Automotive Industry M&A Update Q4 2019

This change in consumer preferences is driven by factors such as lower gas prices, a strong economy, and improvements in the design of SUVs, as well as increasing fuel efficiency. Especially as the retail gasoline prices in the U.S. dropped from $4.14 a gallon in 2008 to below $3.00 in 2014,⁽²⁾ fuel efficiency became less critical in the consumer’s vehicle purchase decision. In addition, the segment has benefited from the introduction of CUVs, which combine the sport-utility body style with the frame of a passenger car, offering a smoother, quieter ride with better fuel efficiency than truck-based SUVs. CUVs are attracting drivers of sedans seeking increased interior space, higher ground clearance and all-wheel drive features, and SUV and pickup truck drivers seeking more affordable and efficient vehicles.

Increasingly stringent fuel efficiency regulations across the globe pose challenges for auto manufacturers. As a result, they are investing heavily in electrification technologies and new crossover models, as CUVs often have slightly lower fuel economies than sedans. However, the recent move by the Trump administration to roll back the Obama administration’s fuel efficiency standards in the U.S. may provide relief to manufacturers by reducing future efficiency improvement requirements.

“All five vehicle types are at or near record low CO₂ emissions and record high fuel economy and have steadily improved in recent years. However, the market shift towards SUVs and away from sedans/wagons has offset some of the fleetwide benefits that otherwise would have been achieved from the increased fuel economy within each vehicle type.”⁽⁷⁾

– 2018 EPA Automotive Trends Report, March 2019

The Changing Landscape

While U.S. auto sales continue to remain stable, the market is witnessing divergent trends in passenger cars and light truck segments, driven by shifting consumer preferences from sedans to SUVs and CUVs. More than 17.0 million light vehicles were sold in the U.S. in 2019, the fifth consecutive year when sales exceeded 17 million units. However, small and mid-sized car sales fell for the seventh consecutive year, while CUVs continued to grow, reaching an all-time high with a market share of 41%.⁽⁵⁾ As the market is expected to witness soft demand in the next few years, new model launches and an optimal product mix will be critical for automakers to protect market share and grow the top line. In the U.S., manufacturers will continue to rely on the truck segment, including pickups, CUVs, and SUVs, which is expected to continue to dominate the market. However, as the segment becomes crowded, profitability may decline.

While FCA halted the production of sedans in the U.S. in 2017, the other two Detroit manufacturers, Ford and GM have announced plant closures and discontinuation of their sedan models by 2023. With the large domestic manufacturers focusing on light trucks, foreign brands like Honda and Toyota are likely to take a larger share of sedan sales in the U.S.

Despite significant differences in terms of new model launches across manufacturers, the product mix of all major global manufacturers is moving towards Crossovers and light trucks.

Electrification of SUVs

The shifting consumer preference for large vehicles, coupled with long-term emission regulations, has caused automakers to focus strongly on electric trucks and SUVs in the next few years. The market has witnessed a flurry of recent announcements of electric SUVs, including new models, as well as electrified versions of their popular nameplates. Automakers have pledged more than $225 billion toward their electrification strategies by 2023.⁽⁸⁾ Success in the electric light truck/SUV category is critical for automakers, as these models are more profitable as compared to lower margin sedans, helping them to better absorb high battery costs. These models may also increase EV adoption by increasing the options available to consumers in terms of vehicle selection. Battery-electric SUVs as a percentage of total SUVs will grow from 1% in 2015 to 35% by 2025.⁽⁹⁾ However, range, infrastructure, and cost still pose significant challenges.

Automotive industry M&A synopsis and key takeaways

Automotive M&A Market Synopsis

• The global automotive industry recorded 102 deals in Q4⁽¹³⁾, becoming the quarter with the highest M&A activity in 2019
• The automotive parts and equipment segment also witnessed an increase on a Q-o-Q basis to record 80 transactions# in Q4 2019
• OEMs and suppliers are increasingly looking to create combinations among themselves to create competitive technologies and solutions, establish a global customer base, and achieve economies of scale

“SUVs are the growth engine behind the global auto market and we think there is little chance of this trend reversing.”
-Jeff Schuster, President of Americas and Global Vehicle Forecasting at LMC Automotive(15)

Key Takeaways

Consumers Growing Preference for Large Cars is Leading Manufactures to Rethink Their Product Mix

• Over the last decade, consumer preferences, especially in the U.S., have shifted towards larger vehicles, which has resulted in light trucks gaining significant market share

• Automakers are responding by shifting their focus from sedans to Sport- and Crossover-Utility vehicles
• A Convergence of EVs and SUVs has given birth to a new e-SUV subsegment, with every major automaker coming to market with new models in the near-term

Valuation Observations and Sector Performance

• While valuation multiples have increased for suppliers over the previous quarter, they have remained at par for the OEMs
• Despite plateauing auto sales, investors are rewarding OEMs and suppliers for their strategic moves toward new technologies

“If you really want people to pay attention to electrics, you need to be playing where they’re interested.”
-Darren Palmer, Global Product Director, Ford Motor(16)