Consolidation is Key for the Automotive Industry

By Francesca Bandini

 

The automotive industry is undergoing unprecedented changes on multiple fronts. Strong sales fluctuations and fierce competition are forcing automakers to reduce their investments, as the demand for most of their products is decreasing. Operating profits are declining — with companies such as Fiat Chrysler, Ford, and General Motors experiencing a decline of 11% in the last 12 months — and R&D spending, essential for the development of safer and more innovative vehicles, is becoming more and more unsustainable. The greater demand for EVs, whose global annual sales are expected to reach 10 million in 2025 according to Bloomberg, is leading to changes in consumer behavior, thus forcing automakers to modify their business model and product portfolios.  In this framework, consolidation becomes essential. However, while the automotive industry’s big consolidation dream remains elusive, companies are opting for new ways to reach their objectives and pool their resources, mainly through joint ventures, collaborations and strategic alliances that see artificial intelligence startups as potential targets. 



Importance of Consolidation. What is the Trend?

In the automotive industry, the need for consolidation is nothing new and it reflects companies’ desire to increase their market share, enter new markets and access new technologies and capabilities. Even though it is not always smooth, consolidation among carmakers is essential, now more than ever: carmakers need scale to survive. Greater size gives better bargaining power and protection against seasonal sales, help to spread investments and reduce development costs in such a capital intensive, fiercely competitive and cyclical industry, thus allowing automakers to reorganize themselves to deal with the oncoming EV challenge. 

Even though the number of mergers and acquisitions is currently declining, consolidation in the automotive industry is a trend that will likely accelerate thanks to the implementation of more flexible and short-term deals. The latest interest in electric, autonomous and shared vehicles, is indeed leading to greater implementation of artificial intelligence and technology-driven deals, with an increasing number of automakers that are trying to integrate electric vehicles within their product portfolio not only through acquisitions but also through strategic alliances and joint ventures. Renault’s strategic alliance with Nissan and Mitsubishi, Toyota’s partnership with Suzuki, and Volkswagen tie-up with Ford are just some of the most significant examples of companies that are teaming up, leveraging their respective strengths and pooling resources to undertake the latest EV challenge.


Graph: Car Mergers 1998-2018: Financial Times


Further Trend Analysis

The need to understand the long-term implications and profitability of EV market as well as effectively shift production towards more sustainable and cleaner vehicles is leading to a dizzying array of collaborations not only horizontally between carmakers, but also with players outside the industry such as artificial intelligence companies and startups. Renault and Nissan’s recent partnership with Waymo, a self-driving technology development company, shows how collaboration between automakers and AI companies are becoming essential for the development and the implementation of autonomous electric vehicles, the ultimate goal set by the automotive industry. This exclusive agreement, set up with the objective of creating driverless mobility services in France and Japan, will allow the three companies to join forces and explore all aspects of driverless mobility while speeding up the development time of autonomous vehicles and sharing the cost burden involved in manufacturing them. 

Who are the Main Parties Involved?

As previously mentioned, the majority of deals comes from large automotive companies collaborating with each other, as in the case of FCA and PSA Groupe, or acquiring small companies and startups in the high-tech sector, as in the case of Tesla and DeepScale or Ford and Mahindra Group. 



Deals to Know About