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China consolidation, tech investments to drive automotive M&A, experts say

All but three of the top mergers and acquisitions within the automotive industry since January 2018 had a transaction value under $1 billion, and more than half involved Chinese companies, both of which experts say point to a growing trend of smaller, noncontrolling investments and consolidation in the Chinese market.

Only three of the top 32 M&A transactions over the past 18 months clocked in above $1 billion, seemingly small amounts for the auto industry, according to data compiled by S&P Global Market Intelligence. However, Gary Silberg, Americas head of automotive for KPMG, said companies have actually ramped up investments that do not always appear in typical M&A data.

"It's not an acquisition, but it's a [noncontrolling] investment in a third-party company," Silberg said in an interview.

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As the global auto industry adapts to a future of electric vehicles, self-driving cars and mobility services, the rationale and nature of mergers and acquisitions throughout the supply chain are also likely to change.

A case in point is electric-truck startup Rivian, which has received investments from both Inc. and Ford Motor Co. so far in 2019. Amazon led a $700 million investment round and reportedly sees opportunities in electric-truck technology to support its logistics efforts. Ford took a $500 million minority stake in Rivian and agreed to jointly build an electric vehicle with its fellow Michigan automaker.

"Combined that's $1.2 billion," Silberg said. "Transactions are large but different now."

There are similar deals going on elsewhere in the industry. They often take the form of minority stake and venture capital investments, giving traditional automotive operators an insight into new technologies.

"The trend in my view will be that way," Silberg said. "We'll continue to see investments as the auto suppliers and automakers try to figure out where to invest to get ahead in these technologies."

Silberg added that the industry will see a lot of "frenemies" as traditional rivals team up to face the future of the changing auto industry. Ford and Volkswagen AG announced July 12 that they will work on self-driving car technology together, with VW investing $2.6 billion in Ford's self-driving company Argo AI. General Motors Co. and Honda Motor Co. Ltd. have also teamed up to develop autonomous vehicles for GM's self-driving car subsidiary Cruise.

Bill Selesky, senior research analyst at Argus Research Group, agreed that the industry is positioned to see a greater variety of transactions.

"[There is] completely new, transformational technology in the car industry, and you have many new entrants," Selesky said. "It just speaks towards getting an edge on the other guy by having cutting-edge technology in place."

Much of the activity is likely to take place among suppliers as they seek to address manufacturers' changing needs, according to Marc Holzer, a partner in Deloitte's M&A transactions services unit and its U.S. automotive M&A leader.

"First, as demand for components related to internal combustion engines decrease, legacy suppliers will be forced to compete on a cost basis in a market of decreasing size to an increasing degree (even more than now) and this will drive benefits to scale players, which will force suppliers to merge over time," Holzer said in an email.

"Second, given the capital requirements necessary to develop new and emerging technologies, such as those used in autonomous vehicles, significant financial resources will be required and large and well-capitalized suppliers will have an inherent competitive advantage, again, likely forcing mergers and consolidation over time," Holzer said.

Consolidation in China

The abundance of players in the Chinese automotive industry means consolidation is inevitable, the experts said. Among the top 32 deals since January 2018, more than half of the buyers or targets were Chinese companies.

Determining the extent of that oversaturation is challenging, however, as data varies greatly. Global accounting firm PricewaterhouseCoopers said there were about 76 auto manufacturers and 184 vehicle assemblers in China as of 2017, while more recent reports have suggested there could be more than 400 electric-car makers alone in the country.

China's government has offered large subsidies to encourage the production of new energy vehicles over the past decade but is now slashing incentives and plans to end them completely in 2020. For now, the subsidy for battery-electric cars with driving ranges of at least 250 miles is 25,000 yuan per vehicle, down from 50,000 yuan per vehicle, according to Bloomberg News.

"There are too many automotive players in China," KPMG's Silberg said. "Eventually there will be consolidation, and that means also with the supplier base."

Silberg said Chinese companies know this and he predicts there will be "a lot more" transactions in the auto industry there going forward. "That will be a trend over the next five years," he said.

Holzer said one view is that consolidation among auto manufacturers in China will occur in the near term, which in turn will push Chinese suppliers to merge to gain customer diversification.

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Of the top 10 automakers in China, several were involved in major deals over the past 18 months.

The largest deal since January 2018, valued at $4.21 billion, was Bayerische Motoren Werke AG taking a controlling stake in its joint venture with Brilliance China Automotive Holdings Ltd. in October 2018. BMW upped its stake to 75% from 50%, taking advantage of China's decision to remove a ban on foreign ownership in its auto industry. Brilliance Auto Group, which holds a stake in Brilliance China Automotive Holdings, was the eighth-largest auto manufacturer in China in 2018, according to the China Association of Automobile Manufacturers, or CAAM.

As well as consolidation, the push toward new technologies is also driving Chinese automotive M&A. The fourth-largest deal globally since January 2018, valued at $925.6 million, involved property development group China Evergrande Group acquiring a 51% stake in electric-vehicle company National Electric Vehicle Sweden AB as part of its move into the sector.

"I think the significance is that Chinese companies are trying to catch up on the technology side, especially with EV applications, and are willing to move ahead faster by buying up other companies and saving them the expense of developing it themselves," Selesky said.

As of July 23, US$1 was equivalent to 6.88 Chinese yuan.