M&A Industry Convergence: Automotive and technology

By: Marcus Holzer and Omar Hoda

Few industries are undergoing disruption as dramatic as the automotive industry. Autonomous and semi-autonomous vehicle (AV) technology is developing rapidly and gaining acceptance from consumers, while automotive original equipment manufacturers (OEMs) and other players continue to focus on developing fully autonomous vehicles and new business models around those capabilities. Additionally, the growth of electric vehicles (EVs) is creating disruption within one of the last remaining core competencies of automotive OEMs—the internal combustion engine (ICE). Lastly, the addition of new entrants to the automotive ecosystem has added complexity to the landscape. These disruptions will likely drive different approaches to M&A, partnerships, and alliances, and require automakers to gain specific capability sets absent from their organizations today and manage an increasingly complex ecosystem.

In the past, automotive acquisitions focused on scale, brands, product capabilities, geographic presence, and other factors; in the future, they will also likely be motivated by the need for talent, technology, speed to market, and ecosystem presence. These deals most likely will not be about acquiring a revenue stream or established products or services; instead, they will be about adding expertise around emerging technologies, such as AV. For established companies with headquarters far from Silicon Valley or Tel Aviv, acquisitions may be a practical way to bring new technology and talent on board and accelerate innovation. Deal volume of this type accelerated significantly in the past three to five years, with a large number of smaller acquisitions that represent bets by existing players on teams, technologies, or new business models.

In addition, electrification has the potential to drive down demand for ICEs and their related components. As a result, automotive OEMs and suppliers will likely need to take strategic actions to deal with decreasing volume and utilization from these assets, possibly through product and supplier rationalization over time, driving scale consolidation and increased M&A activity. As volume and penetration of ICEs and related components decreases over time and adoption of EVs grows, these low-cost, scale producers will likely be the survivors in a decreasing market.

Finally, the automotive M&A landscape has been affected by the entrance of nonautomotive players into the ecosystem. The drivers for these deals are different—they’ve been primarily focused on the acquisition of mature businesses, which bring the nonautomotive acquirer access to automotive domain expertise, customers, and know-how. These acquisitions bring new entrants with different operating models, a lack of historic capital investment to maintain, and—often—significant capital resources to deploy/invest into the automotive ecosystem. This creates a new class of well-capitalized players for incumbents to compete against. Over time, the impact of these new entrants on the automotive industry will likely be significant, as will the rate of change, innovation, and capital deployment. Speed to market for new technologies should increase and innovation from other segments of the economy, such as the technology and consumer electronics industry, will likely find its way into the vehicle.

In short, the dynamics around the automotive ecosystem are as complex as ever—from the impact of technology and autonomous driving, to the adoption of electrification as an alternate propulsion source, to the arrival of new entrants to the ecosystem. Deal makers need to keep their eyes on an increasingly crowded road.