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Is the Auto Industry Set to Witness a Consolidation Spree?
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Will the Fiat Chrysler -PSA Groupe deal herald further mergers in the near future? Well, considering declining global car sales, high capital expenditure and margin compression, a wave of consolidation could actually begin in the automobile industry. The recent Fiat-PSA merger, which will create the world’s fourth-largest carmaker, may just be the beginning.
Consolidation is the Need of the Hour in Auto Industry
The automotive industry is witnessing considerable changes in operating environment, with the widespread usage of technology and rapid digitalization. A shift toward electric and self-driving vehicles has made it necessary for industry players to reorient their business model. Technological development with regard to electric, autonomous and connected cars demand huge investment, and even big auto companies may struggle to generate solid margins amid high capex. Considering the changing dynamics, merger and acquisition (M&A) deals are likely to enable the firms to share research & development costs effectively to fund new technologies.
Apart from cutting down average costs, the M&A deals will help the companies to increase their scale and geographical coverage.Further, the car industry — which has become extremely competitive — needs consolidation and strategic alliance formation to reduce the ruinous levels of competition.
Dwindling car sales environment is also one of the essential motives for consolidation in the auto sector. A study by Fitch Ratings claims that global car sales are anticipated to fall around 4% year over year in 2019. Declining sales in China, which is the world’s largest auto market, is the key factor in worldwide demand of car sales. Carmakers in China, which are battling an unprecedented slump amid economic slowdown concerns, are expected to witness a second straight annual drop in vehicle sales in 2019. New emission standards, weak credit growth, rise in ride-sharing services and used car sales are weighing on the demand for new vehicle sales. Sales in the United States are witnessing a declining trend and vehicle sales are expected to drop 2% year over year in 2019, per Fitch Ratings. Emerging economies like Brazil, India and Russia are also expected to bear the brunt of slowdown in car sales. Notably, Fitch Ratings does not expect any rebound in auto sales in 2020 either.
Amid such a backdrop, auto consolidation seems vital. However, it does have its share of issues.
Consolidation Has Its Set of Challenges
While consolidation is the name of the game in the auto industry, cooperation between carmakers does not always tend to be smooth. Think of the Daimler-Chrysler deal, which is the most prominent merger failure in the auto industry. Indeed, there have been successful mergers in the auto industry. Fiat Chrysler is itself a product of cross-border merger. However, the list of failures is also quite impressive. General Motors-Saab, Volvo-Renault and Ford-Volvo, among others, are notable examples. Cultural clashes and political issues tend to get in the way.
Failed cultural integrations are often at the heart of merger problems. The working and organizational culture of every firm is different, and needs to be addressed by management right from the beginning. Further, M&A’s involving job cuts are likely to face government pressure. Also, mergers in U.S. and European auto markets may induce antitrust concerns.
While consolidation is difficult, its importance is certainly not diminished in the auto industry. Joining forces may be the only way for the companies to stay competitive and survive the trying times ahead. While there has not been any major full merger deal announcement this year apart from Fiat-PSA, various automakers have resorted to form alliances for sharing technology costs.
Race for EVs and Driverless Future Spurs Strategic Alliances in 2019
A host of factors such as pollution issues, technical superiority, stricter fuel-emission standards, and increasing adoption by both automakers and customers have turned the fortunes in favor of electric vehicles. Fast progress in artificial intelligence and machine learning is making the seemingly utopian concept of driverless cars a reality. As the auto companies attempt to share the enormous costs in emerging technologies related to electric and driverless cars, many strategic tie-ups have been announced in 2019.
General Motors’ (GM - Free Report) $2.3-billion joint venture (JV) with LG Chem to establish a battery-cell assembly plant in Lordstown is one of the latest alliances, as firms seek to share the monumental costs related to green and driverless vehicles.
Amid a wave of partnerships sweeping the global auto industry, Honda and Hitachi announced, in October, their plans to combine the car parts business to develop a $17-billion components supplier.
In a bid to develop latest technologies and gain economies of scale, Toyota Motor (TM - Free Report) and Subaru Corporation also expanded their partnership in September.To strengthen ties with Subaru, Toyota plans to raise its stake in the latter from 16.8% to 20% to invest more efficiently in new technologies.The companies intend to make better cars suitable for the CASE (connected, autonomous, shared and electric) era.
To catch up to rivals in driverless car markets, Hyundai Motor and Aptiv also announced their intention to form a $4-billion autonomous driving JV in September.
In August, Toyota and Suzuki strengthened their ties by buying small stakes in each other to further pool their resources to adapt to the changing industry landscape. Apart from developing electric and hybrid models, the firms also aim at jointly developing self-driving technology.
In July, German auto giant Volkswagen (VWAGY - Free Report) and #2 U.S.carmaker Ford (F - Free Report) put aside their rivalries to manage the cost of new technologies. Under the deal, Volkswagen agreed to invest $2.6 billion in Ford’s self-driving startup Argo AI and Ford would use the electric-car components developed by the German automaker. Ford is also investing $500 million in Tesla competitor, Rivian -an electric car start-up.
In March, Daimler and Geely announced their 50-50 JV in China to offer e-mobility services. In February, auto biggies Daimler and BMW (BAMXF - Free Report) announced their plans to jointly invest more than $1 billion in emerging technologies. Both Daimler and BMW carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Last Words
While the auto industry has witnessed several unsuccessful mergers and deals in the past, contracting demand for conventional vehicles and rising costs related to EV/AV development are forcing players in the industry to find partners. In this era of sustainable mobility, deal making among automakers has gathered steam, and one can hope for many more partnerships and M&A deals in the coming year.
Zacks Top 10 Stocks for 2020
In addition to the stocks discussed above, would you like to know about our 10 top tickers for the entirety of 2020?
These 10 are painstakingly hand-picked from over 4,000 companies covered by the Zacks Rank. They are our primary picks to buy and hold.
Image: Bigstock
Is the Auto Industry Set to Witness a Consolidation Spree?
Will the Fiat Chrysler -PSA Groupe deal herald further mergers in the near future? Well, considering declining global car sales, high capital expenditure and margin compression, a wave of consolidation could actually begin in the automobile industry. The recent Fiat-PSA merger, which will create the world’s fourth-largest carmaker, may just be the beginning.
Consolidation is the Need of the Hour in Auto Industry
The automotive industry is witnessing considerable changes in operating environment, with the widespread usage of technology and rapid digitalization. A shift toward electric and self-driving vehicles has made it necessary for industry players to reorient their business model. Technological development with regard to electric, autonomous and connected cars demand huge investment, and even big auto companies may struggle to generate solid margins amid high capex. Considering the changing dynamics, merger and acquisition (M&A) deals are likely to enable the firms to share research & development costs effectively to fund new technologies.
Apart from cutting down average costs, the M&A deals will help the companies to increase their scale and geographical coverage.Further, the car industry — which has become extremely competitive — needs consolidation and strategic alliance formation to reduce the ruinous levels of competition.
Dwindling car sales environment is also one of the essential motives for consolidation in the auto sector. A study by Fitch Ratings claims that global car sales are anticipated to fall around 4% year over year in 2019. Declining sales in China, which is the world’s largest auto market, is the key factor in worldwide demand of car sales. Carmakers in China, which are battling an unprecedented slump amid economic slowdown concerns, are expected to witness a second straight annual drop in vehicle sales in 2019. New emission standards, weak credit growth, rise in ride-sharing services and used car sales are weighing on the demand for new vehicle sales. Sales in the United States are witnessing a declining trend and vehicle sales are expected to drop 2% year over year in 2019, per Fitch Ratings. Emerging economies like Brazil, India and Russia are also expected to bear the brunt of slowdown in car sales. Notably, Fitch Ratings does not expect any rebound in auto sales in 2020 either.
Amid such a backdrop, auto consolidation seems vital. However, it does have its share of issues.
Consolidation Has Its Set of Challenges
While consolidation is the name of the game in the auto industry, cooperation between carmakers does not always tend to be smooth. Think of the Daimler-Chrysler deal, which is the most prominent merger failure in the auto industry. Indeed, there have been successful mergers in the auto industry. Fiat Chrysler is itself a product of cross-border merger. However, the list of failures is also quite impressive. General Motors-Saab, Volvo-Renault and Ford-Volvo, among others, are notable examples. Cultural clashes and political issues tend to get in the way.
Failed cultural integrations are often at the heart of merger problems. The working and organizational culture of every firm is different, and needs to be addressed by management right from the beginning. Further, M&A’s involving job cuts are likely to face government pressure. Also, mergers in U.S. and European auto markets may induce antitrust concerns.
While consolidation is difficult, its importance is certainly not diminished in the auto industry. Joining forces may be the only way for the companies to stay competitive and survive the trying times ahead. While there has not been any major full merger deal announcement this year apart from Fiat-PSA, various automakers have resorted to form alliances for sharing technology costs.
Race for EVs and Driverless Future Spurs Strategic Alliances in 2019
A host of factors such as pollution issues, technical superiority, stricter fuel-emission standards, and increasing adoption by both automakers and customers have turned the fortunes in favor of electric vehicles. Fast progress in artificial intelligence and machine learning is making the seemingly utopian concept of driverless cars a reality. As the auto companies attempt to share the enormous costs in emerging technologies related to electric and driverless cars, many strategic tie-ups have been announced in 2019.
General Motors’ (GM - Free Report) $2.3-billion joint venture (JV) with LG Chem to establish a battery-cell assembly plant in Lordstown is one of the latest alliances, as firms seek to share the monumental costs related to green and driverless vehicles.
Amid a wave of partnerships sweeping the global auto industry, Honda and Hitachi announced, in October, their plans to combine the car parts business to develop a $17-billion components supplier.
In a bid to develop latest technologies and gain economies of scale, Toyota Motor (TM - Free Report) and Subaru Corporation also expanded their partnership in September.To strengthen ties with Subaru, Toyota plans to raise its stake in the latter from 16.8% to 20% to invest more efficiently in new technologies.The companies intend to make better cars suitable for the CASE (connected, autonomous, shared and electric) era.
To catch up to rivals in driverless car markets, Hyundai Motor and Aptiv also announced their intention to form a $4-billion autonomous driving JV in September.
In August, Toyota and Suzuki strengthened their ties by buying small stakes in each other to further pool their resources to adapt to the changing industry landscape. Apart from developing electric and hybrid models, the firms also aim at jointly developing self-driving technology.
In July, German auto giant Volkswagen (VWAGY - Free Report) and #2 U.S.carmaker Ford (F - Free Report) put aside their rivalries to manage the cost of new technologies. Under the deal, Volkswagen agreed to invest $2.6 billion in Ford’s self-driving startup Argo AI and Ford would use the electric-car components developed by the German automaker. Ford is also investing $500 million in Tesla competitor, Rivian -an electric car start-up.
In March, Daimler and Geely announced their 50-50 JV in China to offer e-mobility services. In February, auto biggies Daimler and BMW (BAMXF - Free Report) announced their plans to jointly invest more than $1 billion in emerging technologies. Both Daimler and BMW carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Last Words
While the auto industry has witnessed several unsuccessful mergers and deals in the past, contracting demand for conventional vehicles and rising costs related to EV/AV development are forcing players in the industry to find partners. In this era of sustainable mobility, deal making among automakers has gathered steam, and one can hope for many more partnerships and M&A deals in the coming year.
Zacks Top 10 Stocks for 2020
In addition to the stocks discussed above, would you like to know about our 10 top tickers for the entirety of 2020?
These 10 are painstakingly hand-picked from over 4,000 companies covered by the Zacks Rank. They are our primary picks to buy and hold.
Start Your Access to the New Zacks Top 10 Stocks >>