Auto Sector 2021 Outlook
Global Auto Demand is On the Path to Recovery
U.S. auto sales have seen a quick recovery since the COVID-19 related lockdown in Q2 2020. Once automakers and suppliers were able to resume manufacturing, they quickly ramped up production to catch up with the demand, especially high-margin light-trucks, SUVs, and CUVs. As demand exceeded production – which was and still is hampered by additional safety requirements – in the months after the lockdown, inventory levels saw record lows while used car prices substantially increased due to a shortage of new vehicles. While demand strengthened during the second half of 2020, U.S. light vehicle sales are expected to remain below levels seen in years prior to COVID-19 in the years to come. Nonetheless, the share prices of automakers and suppliers have fully recovered, and in some cases, exceed pre-COVID levels.
U.S. Light Vehicle Sales Trend (in millions of units)1
An increasing propensity to own premium vehicles, supported by lower gas prices and elevated household savings, has resulted in average transaction prices increasing to $38,077 in December, a 9% uptick from last year and 20% higher than five years ago2. Additionally, rising transaction prices are driven by tight inventories (resulting in lower incentives and discounts), low interest rates, and higher trade-in values. Improving sales along with record-high transaction prices will be key drivers for improving profitability in the automotive sector. Despite these positive developments, 2021 holds many uncertainties that may lead to surprises over the next 12 months.
Key Drivers of M&A Activity
- Supportive M&A Environment
With inoculation efforts ramping up, chances of a sustained recovery are rising. Lower interest rates, coupled with an improving economic outlook, should allow for an attractive deal environment. The expected changes to the tax code targeted by the incoming Biden Administration – potentially increasing the tax burden for business owners parting with their companies – will serve as a strong incentive to close a planned transaction no later than by the end of 2021.
- Adapting to a rapidly transforming industry
The auto industry is undergoing a major transformation that changes almost all aspects of its traditional business model. 2021 will likely see more risky bets in the form of M&A transactions aimed at expanding technological competencies, enhancing the talent base, and strengthening R&D capabilities. To free up capital and management attention, the established market participants could seek to offload non-core assets in more mature areas and reinvest into higher growth segments. The SPAC deal frenzy, many of these transactions involving auto-tech companies, is likely to continue and will be an important indicator of the industry’s optimism.
- Increase in Distressed M&A
COVID-19 has long been hailed as a precursor of a distressed M&A wave. The asset-heavy, mature automotive supplier sector appeared to be a particularly suitable candidate. To the surprise of many market participants, this distressed M&A wave did not materialize in 2020. However, companies may find it harder to compete in an environment where light vehicle sales volumes remain subdued while EVs continue to increase their market share. Cash-strained companies focusing on supplying parts for internal combustion engines (ICE) and models with declining volumes (e.g., sedans and compact cars) will be particularly vulnerable and could lead the way in the long-awaited rise in distressed M&A activity, despite an improving economy.
In our Q4 2020 edition of the Automotive M&A Newsletter, we offer insights into the near-term market dynamics affecting the automotive industry, the key drivers of M&A activity in 2021 and M&A activity that has occurred over the past quarter.To read the full report, download the PDF below.
- IHS Markit
- J.D. Power, Memorable (or Forgettable) Year to End Positively as December Sales Up and Average Transaction Prices Surpass $38,000 for First Time (December 2020)
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