By Francesca Bandini
The automotive industry is undergoing unprecedented changes on multiple fronts. Strong sales fluctuations and fierce competition are forcing automakers to reduce their investments, as the demand for most of their products is decreasing. Operating profits are declining — with companies such as Fiat Chrysler, Ford, and General Motors experiencing a decline of 11% in the last 12 months — and R&D spending, essential for the development of safer and more innovative vehicles, is becoming more and more unsustainable. The greater demand for EVs, whose global annual sales are expected to reach 10 million in 2025 according to Bloomberg, is leading to changes in consumer behavior, thus forcing automakers to modify their business model and product portfolios.
In this framework, consolidation becomes essential. However, while the automotive industry’s big consolidation dream remains elusive, companies are opting for new ways to reach their objectives and pool their resources, mainly through joint ventures, collaborations and strategic alliances that see artificial intelligence startups as potential targets.
Importance of Consolidation. What is the Trend?
In the automotive industry, the need for consolidation is nothing new and it reflects companies’ desire to increase their market share, enter new markets and access new technologies and capabilities. Even though it is not always smooth, consolidation among carmakers is essential, now more than ever: carmakers need scale to survive. Greater size gives better bargaining power and protection against seasonal sales, help to spread investments and reduce development costs in such a capital intensive, fiercely competitive and cyclical industry, thus allowing automakers to reorganize themselves to deal with the oncoming EV challenge.
Even though the number of mergers and acquisitions is currently declining, consolidation in the automotive industry is a trend that will likely accelerate thanks to the implementation of more flexible and short-term deals. The latest interest in electric, autonomous and shared vehicles, is indeed leading to greater implementation of artificial intelligence and technology-driven deals, with an increasing number of automakers that are trying to integrate electric vehicles within their product portfolio not only through acquisitions but also through strategic alliances and joint ventures. Renault’s strategic alliance with Nissan and Mitsubishi, Toyota’s partnership with Suzuki, and Volkswagen tie-up with Ford are just some of the most significant examples of companies that are teaming up, leveraging their respective strengths and pooling resources to undertake the latest EV challenge.
Graph: Car Mergers 1998-2018 (Financial Times)
Further Trend Analysis
The need to understand the long-term implications and profitability of EV market as well as effectively shift production towards more sustainable and cleaner vehicles is leading to a dizzying array of collaborations not only horizontally between carmakers, but also with players outside the industry such as artificial intelligence companies and startups. Renault and Nissan’s recent partnership with Waymo, a self-driving technology development company, shows how collaboration between automakers and AI companies are becoming essential for the development and the implementation of autonomous electric vehicles, the ultimate goal set by the automotive industry. This exclusive agreement, set up with the objective of creating driverless mobility services in France and Japan, will allow the three companies to join forces and explore all aspects of driverless mobility while speeding up the development time of autonomous vehicles and sharing the cost burden involved in manufacturing them.
Who are the Main Parties Involved?
As previously mentioned, the majority of deals comes from large automotive companies collaborating with each other, as in the case of FCA and PSA Groupe, or acquiring small companies and startups in the high-tech sector, as in the case of Tesla and DeepScale or Ford and Mahindra Group.
Deals to Know About
Announcement date: 31/10/2019
Acquirer: Groupe PSA (Peugeot SA, EPA: UG)
Target: Fiat Chrysler Automobile (MTA: FCA, NYSE: FCAU)
Acquirer Advisors: Perella Weinberg, Messier Maris & Associés
Target Advisors: Lazard, Goldman Sachs, d'Angelin & Co.
Value: USD 44bn
Rationale: Fiat Chrysler Automobile merger with PSA Groupe is expected to create the fourth-largest OEM, helping the two companies to invest in new technologies and compete at a global level, and to generate annual vehicles sales of 8.7m, revenues of approximately $188.25 bn and operating profits of more than $12.2bn.
Cash or Stock: Cash and Stock
Premium paid: the tie-up between the two companies was not a merger of equals since PSA Groupe seems to have paid a 32% premium to take control of FCA.
Announcement date: 10/01/2019
Acquirer: Tesla (NASDAQ: TSLA)
Target: DeepScale
Acquirer Advisors: N/A
Target Advisors: N/A
Value: N/A
Rationale: Despite their popularity and increasing sales revenues, Tesla’s electric vehicles cannot be considered fully autonomous vehicles as they cannot handle driving in certain conditions without human intervention. In order to improve its autopilot driverless assistance system and develop fully autonomous, or level 4, vehicles, Tesla has acquired DeepScale, a computer vision startup that has recently developed new techniques to improve the accuracy of electric vehicles’ perception system.
Cash or Stock: N/A
Premium paid: N/A
The acquisition details have not been disclosed by Tesla.
Announcement date: 28/03/2019
Acquirer: Daimler AG (ETR: DAI)
Target: Geely Holding Group (HKG:0175)
Acquirer Advisors: N/A
Target Advisors: N/A
Value: N/A
Rationale: After Geely’s acquisition of 50% stake in Smart from Daimler, the two companies announced a globally focused joint venture in China with the objective of developing a new generation of Smart electric models, which are expected to be launched on the global market by 2022.
The details of the JVl have not been disclosed.
Announcement date: 17/07/2019
Acquirer: Renault (EPA: RNO)
Target: Jiangling Motors Corp Ltd (SHE: 000550)
Acquirer Advisors: N/A
Target Advisors: N/A
Value: USD 144m
Rationale: After singing a joint venture with Brilliance China Automotive in October, Renault it's supporting its growth plan in China and increasing its EV capabilities by collaborating with different Chinese carmaker. The recent $144m electric joint venture with Jiangling Motors will lead to the production of a new range of electric vehicles while giving the company greater exposure to the Chinese market, which is currently the world’s largest market for EVs.
Announcement date: 01/10/2019
Acquirer: Ford Motor Company (NYSE: F)
Target: Mahindra & Mahindra Limited (NSE: M&M)
Acquirer Advisors: N/A
Target Advisors: N/A
Value: USD 275 million
Rationale: To increase its presence in the India and other high-growth emerging markets around the globe, Ford has signed a $ 275 million joint venture with the Indian multinational conglomerate Mahindra. The joint venture, which comes after Indian Prime Minister Narendra Modi decision to cut corporate tax rate to boost local manufacturing and offer cheap loans to increase car sales, will allow Ford to develop and sell its vehicles in the Indian market by using its production facilities in the country. By combining Ford’s technological leadership with Mahindra’s successful operating model and experience in the Indian market, the two companies would benefit from economies of scale, reduce their production costs and significantly increase their market share in such a fast-growing market.
Announcement date: 23/9/2019
Acquirer: Hyundai Motor Company (KRX: 005380)
Target: Aptiv PLC (NYSE: APTV)
Acquirer Advisors: Goldman Sachs & Co.
Target Advisors: Citi
Value: USD 4bn
Rationale: After its struggles in catching up with its competitors in the latest autonomous driving and electric vehicle technologies, Hyundai signed a $4bn joint venture with Aptiv, a global technology company that provides resources to some of the major automakers in the industry. Signed with the objective of developing autonomous driving platforms to be implemented by robotaxi providers and automotive manufacturers, this partnership will allow Hyundai to catch up with its competitors and Aptiv to cut its near-term funding needs, thanks to Hyundai’s $1.6bn cash injection.
Cash or Stock: Cash