Top consolidators: Japan in the lead; China falls back
Japanese companies among the Global 100 suppliers have the strongest capability to undertake strategic acquisitions, our analysis shows. They achieved the highest Buyer Score, which measures financial and operational wherewithal, thanks to large acquisitions by electronics suppliers in the lighting and technology systems, autonomous driving and semiconductor spaces. Given the trend of continued consolidation among suppliers of these subsystems, we expect that additional acquisitions will occur and that Japanese Global 100 companies will remain active players.
Meanwhile, Chinese suppliers have lost their appetite for investments into foreign targets after a recent spree of international purchases. In the past two years, the total value of international acquisitions has dropped to just above $1 billion. This marks a reversal from the recent past, when Chinese suppliers made about 10 international acquisitions a year, with an average total value of $5 billion, from 2015 to 2018. There are three main causes of this deceleration. First, automotive suppliers from China received one of the highest distress scores, which measure financial hardship, of any country in our analysis. Second, regulations governing overseas acquisitions by state-owned entities restricted their ability to pursue transactions. And finally, international regulators such as the Committee on Foreign Investment in the United States (CFIUS) have increased their scrutiny of cross-border deals.
In the face of these impediments to international M&A, Chinese auto suppliers have turned their sights on the domestic market. Since 2018, about 50 transactions have occurred between automotive suppliers in China. Overall, Chinese companies account for about 18% of the targets in auto supplier M&A this year.
Around the world, powertrain and electronics systems suppliers are in the forefront among global consolidators—companies that rank highest in terms of both Buyer Score and Buyer Attitude (a measure of acquisition willingness based on M&A track record and publicly announced acquisition intentions). Of the top 15 global consolidators, 11 fall primarily into one of these two categories.
Megadeals continue: Technology drives large transactions
Automotive suppliers have entered an era of unprecedented high-value M&A activity. Since 2015, the industry has closed on about $215 billion of M&A transactions. This trend shows little sign of abating, even if the frequency of megadeals may slow somewhat in 2019. So far this year, seven transactions valued at more than $500 million have closed, and an additional six are pending and expected to close by year-end. That would make 2019 the fifth straight year with more than 10 megadeals. Over that period, the majority of such transactions have involved electronics, powertrain and chassis system suppliers.
Two significant drivers of the largest auto supplier M&A transactions in 2019 have been interest in the space from private equity firms, which have participated in three of this year’s megadeals, and the technological transformation of the automobile. Five of the seven $500 million-plus acquisitions that have closed this year are in the electrical systems or electronics space, according to our analysis. These include transactions that gave the buyer access to advanced battery technology, entertainment systems and more.
Though they aren’t included in our tally of auto supplier megadeals, it’s worth noting there have been five deals this year which saw an acquirer pay $500 million or more for a minority stake in an AV or electric vehicle (EV) business. Taken together, these transactions illustrate the amount of capital required for auto suppliers and new entrants alike to compete amidst the industry’s evolving landscape.
The investment imperative: Preparing for the future
Autonomous vehicle technology and full vehicle electrification are the two dominant future state technologies impacting vehicle suppliers, but neither technology will make up a significant share of new vehicle sales, let alone the global vehicle fleet, anytime soon. Even companies that don’t produce components or systems directly linked to AV or EV production may find their markets disrupted by the automobile’s evolution. Some companies are making investments now that are intended to help them remain competitive in a future where AVs and EVs are a reality, even though it may be years before they truly pay off. Others may be waiting for technology to evolve and consumer demand to shift before acting.
Regardless of their view on how close EVs and AVs are to breaking through, auto suppliers should be thinking about financial and operational transformation. They will be necessary in order to build up a war chest that can be used not just to make future acquisitions, but also to develop the workforce of the future and to invest in advanced parts, materials and processes to keep pace with the evolution of the auto industry.