Pedal to the metal

Out of nearly 50 million passenger cars produced around the world last year, some 32 percent were made in the European Union, according the European Automobile Manufacturers' Association. So far, most of this production has been located in Western Europe, but now more and more firms are looking to move production East.

Further down the road

Sylwia Jaœkiewicz, an analyst from CDM Pekao, says that even though production costs in Central and Eastern Europe are growing, they still remain lower than in Western Europe, giving the region good long-term investment prospects. "I believe the relocation of production [to CEE] could even last for the next 10 to 15 years, until the costs are no longer competitive," says Jaœkiewicz.

When car makers relocate their production, they are often followed by their suppliers. More than 300 components producers, including Bosch, Delphi, Continental, Faurecia, TRW, Johnson Controls and Magna, have also moved into the CEE region over the past decade.

Ace investments

One of these suppliers is Luxembourg-registered Automotive Components Europe (ACE), a manufacturer of braking-systems sub-products which debuted on the Warsaw Stock Exchange last week. José M. Corrales, president of ACE, says the focus of the automotive industry on the CEE region was a major factor in his company's choice to debut on the WSE floor.

"Poland is one of the fastest-developing countries in Europe. That is why we chose Warsaw as the place for our company's listing. We wanted to be in the center of Europe because today Poland and Central Europe are at the center of our business," says Corrales.

Short history

The ACE Group was set up only last year and consists of Spanish Fuchosa producing iron anchors and Polish EBCC making aluminum calipers. The merger was possible thanks to the Innova group of investment funds, which took over EBCC in 2005 and Fuchosa in 2006.

Andrzej Powierża, an analyst from DM PKO BP, says the company's joint history is relatively short. "Both companies are very good if they are considered separately. However, it is too soon to evaluate them as one company. The question is whether the holding is able to look for new goals and implement them," says Powierża.

However Rafał Orłowski, director at the Polish Chamber of Automotive Industry (PIM), believes ACE will have no problem staying focused on its strategy, pointing out that Innova only acquires and develops companies which offer very specialized products. "These are very niche products and not many firms produce them," he says.

Niche strategy

ACE's market share seems to show that its strategy is effective. The company is the biggest manufacturer of iron anchors for disc brakes in Europe, with a market share of 44 percent. Its annual production amounts to 27.5 million units, which are installed in about 125 car models. The company makes 5.6 million aluminum calipers per year, making it the second-largest producer in Europe. These are part of 16 various braking systems platforms used in about 50 different car models.

ACE's largest customers include Robert Bosch (Europe's biggest automotive components manufacturer, whose annual revenues reach $52 [zł.149] billion), as well as other leading producers such as TRW and Continental Teves. About 97 percent of ACE's revenues come from contracts with these three giants, which together control some 80 percent of the European automotive braking-systems market. Some 60 percent of all products are sold to Germany and the Czech Republic.

In 2006, 56.2 percent of ACE's revenues were generated by the sale of iron components and 43.8 percent by the sale of aluminum components. The company's total revenues amounted to E79.2 (zł.304) million, while net profit amounted to E6.9 (zł.26.5) million.

DM PKO BP's Powierża says that this year ACE's revenues should reach E83.4 (zł.320) million and E106.1 (zł.407) million next year. "Net profits will amount to E8.8 [zł.33.8] in 2007 and E9.5 [zł.36.4] million in 2008," he predicts.

Expansion plans

While further strengthening its position on the braking-system components market, ACE also wants to launch one or two other products. The company is only considering such segments of the automotive market where it could become a leader within three to five years. According to Corrales, this will be achieved by both organic growth as well as acquisitions. The company wants to take over a company from the iron-foundry sector in the CEE region, for example.

 "The idea to buy a company which deals in the iron-foundry sector but has little to do with the automotive industry is very good. It would be interesting to take over such a firm, use the potential of the workers and develop a new products for the sector," opines DM PKO BP's Powierża.

The acquisition will be financed by funds raised from the WSE. The rest of the money will cover financial liabilities and the company's other future plans. In total, the company gathered zł.256 million from its debut, out of which around zł.42 million came from the issue of new shares. The issue price was set at zł.20.50 and on the day of its debut the opening price increased by 9.7 percent, reaching zł.22.50.

"I think the first day of the listing cannot represent the evaluation of the company. Our target is to increase this value in the future, not only in a day," says Corrales.