The global automotive industry is witnessing significant technology disruptions occurring simultaneously across multiple facets of the industry, says a report released today by Grant Thornton India.
The report states that on the back of improving macroeconomic factors and revival in consumer demand, the global automotive industry is in a better shape than it was five years ago. This progress, while likely to continue, is expected to pan out differently for different global markets with new profits expected to come mainly from growth in emerging markets.
As technology disruptions continue to challenge the business models of incumbent manufacturers and suppliers, in an effort to stay competitive, the industry is increasingly exploring inorganic opportunities in traditionally unorthodox quarters. The global automotive industry is rapidly approaching a pivotal crossroads that would influence its long-term trajectory. Unlike the past cycles of peaks and troughs that were driven by macro-economic factors and impacted consumer demand, it is now witnessing an accelerated technological transformation that is changing consumer tastes and demands.
The report states that this transformation will likely shape the industry into something with little resemblance to what it is today. With significant technology disruptions occurring simultaneously across multiple facets of the industry, there already are vehicles that directly consume no traditional fuel and vehicles that can self-navigate with no human intervention. These transformations are not only disrupting the fundamentals of the automobile manufacturing processes, but are also bringing in innovative business models. It finds that these transformations are being led by an entirely new and disruptive set of companies, from automakers such as Tesla to ride sharing platform providers such as Uber and Lyft to established technology giants such as Google, Apple and Intel. As these disruptions continue to challenge the business models of incumbent manufacturers and suppliers, in an effort to stay competitive, they are increasingly driving incumbents to explore partnerships opportunities in traditionally unorthodox quarters.
Two deals account for 40% of total global value
Grant Thornton India finds that the transaction activity in the automotive sector saw an upsurge in YTD 2018, with total deal value of announced deals amounting to $43 billion (Rs 271,631 crore), the highest in the last five years. In addition to large consolidation transactions, vehicle manufacturers, component manufacturers and technology companies continue to invest in mobility programmes to revamp their business models.
Furthermore, as deal volumes continue to remain robust, the average disclosed deal size increased to $128 million (Rs 809 crore) in YTD 2018, a 1.3x growth from 2017. The report states that the increase in value and average deal size was largely driven by two megadeals in the auto component segments in Q1 2018: Melrose’s acquisition of GKN PLC and Tenneco’s acquisition of Federal Mogul. These two deals collectively accounted for 40 percent of all disclosed deal value in YTD 2018.
Asia-Pacific – 53% of transactions
The rising demand in the Asia-Pacific market has seen emergence of new players and offerings. The report states that OEMs and component suppliers globally are re-focusing their efforts and investment from mature economies to vibrant and emerging economies. The deal activity in YTD 2018 reiterates the attractiveness of the Asia-Pacific markets with 53 percent of the transactions in this period pertaining to targets based in the region. However, with an overwhelming share of buyers also from the Asia-Pacific region, a large number of the deals were either local or regional in nature.
Strategic investors lead the way
Strategic investors continued to drive majority of deal activity (by deal volume) over the last five years (2013-2018), though financial investors continued to back buy-outs of scaled-up platforms. The report states that financial investors have largely continued to pursue returns through technology-oriented companies and start-ups looking to provide solutions to the emerging auto-tech companies. They have continued investments in alternative powertrains, connected car technologies, autonomous vehicle and digital services.
On the other hand when it came to technology, there is a growing demand for tech adoption among auto OEMs and component suppliers, and it is becoming far easier to buy into cutting-edge technology than to develop it in-house. Automobiles are increasingly incorporating technologies, and early-stage tech start-ups are being purchased by large and traditional OEMs/ part suppliers as the industry outlook shifts further towards software and digital services.
The Indian auto industry is one of the largest in the world. It accounts for 7.1 percent of the country’s GDP and is poised to become the fourth largest manufacturer of automobiles globally by 2020 after China, the US and Japan. Further, the significance of India in the global auto industry continues to increase with India accounting for a significant share of sales for global OEMs.
The study finds that even as Indian players are busy catering to the demand of the domestic market, which is growing at breakneck speed, there has been an increased appetite for overseas acquisitions. A route traditionally explored only by the large players. Meanwhile, overseas component makers, especially in the developed markets, are dealing with a mature auto market where sales growth is muted. Hence, valuations in these regions look attractive for acquirers.
The report states that the deal volumes in the Indian auto space have remained steady with 18 announced transactions in H1 2018, including two significant domestic buyouts by financial investors – Kedaara capital bought a 100 percent stake in Sunbeam Auto and Blackstone bought a 100 percent stake in Comstar Automotive.
It found out that with the majority of inbound transactions were led by the Asia-Pacific region by volume (~58%) and value (~68%), with Japan being the front runner, followed by Europe and the US. Europe was the preferred geography for outbound transactions for Indian auto players, accounting for 68 percent by volume and 73 percent by value of all outbound transactions. The ability to tap into markets across the European region coupled with reasonable valuations on account of tepid growth in the region have been the primary deal drivers for Indian players looking to expand their footprint outside of the domestic market.
In terms of transactional activities in the auto-tech space the demand drivers and demand dynamics of the Indian auto sector deeply intertwined with global considerations, technology disruptions in the auto sector in more mature markets are also likely to drive Indian players to re-evaluate their strategies and increase focus on technological innovations.
The report states that with the emergence of Automated, Connected, Electric and Sharing (ACES) automotive technologies and business models has been the primary driver of M&A activity globally, some Indian players have adopted the inorganic route to insulate their business from these disruptions so far.
However, the inorganic route is expected to gain popularity because of continuous disruptions in the sector in the form of evolving customer preferences and increasing regulatory push on:
- Emission control (move from Bharat Stage IV to Bharat Stage VI)
- EV adoption (through subsidies under the FAME Scheme)
- Safety and security (with the Ministry of Road Transport and Highways making it mandatory to have an emergency button and Vehicle Tracking System [VTS] in all public transportation vehicles)
The report finds out that in addition to the domestic factors, the need to stay relevant from a global context is expected to be another key driver for Indian auto players to invest in and accelerate technology adoption in their own businesses. With limited investments made so far in in-house tech creation, the inorganic route offers a significantly faster go-to-market proposition to Indian auto players.
It finds out that while the auto-tech transaction landscape is still evolving in India, an increasing number of start-ups are emerging, targeting different segments of the auto-tech value chain. While the bulk of investments have been in the ride sharing sector, with the likes of Ola and Uber, along with online market places like Cardekho, Droom, Car24 and CarTrade, there is also an increasing investment focus on EV manufacturing start-ups.
M&A trends in the Indian market over the near term are likely to follow two key trends – continued consolidation and expansion driven by conventional growth considerations and mirroring some of the broad themes that are already visible in the global markets.
While OEMs globally continue to shift their efforts and investment from mature economies to vibrant and emerging economies, the industry is also likely to witness a significant shift in the demand for components driven by technological disruptions and changing customer preferences.
With OEMs and suppliers experiencing disruptions, transformations and evolutions simultaneously on multiple fronts, inorganic strategies to acquire technologies, pivot business models and identify additional avenues for growth are likely to take centre stage in the auto sector in the near term. The Indian auto component industry will not be left untouched from these disruptions. While demand fundamentals appear robust for the Indian market, the evolving demand dynamics and customer preferences are expected to change the way traditional incumbents in the market evaluate and capitalise on this growth opportunity. The jury is, however, out on the timing of this change, which is likely to happen in the longer term rather than immediately.
Grant Thornton expects that the M&A trends in the Indian market over the near term will follow two key trends – continued consolidation and expansion driven by conventional growth considerations, and mirroring some of the broad themes that are already visible in the global markets.
It states that the alliances and joint-ventures in the Indian market is likely to be driven by –
- Increasing relevance of software and electronics in the automotive industries: Approximately 90% of automotive innovations in the recent past featured electronics and software, especially in active safety and infotainment options.
- A common need for automotive OEMs and suppliers to create infrastructure that can support a quicker adoption of ACES automotive technologies: Globally, traditional competitors in the automotive market such as Ford, Toyota and Suzuki have collaborated to develop standards for in-car connectivity in an attempt to limit the control of emerging tech players like Google and Apple in this sector.
- Increasing focus on lightweighting technologies to adhere to stricter emission norms.
- Pivoting of business models/finding new avenues for growth to remain competitive in the evolving auto sector landscape: BMW is collaborating with its direct competitor Daimler AG on car-sharing services; Toyota has gone one step further and unveiled an electric concept vehicle, dubbed e-palette, with a vision to create mobile pizza parlours, shoe shops or offices.
While some key players in the Indian market have already taken initial steps in embracing technology, most continue to lag in their investments towards technology adoption. However, with the emergence of a flourishing start-up ecosystem focused on innovations, supported by industry and regulatory initiatives, the future of the sector seems bright.
Main image courtesy Valeo