2017 was another strong year for the automotive sector and related mergers and acquisitions activity, thanks in large part to positive macroeconomic factors and the continued development of emerging automotive technologies.
The value of automotive M&A activity rose 30 percent last year to $53.2 billion while the number of transactions rose 2.6 percent to 598, according to an annual report by PwC.
The new automotive ecosystem in which traditional manufacturers and suppliers collaborate and integrate with established and emerging technology companies continues to mature as buyers across these sectors leverage strong balance sheets, relatively low borrowing costs and eager outside investors in order to participate in the race toward the development and full-scale market adoption of environmentally friendly autonomous and connected vehicles.
Given the various technological, legal and consumer-driven hurdles on the horizon, not to mention the ever-pressing question of where are we in the current automotive cycle, there is disagreement about the realistic time frame for when (and how) this automotive panacea will be realized.
But there is a clear consensus that the journey should be lucrative for those who can keep up. Sitting on the sidelines is not a suitable long-term option.
The emergence of automated, connected, electric and sharing (ACES) automotive technologies and business models has been the most notable development in the automotive industry over the last several years and continues to be a primary driver of M&A activity.
This is sometimes misportrayed in the North American market as Detroit vs. Silicon Valley, when in reality, this has resulted in Detroit plus Silicon Valley. Many Detroit automakers and traditional suppliers have established a Silicon Valley presence for access to software talent and startups, while many traditional Silicon Valley technology companies are opening locations in Detroit for proximity to automotive customers, manufacturing engineering talent and the significant automotive r&d activity that is based in Detroit. (There are more than 2,200 automotive r&d facilities in Michigan, according to a recent report issued by MichAuto.)
Large suppliers such as Delphi have found they can accelerate their r&d activities in this space by acquiring existing teams, such as the recently announced NuTonomy transaction valued at $450 million. At the same time, traditional technology companies are also becoming increasingly invested in this space and helping to drive deal activity and valuations higher and higher, as is evident by Intel's $15.3 billion acquisition of Israel's Mobileye, a maker of cameras, sensors and software targeted at the autonomous vehicle market, and Samsung Electronics' $8 billion acquisition of Harman International Industries.
The M&A activity for auto-tech deals involving component suppliers has exploded, with PwC reporting a 70 percent increase in deal volume from 2016 to 2017. We can expect these trends to continue as the convergence of the automotive and technology industries progresses and, with that progression, a new technology-centric automotive ecosystem develops and matures.
The move toward lightweight materials is another trend that should continue to bolster M&A activity in the automotive industry, albeit amid increased regulatory uncertainty under the Trump administration. The major contributor to the lightweighting push is, of course, government regulations to control vehicle emissions in an effort to address climate change.
While the current administration has taken steps to roll back some of the corporate average fuel economy targets put in place by the Obama administration, the rest of the world, including the European Union, India and China, continues to adopt and stand by aggressive emission targets. The addition of new content to vehicles such as driver-assist sensors and improved infotainment features will add more weight to vehicles that will need to be made up for with lightweighting materials.
Research conducted by the Center for Automotive Research indicates that by 2025, around 5 percent of the curb weight of the U.S. fleet will be added to every vehicle for these safety and performance improvements, including an additional 200 to 300 pounds per vehicle for automated driving features. And as autonomous driving takes hold and fewer crashes occur, the acceptance of lightweight materials should continue to grow.
As Teijin's 2017 acquisition of Continental Structural Plastics Holdings Corp., a major composite supplier based in Michigan, for $825 million suggests, the demand for advances in this space should drive deal activity and valuations in 2018 and beyond.
This article was originally published in Automotive News.