Cross-border automotive and mobility M&A value reaches new heights in Q4 2018

  • Q4 cross-border M&A in the automotive & mobility sector hit US$26.5bn
  • Quarterly deal value increased 34% over Q4 2017
  • Movement towards autonomous, connected, electric, and shared mobility continues to drive deals 

Rapid changes in the way that people travel, and the threat this poses to the future of the automotive industry, are shaping carmakers' corporate strategies and giving extra impetus to M&A activity. After decades of manufacturing vehicles founded on the same technology, car makers are increasingly moving from the combustion-engine-powered drivetrain to electric vehicles. According to the International Energy Agency, the world’s fleet of electric vehicles grew 54% from 2016 to 2017, to a total global stock of 3.1 million units, with annual sales exceeding 1 million. By 2030, the global electric vehicle fleet is due to rise to 125 million. This is one example of how recent years have seen the nascent development and adoption of vehicle technology that is autonomous, connected, electric, and shared (ACES). 

There was an estimated US$26.5 billion worth of cross-border deal value globally in the automotive and mobility sector in Q4 2018. Two transactions accounted for more than 76% of that deal value: the US$13.2 billion purchase of the automotive battery-making arm of Johnson Controls by Brookfield Business Partners, alongside the pension fund Caisse de Dépôt et Placement du Québec, and the US$7.1 billion sale of Fiat Chrysler’s Italian components maker Magneti Marelli to Japanese car parts company Calsonic Kansei. Aggregate deal value in the automotive and mobility sector stands at 70% above the US$15.6 billion quarterly average since 2010, although such invested amounts were spread across 68 deals, 16% below the quarterly average over the same period. 

New drivers, new competitors 

An automotive revolution is underway across ACES and beyond. Established carmakers are facing competition from ride-sharing apps like Uber, which is investing in self-driving fleets in the hope of cutting out driver commissions, as well as driverless car projects, from tech giants like Google parent Alphabet Inc.’s Waymo. 

All of this activity puts pressure on OEMs to develop their own autonomous products. In September 2018, BMW unveiled a concept model for its Vision iNext model, which it plans to put into production in 2021. BMW does not own the enabling technology, but has signed a partnership agreement with Mobileye, the Israeli autonomous driving innovator acquired by Intel in 2017. This commercial arrangement is indicative of a broader trend as the line between auto and tech blurs. 

Conscious of the rapid disruption caused by new technologies, carmakers are interested in incorporating ground-breaking software and hardware into their vehicles via strategic alliances, joint ventures (JVs) and minority investments, as well as outright acquisitions. This trend can be seen between OEMs themselves. 

In February 2018, Chinese carmaker Geely became the largest shareholder in Daimler after building a 10% stake. The following month, BMW and Daimler agreed to enter a JV for the companies each to take a 50% share in their merged mobility services business units, which encompass car-sharing, ride-hailing, parking, charging and multimodality. 

From artificial intelligence to robotics, mapping software to high quality sensors, and cybersecurity, as cars become equipped with full connectivity, strategic acquirers see opportunity in a broad range of technologies, even those in the earliest stages of the innovation cycle. In this vein, many OEMs and suppliers are also establishing corporate venture capital funds (CVC) to invest in innovative start-ups. In November 2018, Renault-Nissan-Mitsubishi, for example, announced it planned to invest as much as US$1bn over the next five years through its CVC, Alliance Ventures.

Challenges and opportunities

The race among OEMs to equip themselves with the technology required to remain competitive will spur M&A activity in the automotive and mobility sector, although near-term obstacles stand in the way of cross-border dealmaking. 

There are early signs that the attention of Chinese investors is shifting away from the United States to Europe in a possible reaction to recent trade tariffs and policies targeting Chinese foreign investment. If prolonged, such a shift would be impactful given China's position as the world's largest automotive market. 

The Committee on Foreign Investment in the United States (CFIUS), the body responsible for reviewing the national security implications of foreign investments in U.S. companies, has heightened its scrutiny of deals in recent months, particularly those emanating from China. This culminated in Congress enacting the Foreign Investment Risk Review Modernization Act (FIRRMA) in August 2018, expanding the scope and powers of CFIUS. The Committee now has the jurisdiction to vet not only controlling interests but also minority deals, and has more time to review deals.

CFIUS has focused its attention on deals involving Chinese buyers and technology assets, over fears that U.S. entities will lose control of valuable intellectual property. This could complicate cross-border investments into the United States as the automotive and mobility sector becomes increasingly tech-centric. 

Protective action is not limited to the United States, as key European markets have also taken a stricter stance against M&A in strategically sensitive industries in recent months. In December 2018, Germany announced changes to its own national security review procedures, which allows authorities to investigate investments by non-European investors seeking to acquire 10% or more of a German company involved in industries such as technology, telecommunications, media or defense.These changes reduce the threshold of 25% that has applied since 2017, and are thought to be driven in part by concerns about China-based investment.  

The picture in China, however, is very different. In July 2018, the Chinese government pared back its blacklist of industries in which foreign ownership is prohibited or restricted, by nearly 25%. Notably, under the new rules, a 50:50 cap on foreign ownership of Chinese manufactured vehicles was lifted, which will come into effect for the wider car market in 2022. BMW was quick to respond to this regulatory easing, increasing from 50% to 75% its stake in its JV with Brilliance China Automotive Holdings, with the deal anticipated to close as the new rules are brought into force. Whether this signals similar moves by other global OEMs with holdings in Chinese JVs is not clear. 

The auto-tech revolution has already begun. While regulatory challenges and uncertainty exist, those hurdles will not stop the revolution that will fuel automotive M&A activity over the next decade.

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