Challenges for traditional powertrain suppliers ahead
The long-anticipated shift to Electric Vehicles (EV) will increase pressure on a highly fragmented and stagnating global powertrain market, which has long been suspected as one of the potential casualties of the EV disruption. In the current market environment, this development is largely driven by rapidly expanding global regulations that target a reduction of CO2 emissions caused by internal combustion engine (ICE) technology.
Powertrain components that will ultimately face declining volumes include, for example, internal combustion engine parts, transmissions, differentials, axles, and intake/exhaust systems. As volumes decline, competition for market share will intensify among the diversified landscape of powertrain component suppliers.
Revenues in the powertrain segment have been flat in recent years, and current forecasts project very limited growth through 2024. Pressure on global suppliers and their respective product margins will mount in response to industry trends and regulatory challenges, including the following:
- Increasing fuel economy standards: With stricter fuel economy standards enforced by CAFE (Corporate Average Fuel Economy), automakers are expected to further expand development of EV product lines
- Regulatory focus on greenhouse gas reduction: Reducing greenhouse gases is a priority for countries in the European Union who are aiming to curb sales of gas and diesel cars to reduce the carbon footprint
- Expected EV market share increase: As fuel taxes increase and the cost of battery technology declines, the total cost of EV ownership will become more competitive with ICE vehicles, and adoption of EVs will accelerate
- Emergence of autonomous vehicles: For high-mileage autonomous vehicles, OEMs are expected to opt for hybrid or fully electric powertrains rather than traditional ICE technology, especially for vehicles sold to fleet operators
Despite these mounting challenges, the powertrain sector remains highly fragmented. A consolidation among powertrain suppliers seems an inevitable outcome to compensate for the lack of growth prospects and to increase efficiency.
How powertrain suppliers can successfully leverage M&A in a changing market
Summarized below are some of the strategic benefits that could be realized as the result of M&A activity in this sector:
- Cross-selling opportunities: Companies with complementary products have an opportunity to sell across their customer bases, thus increasing the share of wallet with OEMs
- Footprint consolidation: Manufacturing resources can be realigned and optimized to take advantage of facilities in close proximity that produce similar parts
- Procurement savings: By consolidating the sourcing of raw materials, the combined organization’s negotiating position will improve, and total procurement costs can be lowered
- Research & Development alignment: R&D cost redundancies can be eliminated and the level of collaboration on new product development can be increased
- Manufacturing efficiencies and network optimization: Identifying best practices and applying them across the combined organization can help improve KPIs and lower consolidated maintenance, repair, and overhaul spending
- SG&A consolidation: Combining back-office functions like human resources, finance, and sales can improve overhead cost ratios
While a long tail is expected for ICE-powered vehicles, proactive powertrain suppliers will pursue consolidation as a means to capture market share and protect margins as traditional product volumes decline.
In such an environment, the ability to effectively manage and execute transactions can turn into a key competitive advantage. This will require experienced capabilities to identify targets and coordinate acquisitions, as well as a strong network of advisors that can help swiftly assess acquisition targets and identify and understand the risks that might come along with a transaction.
M&A transactions – especially auction processes and distressed sale situations – require the ability to move at a fast pace. Having the right internal and external resources at hand when the opportunity arises might tip the scale on who will be able to benefit as consolidation in the powertrain sector progresses.
Automotive Industry M&A Synopsis and Key Takeaways
- The global automotive industry recorded 96 deals in Q3 2019, a slight increase compared to Q2 2019 (+7)
- While the M&A market experienced a high level of activity, Q3 has seen a rise in auto companies teaming up via alliances, joint ventures, and partnerships to stay on top of the latest technological trends
- The urgency for transformation while controlling development costs, and the need to make bets on multiple products and services is a major driver for this development
- Volkswagen Group expanded their alliance with Ford by investing $1 billion in Argo AI, the autonomous vehicle technology platform. Volkswagen is also contributing its $1.6 billion Autonomous Intelligent Driving company, valuing Argo at more than $7 billion
- Hyundai Motor Group and Aptiv PLC have entered into an agreement to set up a joint venture for an autonomous driving business, valued at a total of $4 billion. The goal of the new venture will be to develop Level 4 and Level 5 production-ready self-driving systems for commercialization