Technological disruption drives automotive M&A in Q1

Auto sector M&A just hit a seven-year high. But the future could be even brighter, as technology firms seek opportunities within the auto industry

The automotive sector has staged a remarkable comeback. Worldwide car sales grew by 4.8% in 2016 to US$88.1 million, the highest figure for at least a decade, according to data from investment bank Macquarie.

Higher sales have translated into profits, which in turn has meant automotive M&A is firing on all cylinders. Last year the sector saw the second-highest deal value since 2006, with global transactions reaching a combined US$59 billion. This momentum has continued into 2017, with with Q1's US$22.2 billion-worth of global deals representing not only the highest quarter since 2010, but also the highest cross-border quarterly value on record (US$19.5 billion).

The deal that captured the headlines in Q1 2017 saw the PSA Group, owner of the Peugeot and Citroen marques, agree to acquire Vauxhall/Opel from General Motors for US$2.2 billion. Consolidation in the market is likely to continue, as such deals allow carmakers to increase revenues and margins by sharing the manufacturing costs of engines and other internal parts across models and brands.

Tech takes over the auto industry

Carmakers are increasingly keen to incorporate ground-breaking software and hardware into their vehicles via strategic alliances and acquisitions. Meanwhile, technology giants are keen to impose themselves on the auto sector.

According to research firm CB Insights, investors comprising VCs, corporate VCs and corporates deployed US$409 million into “auto-tech” companies across a record 41 deals in 2015. On a value basis, this number was beaten only in 2013 (US$576 million), the year in which Israeli driver-assistance innovator Mobileye enjoyed a US$400 million funding round.

Driverless applications are the most prominent example of automotive converging with tech. Having signed a collaborative arrangement with companies supplying driverless technology, BMW expects to roll out a test fleet of 40 self-driving cars by the second half of 2017 in preparation for the planned release in 2021 of its BMW iNEXT—the German manufacturer's first fully autonomous vehicle.

Disruptors in the taxi and ride-sharing industries such as Uber and Lyft are in the early stages of deploying their own self-driving cars. Once these prove workable and are appropriately regulated, capex investments will be made into increasingly larger driverless fleets in favor of splitting fare income with self-employed human drivers.

Connectivity and convergence drives deals

Broadly speaking, the automotive and tech sectors are converging along four themes: autonomy, efficiency, connectivity and safety.

This year Ford will release its SYNC Connect technology that enables drivers to voice-control their entertainment, climate and navigation systems, as well as remotely start their vehicle, unlock its doors and check its fuel level and other readings with their smartphones.

Notably, Ford is encouraging open collaboration in the connectivity arena rather than defending its competitive gain, a strategy that, perhaps counterintuitively, is becoming common among car manufacturers.

Don Butler, head of Connected Vehicle and Services at Ford, has said: “We chose to make our smart device link open source because we want to attract other manufacturers. It creates a broader addressable space for developers and that common architecture is one of the ways we believe will bring the promise of connected vehicles to life.”

This sentiment echoes that of Fiat Chrysler CEO Sergio Marchionne, who believes that carmakers would benefit by collaborating and sharing costs rather than spending billions developing virtually identical systems.

Similarly, BMW intends to share data and R&D expertise, gleaned in part through its collaboration with Mobileye, with rival automakers to help guarantee a future industry-wide rollout of driverless technology.

Klaus Fröhlich, BMW's board member for development, has said: “The holy grail of autonomous driving will not be easy to reach. This is why we are partnering with experts. We are thinking in terms of scalability and welcome other companies—manufacturers, suppliers or technology companies—to participate and contribute to our autonomous platform.”

Tech megadeals on the horizon

While carmakers' R&D budgets soared by 61% to US$137 billion between 2010 and 2014 according to Bloomberg, manufacturers are also seeking out investments and partnerships to avoid ploughing investment into costly tech projects which could prove less than fruitful.

This trend accelerated in 2016, with Fiat Chrysler striking a partnership with self-driving pioneer Google, Volkswagen investing US$300 million in Israeli taxi start-up Gett, and Ford acquiring Israeli self-driving machine learning start-up SAIPS and investing in mapping start-up Civil Maps, light detection and ranging (LiDAR) firm Velodyne and computer vision company Nirenberg Neuroscience.

The “technification” of auto is even greater than such deals suggest. Big tech M&A last year included Samsung's US$8.6 billion purchase of Harman International Industries, a maker of navigation systems for connected cars, and Qualcomm’s US$46 billion agreement to purchase NXP Semiconductors, the biggest chip maker in the automotive sphere. Neither deal involved traditional car manufacturers, but both were motivated by the auto industry's rising demand for technology.

And it is there, within the tech sector alone, where most of the megadeals are likely to happen. Tech companies are well capitalized, with larger margins than auto manufacturers and higher valuations, meaning any deals as a percentage of market cap are smaller. Automotive incumbents have high fixed costs and are under pressure to run at full capacity, and are therefore more likely to seek out supplier partnerships, start-up acquisitions and strategic corporate minority investments in larger tech and auto tech players.

Regardless of traditional manufacturers' relative purchasing power, cars are increasingly at the forefront of innovation in the pursuit of autonomy, efficiency, connectivity and safety. Without a doubt, the auto-tech trend is already in motion and is accelerating fast into the future.

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