The automotive industry has been one of the most heavily challenged to adapt to COVID-19. To no one’s surprise, automotive M&A activity took a significant hit on the chin during the first half of the year. Dealmaking activity reached the lowest levels since the 08’ recession.
A steep short-term drop in demand and disrupted supply chains pressured an industry already dealing with enormous changes to its traditional business model in the form of CASE technologies (connected, autonomous, shared, electrified). Let’s look at the numbers from January 1 – June 30 and what they signal for the future of the auto industry:
Vehicle manufacturers who previously made strategic bets to transform business models from the introduction of CASE technologies will continue to look for M&A opportunities to help strengthen their competitive position while also funding existing investments, particularly the area of electrification. Component suppliers face a more challenging environment. We anticipate a significant rise in acquisitions resulting from distressed opportunities later in 2020 and into 2021. Some suppliers may be forced into M&A to secure supply chains, and others into investments that can accelerate their digital transformation.
Retailers, wholesalers and businesses with service offerings in repairs and maintenance all face uncertainty. Those who have made investments in technology to help facilitate contactless purchasing and e-commerce, or those who have led the way in shaping this sub-sector with more focused investments, should emerge stronger as consolidation continues.
One area to keep an eye on for the back half of the year is the level of interest from private equity. At a time when the price of assets should experience a correction, financial investors have access to record levels of capital for deals. Those willing to consider how this pandemic could change the automotive sector will be better positioned to make deals with lasting impacts and returns similar to their approach in the aftermath of the Great Recession.
With banks cautious to extend credit to capital intensive automotive players, M&A will serve a dual purpose. Divestitures of non-core assets will enable realignment of business strategies, providing the capital injection needed to support new investments in technology. Alliances and joint ventures will continue as manufacturers look to share the costs of development and hedge the risk of market acceptance for their technologies.
We’ve seen swift and significant governmental actions, but more is needed to combat a second wave and mitigate a prolonged period of high unemployment which would deteriorate consumer demand. Fortunately, key players in the industry have entered this recession with stronger balance sheets and financial standing than that of the Great Recession, bringing hope that a rebound in the second half of 2020 will materialize.
All things considered, the industry will face a difficult 12 to 18 months with 2020 global GDP growth expected to decrease 6-8% from last year, record unemployment levels, and the threat of a second wave of COVID-19 creating supply disruptions and workplace health restrictions. But through these difficult times, winners and losers will emerge that will drive M&A activity for the remainder of the year.