2017 Auto Industry Outbound Investment Report

"2017 Auto Industry Outbound Investment Report" explores the shifting trends in China auto outbound investment, the impact brought by the "One Belt and One Road" initiative, and the future outlook. It also points out the risks that the auto companies need to be aware when planning for outbound investments, then provides suggestions for them to consider when developing global footprint.

Viewpoints / key findings

As the pressure of auto industry transformation intensified, the auto companies feel the urge to speed up the globalization and enhance the competitiveness in overseas markets. Built upon the traditional export model, automakers and suppliers continue to go abroad by building plants in the target markets or acquiring foreign companies that match their needs. The following is a summary of the key findings from the report:

Status quo of outbound investment:

• The outbound M&A activities for China's automakers and suppliers in 2016 have slowed down, as the state-owned enterprises (SOE) became more rational while private enterprises' enthusiasm continued. The volume of large transactions fell sharply. Half of the deals were between 100 million to 200 million USD. The majority of the targets were in forward-looking technology field, with strong revenue growth and higher premium rate.
• When looking into the format of outbound investments, the growth momentums for outbound M&A and greenfield investment were very different: outbound M&A for automakers and suppliers declined, while greenfield investment increased significantly, exceeding outbound M&A in both scale and volume.
• In terms of M&A target destination, Western Europe and North America are still the most attractive geographies for automakers and suppliers, especially in the U.S. and Germany, representing 60% of total transaction volume, accounting for 90% of total transaction value. When analysing the industry sector of the M&A deals, the U.S. and Germany deals concentrated on the advanced technologies, such as core components for electric vehicles, connected vehicles, and autonomous driving.
• Over the past year, outbound M&A activities of auto companies presented a distinct trait, with the rise in horizontal M&A and investment in emerging strategic industries. Acquiring foreign enterprises to achieve transformation and improve the existing products has been the main driving force for business growth in recent years.
• Deloitte believes that the reasons for the slowdown in outbound M&A among China auto companies include: first, SOEs, especially those listing large SOE suppliers, reduced their outbound M&A activities due to the shrinking profit and operation inefficiency; second, the Chinese government tightened the approval for cross-border investments and the control on capital outflow, which affected the confidence in outbound investment to some extent; third, the host countries increase the scrutiny on foreign buyers with the reasons like asymmetry in market access conditions.

Outlook for Outbound Investment Trends:

• In 2017, market data shows a good amount of M&A deals in the pipeline, while the regulator's approval allowing smoothness of capital outflow might be one of the biggest obstacles for China enterprises to invest overseas. It's expected that the pace of outbound investment in auto industry will be steady, which will affect large or non-core business M&A transactions.
• In the long run, with the accelerated adjustment of the industry, the slowdown in domestic consumption, and the decline in the operational efficiency, auto companies have a strong incentive to acquire core assets including patent, technology and brand in the overseas markets to enhance their R&D capabilities and competitiveness in emerging strategic industries.
• Deloitte predicts that private auto companies with better operational efficiency and product competitiveness will continue to be active in overseas M&A; while the SOEs with higher debt ratio are expected to undergo a rigorous audit if they intend to increase the debt level to support non-strategic M&A activities. At the same time, as the overseas regulators tighten up the review of Chinese investors, state-owned investment transactions are expected to be subject to certain restrictions.