July 6, 2022
By Stuart Hands, Managing Partner: IMA Corporate Finance, a member of the Translink Corporate Finance Group
What will the cars of the future look like? Could they run on cold fusion? Will vehicles even exist, or will they be replaced by travel via the Metaverse? For now, there are many horses running the race to carry the automotive industry into its next big growth phase. And electrification seems like the safest bet, even if it’s a ‘stop gap’ to something greater. What this all means? The automotive sector has emerged from its sluggish state and is entering a new period of prolonged cyclical reinvention. This bodes well for M&A activity, especially for innovative new entrants.
In terms of trends, here are the big ones we’re seeing:
1. Electric vehicles (EVs): These are completely disrupting the industry. An internal combustion engine vehicle has 4 000 parts. An electric vehicle has 20. That means car design is undergoing radical change. So are production methods and charging infrastructure. Even the roads will change as autonomous vehicles redefine the rules. Often, electrification is driven by governments’ emission agendas, so we’re likely to see a massive uptake soon. There’s a whole industry growing up around the sector’s reinvention of itself, driven by the triopoly of digitisation, electrification, and the human-vehicle interface.
2. Charging infrastructure: It’s a bit like the Wild West right now – there’s no universal charger or strategy. As the number of electric cars increases, infrastructure should as well, which has a multiplier effect on economies. However, charging technologies are changing rapidly. Right now, most cars are on a 400-volt system, but the 800-volt system has a smaller battery with a faster charge and longer range. Hence, it’s difficult because as fast as the infrastructure is adopted, it will need to be changed. This race will be won by those that can get products to market the fastest. EVs had a record sales year in 2021, but still only account for 10% of new vehicle registrations globally. Demand is growing and companies are striving to keep up.
3. But are EVs really the future? Reuters did a study recently that showed an electric car must be driven for something like 22 000 km before it’s actually more environmentally friendly and cheaper than an internal combustion engine car. So, are EVs a stop gap to something else? Will there be a different technology in 20 years’ time? Undoubtedly. Can we predict what this will be? Not yet. But we’re seeing big investment from goliaths like Google into alternative fuelling.
4. Autonomous vehicles are still a big trend: Driver error accounts for many accidents, hence the push to autonomous vehicles. The snag is that humans like to drive. We like the control and freedom it affords us. So, right now, semi-autonomous vehicles are being explored as a hybrid alternative, where some control is relinquished to an operator that oversees the systems from a distance. Google is putting big spend into this.
5. OEMS are investing in Uber: Original Equipment Manufacturers (OEMs) are currently investing in taxi businesses like Uber. They want to provide the cars now, so when a true move to automotive vehicles happens, they’ve already captured the market.
6. Supply shortages: Semiconductor shortages have been an issue for a while. Now, with the situation in Ukraine, there are wiring harness shortages as well. Cost inflation is also weighing heavily on manufacturers’ minds as we emerge from the COCID-19 crisis.
7. A booming second-hand market: During the pandemic, many factories closed, and manufacturers couldn’t retain their normal new vehicle production volumes. So, people started to turn to second-hand cars, and the prices of these went through the roof. There’s also been a correlating step-change in how new and used car dealerships operate. People used to pop in for a test drive. Now, many apps make it possible to buy a car without ever having seen it.
The impact on M&A activity
We’re seeing some exorbitant valuations currently, for anything ‘sexy’ and IT-oriented, while traditional OEM and component businesses are being valued much lower as investors aren’t sure how they’ll approach the future.
There’s a lot of investment in businesses with early-stage ideas. Post COVID-19, there’s significant private equity and venture capital looking for a home. Much of that money is being invested in ideas – perhaps even loss-making ventures – in the hope that something will become ‘the next big thing’. Any new technologies in electrification and software development tend to be met with a rush of money.
Another trend is industry consolidation through acquisitions – like Good Year buying Cooper Tire and Rubber. We’ve also seen a lot of dealership deals, in the US especially, on the back of the used car shortage.
Right now, it’s all about enhancing EV and battery performance, with relevant transactions rising in Germany and China. We’re seeing lots of small entrants, especially in the electrification space. In terms of growth drivers, the big players are obviously Tesla and Google, German OEMs, Asian OEMS, and lesser-known Chinese developers who will drive lots of industry developments as the global focus shifts to the east. Uber is also influential in terms of the business model its catalysed.
Importantly, we foresee fewer sectors operating in siloes; there’ll be increasing crossover between the automotive and IT industries, for example.
Advice for business owners right now
The best advice would be to cast your sights on international opportunities. We’re seeing that across many sectors, you won’t receive true appreciation for the value of your business if you stick within your own jurisdiction. To drive competitive tension, you must look globally. That’s where Translink is your ideal partner. We have experts around the world with deep relationships with buyers and private equity investors. That really sets us apart and helps us get the deal done.