We’ve come to a crossroads, ladies and gents; the automotive landscape is on the verge of becoming more of a robotic monster than ever before. But despite all of man’s technological advancements and autonomous inclinations, not everything is right in this carbon-clad future: A recent report from Bloomberg illustrates that self-driving cars and the electronics that go into them are making or breaking auto suppliers.
According to the business-oriented publication, “the auto industry’s self-driving revolution has spurred the biggest two years of car-supplier takeovers in a decade,” with further acquisitions on the horizon as many parts makers struggle to keep up with tech demands. To put this shift into perspective, note that the value of automotive-supplier deals in 2015 and 2016 alone was around $74.4 billion; Bloomberg’s data shows that this easily dwarfed the $17.7 billion annual average seen in the previous 10 years.
While all of this looks great for tech startups and established electronics suppliers, as the total number of acquisitions valued at over $500 million came to 18 last year — triple the level from the previous decade — trouble brews at the bottom. In 2016 alone, there have already been 11 of these major deals, meaning monolithic consolidation is squeezing out smaller businesses at an alarming rate as the urgency to keep up with an increasingly autonomous future becomes more frantic.
The suppliers of tomorrow need interdisciplinary tech expertise today if they want to survive, which means providing the sensors, cameras, radar systems, and computers that make self-driving commuter cars a reality. Competition is fierce in this segment too, with many parts manufacturers offering cheaper components and software patches due to engineering advancements and outsourcing, all while economic uncertainty continues to keep share prices at increasingly lower levels.
Christian Kames, Citigroup’s head of investment banking for Germany, Austria, and Switzerland, and the global co-head of automotive, elaborates: “The focus areas are electronics, communications, and software. In the past, most suppliers didn’t really have that kind of technology, but they now know they need to have it to set the industry standards for the future.”
This leads us to the next major topic of takeovers. As infotainment goes from being a passive touchscreen designed for listening to music and getting directions to a control panel that keeps the driver in touch with the car, a new breed of programmer is emerging. As Bloomberg illustrates, for many smaller startups, this particular sector is quite attractive since thus far it hasn’t been flagged by competition regulators. Autonomous tech specialist Delphi Automotive is a prime example; just look at Delphi’s coast-to-coast autonomous drive last year.
Meanwhile, major players like ZF Friedrichshafen AG, Continental AG, and Robert Bosch surprisingly have very little prior exposure to infotainment, a fact that’s about to change after a recent slew of deals left ZF with a 40% stake in radar supplier Ibeo Automotive Systems. It’s nothing that we didn’t expect to see eventually, just further proof that big businesses are buddying-up with any and all tech automotive firms that exhibit self-driving creativity.
But gobbling up smaller startups and buying stakes in large tech firms aren’t the only moves being made by the multi-billion dollar industry giants. In South Korea, Samsung is rumored to be in talks with Fiat Chrysler in order to buy some or all of auto-parts maker Magneti Marelli, a deal that could top out at $3 billion when the tire smoke clears. This would mark Samsung’s first automotive purchase and, based upon the company’s continued success in global markets, could prove to be a major power move for the tech-focused firm.
“If you don’t buy now, and boost your capabilities for autonomous driving and for connected cars, there’s no second chance, because the others will,” says Dietmar Ostermann, director of automotive practices at PWC, and a specialist who conducts annual studies on supplier deals. While transactions involving the acquisition of powertrain and chassis manufacturers still remains the most common move, Ostermann says that electronics-related procurements are easily the fastest growing segment.
Axel Hoefer, a managing director at Goldman Sachs in Frankfurt, weighed in with the point that the shift toward electric vehicles will also continue to drive deals, especially with stricter government regulations prompting automakers to one-up one another. Volkswagen expects that as much as 25% of its global sales will be battery-powered by 2025.
Regarding the rolls of traditional suppliers and the chain that has stood in place for decades, Hoefer says that many of these companies are having a tough time adjusting to the rapidly transforming automotive landscape. “A gradual shift is fine,” he explains, “But if it’s a steep change, that will put lots of people under pressure.” Nowhere is this issue more apparent than in China, where companies like Ningbo Joyson Electronic Corp., a crucial supplier for several of the world’s largest automakers, agreed in February to buy U.S. airbag maker Key Safety Systems for $920 million. Being a pivotal player behind many of these recent purchases, Hoefer sums it up simply and effectively. “The targets for my clients sit in Silicon Valley,” he says, “while the buyers for my clients are in China.”
Continental, Europe’s second largest automotive parts supplier, bought Elektrobit Oyj’s automotive-software division for $665 million last year, and now claims that orders for self-driving systems leapt 50%, marking it as the brand’s fastest-growing division. “If you think back five years ago, nobody knew such products would exist,” says Continental Chief Financial Officer Wolfgang Schaefer in an interview, who isn’t the only German getting in on this action.
BMW is also pushing full steam ahead, as it teams up with computer chip specialist Intel and camera-software powerhouse Mobileye to meet a 2021 self-driving deadline that is being matched by companies like Volvo and, more recently, Ford. Meanwhile, Uber is tirelessly testing autonomous vehicles in Pittsburgh, as lofty profit projections for shared vehicles spurn on interest, making it the world’s most valuable startup, with a $62 billion price tag currently attached to it.
The mass production of headliners, rear differentials, and door jams won’t ever go away though, because in order to make a vehicle, automakers must always have parts on hand in order to complete an assembly line sweep. It’s just that the tech side of the equation is growing so much more rapidly than previously predicted, and any supplier that has issue keeping up with the times stands a strong chance of getting gobbled up by big business or going belly-up. Electronic innovation and hands-free driving experiences are rapidly replacing horsepower numbers and stamped steel sales pitches, and that creates both an opportunity and an obstacle for automotive suppliers.