- The global automobile industry cannot remain as it is and companies will have to adapt to stay competitive as electrification becomes imperative.
- FCA’s failed deal to merge with Nissan-Renault is indicative of a market which needs M&A to survive.
"CEO confidence is high, M&A is a confidence market notwithstanding geopolitics," said Eamon Brabazon, co-head of EMEA M&A at Bank of America.
From geopolitics to increased regulation, CEOs at major automakers are stepping up their efforts to stay relevant in a changing industry.
The European Union is pushing for vehicle electrification after publishing legislation last year to require 20% of sales revenue from carmakers to come from full-electric vehicles, or "Ultra Low Emissions Vehicles" by 2025. That target is set to rise to 40% of sales by 2030.
"The auto industry can’t sit still, it’s impossible," said Larry Slaughter, executive vice chairman at Bank of America, at a recent mid-year M&A roundtable event in London. It’s also a sign that CEOs are reacting to changes in the market.
The electric vehicle (EV) market could be worth as much as $356.5 billion by 2023, according to MarketWatch research.
As a result, M&A and strategic moves into the space are increasingly likely. A failure to do so could leave automakers high and dry as major players snap up lithium — the element behind EV batteries — assets and boost market share in the EV industry.
One example of the need to scale was last month’s move by Fiat Chrysler Automobiles (FCA) to form the world’s third largest automaker in a deal with Nissan and Renault. The deal ultimately fell through but the attempted merger’s existence came from the automakers’ need to boost their presence in the EV space and was a sign of the market’s electrification imperative.
The company’s press release at the time noted "the need to take bold decisions to capture at scale the opportunities created by the transformation of the auto industry in areas like connectivity, electrification and autonomous driving."
It’s part of a broader swathe of dealmaking with carmakers acutely aware of the need to scale up to survive which comes at a positive time for the M&A market. "CEO confidence is high, and M&A is a confidence market notwithstanding geopolitics," Eamon Brabazon, co-head of EMEA M&A at Bank of America, said at the roundtable event.
A Bank of America note from the end of May noted that the failure of the FCA deal had sparked a conversation within the industry about electrification. They indicated that major automakers such as GM, BMW, and Ford could all be ripe for joint ventures, strategic acquisitions, and mergers.
"As production volumes continue to increase … working capital and capacity investment could become a pressure point for smaller local suppliers, and particularly those lacking adequate liquidity," the report’s authors, John Murphy, Aileen Smith, Yarden Amsalem, and Gwen Yucong Shi, said. "In addition, R&D and investment in technology will likely increase as industry participants seek to leverage ongoing trends (electrification, autonomy, connectivity, etc.), for which scale will be necessary to effectively spread this potential cost burden."
European legislation and geopolitical pressures were also behind the recent move by Volkswagen and BMW to sign an equity finance deal with Swedish green lithium battery producer Northvolt with funding from Goldman Sachs. The deal was a sign of the additional importance of both electrification to European manufacturers. More importantly, it highlighted the need for a guaranteed European supplier of batteries for electric vehicles to escape ongoing geopolitical rows between the US and China.
"This is Europe’s first gigaplant from a green source and we are long on the trend of ESG investing," Michael Bruun, a partner at Goldman Sachs who led the equity raise, said in an interview with Business Insider. "Diversifying the supply chain and having a European champion in this space has clear benefits for customers looking for a sustainable and proximate supplier."
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