Automotive Industry Report

January 23, 2018

M&A Update

January 2018

What’s Happened?

The UK remains a leading producer of cars, with over 13 million manufactured last year – 16% of global production.

Longer term changes to the automotive sector are finally beginning to catch up with the industry. Operators are expecting mass disruption to be caused by well-publicised driverless car technologies being developed by Google and others. In addition, greater consumer awareness around environmental issues, especially climate change, has resulted in large manufacturers beginning to take electric cars seriously. These factors, combined with the ever-increasing complexity of both exterior design and interior functions has resulted in significant cost increases for OEMs operating in the automotive space.

 

Who’s buying?

Despite these concerns, appetite for acquisition of UK firms in the space has stayed strong. The number of buyers based abroad has increased by 14 percent to 55%, with over half of this interest coming from the USA.

Private equity has only made up a small portion of activity in the sector, buying less than 1-in-8 companies sold. The majority of buyers were companies active in the same area, looking to extend their geographical reach and product offering. The highest profile example is Genuine Parts Company, a distributor of automotive replacement parts, and its acquisition of Alliance Automotive Group, a supplier of spare parts for commercial vehicles for £1.5bn.

Alliance Automotive Group have been the most active in the market during 2017. The company acquired parts suppliers LDS Motor Factors and Fast Parts Wales, as well as being acquired by Genuine Parts Company in September.

Driverless Cars

Often talked about, driverless cars are anticipated to be a regular sight on roads within the next 5 years. Whilst there may be some initial trepidation by users, consumers and policymakers are likely to be taken in by the promise of an enormous reduction in driving-related casualties.

Longer term, it is likely that many people will not own an individual car but instead will ‘call’ a driverless car when needed, much in the same way Uber is used now. This could potentially result in a 20-fold fall in the number of cars manufactured, as it is currently estimated that the average car is parked 95% of the time. This suggests that, following the introduction of these cars, the growth in the sector will shift away from companies involved in the manufacturing supply chain or those providing aftermarket services, towards those developing safety technologies and driving software.

A response to this longer-term threat may be for larger companies to shift their operations towards safety and software development. This has begun to play out already, through acquisition, with firms looking to make sure they have sufficient software capabilities.

 

Electric Cars

Even longer in the making, electric cars are getting to closer to the mainstream. This has primarily been pioneered by premium car producer, Tesla. The greater public profile combined with the increased move away from diesel is bringing us closer to the tipping point at which mass consumer adoption begins.

When this happens, the likely impact on the automotive industry cannot be understated. Electric vehicles contain fewer moving parts and require a simpler and less capital-intensive production process – which also includes less labour. This shift will require large investments into new manufacturing facilities and as such will favour the larger players in the market.

This dramatic shift in the manufacturing process is likely to lead to the larger companies in the market acquiring smaller players that have the capabilities at each stage of the new production process. A noticeable increase appetite for powertrain developers has been observed and powertrain companies are the leading segment globally in automotive deals.

 

Brexit

With automotive manufacturers having complex supply chains, deeply embedded throughout the EU, there will be a significant impact on their operations depending on the terms on which the UK leaves the union. PA Consulting has estimated that finished car costs could increase by over £2,000 if the result of negotiations is a so called ‘Hard Brexit’.

It is currently very difficult to predict what the ultimate outcome will be. Carmakers may wish to move operations elsewhere within the EU, if tariffs are imposed on UK-made vehicles. Conversely, the UK government may lower corporation tax and provide an incentive for manufacturers to base their operations in the UK, even if this is not currently the case. The uncertainty the vote has comes at a time when the industry is likely to face significant technological changes in the next decade.

 

Interiors

OEM’s have taken much of the profitability away from interior design businesses, now only asking them to manufacturer to specifications which have been designed inhouse. Autonomous vehicles are expected to change this, allowing for much greater creativity and originality in automotive interiors.

 

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