspending operations at North American plants. In May that year, the supplier added to its debt pile by securing another $1.2 billion in loans from Japanese banks and KKR. The cash was intended to help it weather the market storm.
By September 2021, Marelli was planning to slash 1,500 jobs worldwide, Bloomberg reported, citing an internal letter from the CEO. At the time, Marelli was racing to streamline operations under a restructuring plan, and KKR was considering the sale of the supplier’s suspension business.
KKR originally tapped German veteran Beda Bolzenius to lead the company, but as Marelli’s problems festered, the private equity firm jettisoned him. Fixing the supplier now falls to David Slump, an executive from Harman International, who took over as CEO on Jan. 1.
Private equity players on the global auto stage face a variety of challenges, ranging from complex industry dynamics, a rapidly shifting competitive landscape and structural limits to the speed of transforming portfolio companies and managing cultural differences, said Dominik Luczak, partner and leader of McKinsey & Co.’s automotive practice in Japan.
But they can also play a vital role, by bringing expertise, talent and access to funding in the right direction.
“If set up and executed the right way,” Luczak said, “this can be a win-win and great opportunity equipping companies with access to additional funding for growth, challenge the established strategy with a fresh outside view and be the spark for a successful transformation.”
The disposal of Marelli’s forerunner companies by their automaker partners contrasts with the tight-knit approaches Toyota and Honda still take toward their own keiretsu suppliers. Even as Nissan shed its suppliers, Toyota circled closer with its group, anchored by heavyweights Aisin Corp. and Denso Corp.
Meanwhile, Honda helped broker a megamerger among three of its keiretsu suppliers with Hitachi Automotive Systems into a new Japanese juggernaut called Hitachi Astemo.
Honda still keeps a 33 percent “silent partner” stake in the company.
Luca Ciferri contributed to this report.