Automotive supplier transactions continue to surge

An estimated $44 billion in automotive supplier mergers and acquisitions will close in 2019, continuing a trend of strong deal-making activity, according to PwC’s latest Global Automotive Supplier Consolidation Study. The automotive industry is facing a period of transformation, with investments in alternative powertrain and autonomous vehicle (AV) technologies and preparations for a potential slowdown in vehicle production both top of mind for many companies. Against that backdrop, merger and acquisition activity among auto suppliers continues to be strong. According to PwC analysis, we expect M&A transactions to reach $44 billion in 2019, continuing the momentum that has pushed total deal value in the space to top $50 billion in three of the past four years. If acquisitions of partial stakes in AV technology companies are included, the total value of deals in the space will likely exceed $50 billion this year.

Top consolidators: Japan in the lead, China falls back

Average scores by region# of companies Buyer Score Divestor Score Potential Distress Score

China 65 3.7 1.5 5.1India 51 3.5 1.8 4.0Japan 130 4.1 2.3 3.1S.Korea 58 2.2 1.0 5.2SE Asia 47 3.5 2.1 4.0Europe 96 4.5 3.9 3.8N.America 63 4.6 3.5 3.4S.America 5 2.0 1.0 4.5Global 100* 100 5.5 4.0 3.5Global 100 Japan 33 6.0 3.4 3.2Global 100 Europe 36 5.4 4.8 3.8Global 100 North America 18 5.3 4.3 3.5Total (Average of All)* 515 3.8 2.4 3.9

Strongest buyers

Most likely divestor

Most likely distressed

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.

Deal volum

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Deal volume (2019 Proj) 2019 YTD closed Deal Volume

Closed Deal Value ($B) 2019 Projected Deal Value ($B)

Note: Automotive deals are defined where target company has greater than 25% automotive revenue and obtains a >50% share of company Sources:Strategy& Analysis.

Source: Strategy& Analysis

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 transaction. 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.

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PwC | Automotive Supplier Transactions Continues to Surge

Source: Strategy& Analysis,*Mega-deal considers deal value >$500M

Num

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f Meg

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als

111

3

11 1

3

3

1

4

5

3

4

4

12

6

1

9

7

18

7

9

16

6

9

11

21

7

8

6

7

1718

13

YTD

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 mega-deals may slow somewhat this year. 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 mega-deals. Over that period, the majority of such transactions have involved electronics, powertrain and chassis system suppliers.

Mega-deals continue:Technology drives large transactions

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Dietmar Ostermann Principal, PwC US +1-972-672-4424 dietmar.ostermann@pwc.com

Doug HarveySenior Managing Director, PwC US +1-248-705-8984 douglas.s.harvey@pwc.com

Reid WilkPrincipal, PwC US+1-248-872-6792 reid.wilk@pwc.com

Ashkay Singh Principal, PwC US+1-440-382-8477ashkay.singh@pwc.com

To discuss how PwC can help your company navigate this changing landscape, contact:

Autonomous vehicle technology and full vehicle electrification are the two dominant future 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 dominate, 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.

The investment imperative: Preparing for the future

Two significant drivers of the largest auto supplier M&A transactions in 2019 have been interest in this space from private equity firms, which have participated in three of this year’s mega-deals, and the technological transformation of the automotive industry. 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 mega-deals, 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.