M&A
In my experience, many companies faced with this type of looming threat to their business model embark on precarious M&A activity. GNTX has already embarked on some questionable M&A. In 2013, the Company acquired “HomeLink, a wireless vehicle/home communications product that enables drivers to remotely activate garage door openers, entry door locks, home lighting, security systems, entry gates and other radio frequency convenience products for automotive applications, wherein the Company had previously been a licensee of HomeLink® and had been, since 2003, integrating HomeLink® into its interior automatic-dimming rearview mirrors.” I suspect we’ll see more M&A and increasingly off-point. At least, you can put your garage opener on your rear view mirror but I expect future M&A to be in unrelated areas.
Customer Concentration
From the risk factors in the 10k:
“We have a number of large customers, including three automotive customers which each account for 10% or more of our annual net sales in 2015 (including direct sales to OEM customers and sales through their Tier 1 suppliers): Volkswagen Group, Toyota Motor Company, and Ford Motor Company. The loss of all or a substantial portion of the sales to, or decreases in production by, any of these customers (or certain other significant customers) could have a material adverse effect on our business, financial condition, and/or results of operations.”
A move by any major customer to shift away from GNTX mirrors in an attempt to further their active safety and connected car implementation would probably destroy the multiple here. Please note, Japan was already recently allowed the replacement of mirrors with cameras. It will be very interesting to see how this market evolves.
Other regulatory developments
From the 10k risk factors:
“On March 31, 2014, the National Highway Traffic Safety Administration issued a final rule requiring rearview video systems in U.S. light vehicles by May 1, 2018, with a phase-in schedule requirement of 10% of vehicles after May 2016, 40% of vehicles after May 2017, and 100% of vehicles after May 2018…The Company’s rear camera display mirror application meets all the technical requirements of the
NHTSA ruling when installed in a vehicle and appropriately paired with an OEM specified camera. The NHTSA ruling that rearview video systems are required has increased competition for systems capable of
rear video in a variety of locations in the vehicle. Our Rear Camera Display (RCD) mirror application has and will continue to be affected by this increased competition.”
It's anyone’s guess who this will evolve but I think it’s a reasonable assumption to make that as regulation and the car’s general evolution push forward, OEMs will want comprehensive, integrated, and seamless solutions. Not good for GNTX….