Alphabet Inc. (GOOGL) – Market cap as of 6/10/16: $542.35bn

Fiat Chrysler Automobiles N.V. (FCA) – Market cap as of 6/10/16: €7.55bn

Apple Inc. (AAPL) – Market cap as of 6/10/16: $613.96bn


The automotive industry is one of the businesses which is going to be affected the most by the technological innovations of recent years. Car sharing and electric/hybrid cars are already common and they are going to increase their market share, while autonomous cars are rapidly developing and might become concrete in few decades. The increasing influence of technology has a direct effect on the companies’ acquisition strategies, which are more and more focused on high-tech firms that own the expertise they need to adapt to this changing environment.

Industry overview

The automotive industry experienced a stable growth during the past decade (3% on average), except for 2008 and 2009 when the number of vehicles sold declined more than 15%, highlighting the great cyclicality of the business. However, forecasts for the next 7 years expect a solid increase in sales (4% on average), mainly driven by China, Brazil and India, while developed countries such as Europe and North America will only contribute marginally to the growth.

This is one of the least profitable sectors in terms of EBITDA margin, which is around 7%. It is worth mentioning that auto suppliers are on average more profitable than the automobile industry itself (EBITDA margin of 10%).  This can be explained by analyzing the business: most car producers just assemble the parts in-house, externalizing most of the production to reduce as much as possible fixed costs. Indeed, materials account on average for 47% of the total costs, while depreciation only accounts for 8%, signaling that this is not a capital-intensive business anymore and the value is mainly created by suppliers. The goal is having a cost structure which is more flexible and that can be rapidly adapted to changes in volumes, which is crucial in a cyclical business.

Current trends

The automotive industry has been deemed to be the main cause of pollution for many years and this has led to stricter regulations aimed at reducing emissions. Indeed, European and US producers will have to ensure that their vehicles cover on average 25 Km/L by 2025. This goal becomes even more difficult considering that oil prices remain low and consumers, especially in North America, tend to prefer less efficient vehicles.

Auto makers are trying to achieve this objective by developing more efficient engines, lighter materials and more efficient aerodynamics.

Another possible solution is developing electric or hybrid cars. Indeed, this niche already reached 550,000 vehicles sold last year.  However, this new kind of vehicles is still far more expensive than traditional cars. Governments are trying to make it more competitive on the market via subsidies.

The biggest challenge to electric cars is related to batteries’ cost, which is currently the main cost component of these vehicles. Indeed, after a rapid drop in the past years, their cost seems now to have stabilized. Moreover, governments will not be able to subsidize a much larger number of vehicles, thus preventing this market to develop further.

Even if batteries’ cost eventually achieved a sustainable level, a capillary network to charge (or change) batteries will have to be created. However, network operators will need the market to achieve a critical mass before considering the move economically convenient. This may generate a typical market failure which will likely need an external shock to be solved.

Car sharing is another big change for city mobility, however it is not expected to have a material impact on car sales over future years. Even if for many people car sharing will be economically convenient with respect to car ownership, BCG estimates that car sharing would decrease car sales only by 1%. The reason behind this forecast is related to the fact that many people do not consider cars only as a mean to reach a certain destination, but they rather consider them as a mean to show off their wealth or to enjoy the pleasure of driving.

The development of autonomous cars may not only change the business of automotive producers but it will have an impact on other businesses too. For example, insurers will have to shift their business model and start insuring car producers from possible liabilities caused by accidents related to malfunctioning in their systems. Moreover, according to a study by McKinsey, given that autonomous cars will free-up a lot of time for passengers, internet and mobile companies will benefit from an additional $5bn revenues per year for every additional minute spent on the internet.

FCA – Google partnership

Given the challenges mentioned in the first part, many car makers already paved the way to obtain the necessary expertise to rapidly adapt to this changing environment.

On May 3, 2016, Google and Fiat Chrysler Automobiles announced a collaboration to develop a fleet of 100 self-driving minivans based on the Chrysler Pacifica Hybrid model and on Google’s self-driving system. This represents one of the first attempts of collaboration between a disruptive, innovative company — such as Uber, Apple, Tesla or Google itself — with a traditional carmaker in order to develop autonomous cars. Moreover, this partnership thrusts FCA on the forefront of innovation in the automobile industry, after criticisms the company was lagging behind its competitors, such as Daimler and BMW.

On the one hand, Google does not want to manufacture self-driving vehicles on its own, despite having run more than 2.2m kilometers of tests with its own prototypes. On the other hand, FCA will enjoy a window into the new technology which it considers too risky to develop on its own, and the company may obtain an edge in the self-driving cars market, which will become about 15% of global car sales by 2030. Finally, the partnership allows the companies to cooperate with others, and Google will not share with FCA its proprietary self-driving technology developed for another prototype vehicle.

In a similar industry-wide trend, there are rumors that Apple is in talks to acquire McLaren Technology Group, a British sports-car manufacturer and Formula One team owner. Since 2014, Apple has started a special group, called Project Titan, and has been working on its own electric car venture and it is expected to enter the automotive industry in the high end, much as Tesla did with its Tesla Roadsters, which resulted from a collaboration with Lotus, another British sports-car maker. The deal would value McLaren at £1bn-£1.5bn while the company reported revenues for £265m and a negative pre-tax net income as of 2014.

Trends in the M&A market

As previously stated, suppliers are strategic in this industry and they also need to adapt to the new challenges arising

during these years. Indeed, they are trying to acquire the necessary expertise by growing externally, thus performing a significant number of acquisitions of high tech companies. M&A in the global automotive supplier sector reached an unprecedented level in 2015 and the majority of global consolidators were powertrain and chassis suppliers. Over the years, external growth revealed to be a successful strategy, as more than 70% of acquiring companies outperformed the peer group in terms of EBITDA margin growth.

In 2015 the total value of auto supplier M&A activity reached $50bn, more than three times that of the year before, with just a previous high of $35bn in 2007. This number reflects the significant changes that the auto supplier sector must face during these years. Additionally, PE firms were involved in about 25% of the deals, underlining the lucrative opportunities that this sector is offering.

An example of auto suppliers M&A: The ZF Friedrichshafen – TRW Automotive deal

ZF Friedrichshafen AG is a traditional German auto supplier company, which produces transmissions, braking and steering systems. TRW Automotive is an American global supplier of innovative automotive systems, such as automatic cruise control, lane keeping assistance, detection of blind spots, assistance for lane changes and emergency braking systems.

On September 2014, ZF announced the acquisition of TRW with an all-cash transaction where stockholders received $105.60 in cash for each share owned. On May 2015 ZF completed its $12.6 billion acquisition of TRW, which was incorporated as a new division called “Active & Passive Safety Technology”.

As a result of the acquisition, ZF is now almost twice the size it was in the previous year and has substantially increased group sales to €29.2bn, with TRW contributing for €8.9bn. Moreover, EBIT passed from €1.1bn in 2014 to €1.6bn in 2015, EBITDA increased by 41.2% and EBITDA margin achieved 11.5%. In addition, the debt was substantially reduced thanks to the substantial operating cash flow produced, allowing the company to invest around €1.3 billion in property, plant and equipment to expand its production and development capacity.

ZF Group aims to become a leading technology company. Indeed, the acquisition is fundamental for developing smart mechanical systems, following the trends of efficiency, safety and autonomous driving. The company aims to fully leverage the recently obtained expertise to implement fuel efficiency, occupant safety, and driver assist systems. ZF now has all the technology and expertise to become a fully-fledged car producer, indeed it presented its first prototype at the International Motor Show in Frankfurt, in September 2015. ZF produced the AUV (Advanced Urban Vehicle), an extremely agile, all-electric car. It is equipped with many smart assistance functions and with the Cloud Driving Assist function that stores key route information on the cloud, allowing it to be accessed by other vehicles as well.

Knowledge sharing and further development of common standards will improve the quality of the products even further, while materials procurement of the two companies is also being merged with positive repercussions for the cost structure.

[edmc id= 4136]Download as PDF[/edmc]


Leave a Reply

Avatar placeholder

Your email address will not be published. Required fields are marked *