The auto industry’s self-driving revolution has spurred the biggest two years of automotive supplier takeovers in a decade, with more coming as parts makers struggle to keep up with the pace of technological transformation.
The total value of automotive supplier deals in 2015 and 2016 was $74.4 billion, according to data compiled by Bloomberg, with each of those years far exceeding the $17.7 billion annual average in the previous 10 years. The number of transactions valued at $500 million or more also skyrocketed to 18 last year, triple the level of the previous decade. There have been 11 such deals so far this year.
The driving force behind the wave of consolidation is the pressure to keep up with the shift toward autonomous driving that started about five years ago. Suppliers need the know-how to help cars see their environment much as a human pilot would, which means sensors, cameras and radar, plus the computing power to comprehend the waves of data and share some of it, like traffic conditions, from vehicle to vehicle. Meanwhile, parts makers are getting cheaper, with economic uncertainty and Brexit concerns driving share prices down.
“Automotive bankers are definitely spending more time in places like Silicon Valley,” said Christian Kames, Citigroup Inc.’s head of investment banking for Germany, Austria and Switzerland, and the global co-head of automotive. “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.”
Up next could be deals in infotainment, which would give parts makers access to the all-important interface between driver and vehicle. With a number of smaller players, the sector is attractive because combinations probably wouldn’t raise the concern of competition regulators, said Chris McNally, a London-based analyst at Evercore ISI. Companies that could be bought either wholly or partially include Harman International Industries Inc., Visteon Corp. and Delphi Automotive Plc, he said.
“I think we’ll probably see a few more interesting deals over the next year or so,” McNally said. ZF Friedrichshafen AG, Continental AG and Robert Bosch GmbH have relatively little exposure to infotainment, he said.
Last week’s slate of deals show where the industry is headed. ZF, fresh off last year’s $12.9 billion purchase of TRW, the industry’s biggest in eight years, took a 40 percent stake in radar supplier Ibeo Automotive Systems GmbH and bid 4.41 billion kronor ($515 million) on Aug. 4 to win brake maker Haldex AB away from German competitor SAF-Holland SA. The day before, Samsung Electronics Co. was said to be in advanced talks to buy some or all of auto parts maker Magneti Marelli from Fiat Chrysler Automobiles in a potential $3 billion deal. If successful, it would be Samsung’s first automotive purchase.
“If you don’t buy now, and boost your capabilities for autonomous driving and for connected cars, there’s no second chance,” said Dietmar Ostermann, director of the automotive practice at PWC. “Because the others will.”
The shift toward electric vehicles will also drive deals, especially as industry leaders announce ambitious targets, said Axel Hoefer, a managing director at Goldman Sachs Group Inc. in Frankfurt. Volkswagen AG CEO Matthias Mueller is aiming for as much as one-quarter of its global sales to be battery-powered vehicles by 2025.
“Put yourself in the shoes of a traditional supplier,” Hoefer said. “A gradual shift is fine. But if it’s a steep change, that will put lots of people under pressure.”
In addition to the rush to acquire technology, increased appetite from China is driving deals, according to bankers. For example, Ningbo Joyson Electronic Corp., a Chinese supplier to several of the world’s largest automakers, agreed in February to buy U.S. air bag maker Key Safety Systems for $920 million.
“The targets for my clients sit in Silicon Valley, while the buyers for my clients are in China,” Hoefer said.
Autonomous functions will take a leap forward in the next few years. BMW AG is working with chipmaker Intel Corp. and camera-software company Mobileye NV to bring a car to the road by 2021 that can cruise highways autonomously. Volvo Car Group is promising the same. Continental, Europe’s second-biggest car-parts supplier, is working on its own BMW-style cooperation. The industry’s profit expectations for shared self-driving cars have helped make ride-sharing provider Uber Technologies Inc., which is testing autonomous vehicles in Pittsburgh, the world’s most valuable startup, worth about $62 billion.
Continental bought Elektrobit Oyj’s automotive software division for 600 million euros ($665 million) last year. This month, the company said orders for autonomous systems, including products that use Elektrobit technology, leaped 50 percent to 1.2 billion euros, making the area its fastest-growing business.
“If you think back five years ago, nobody knew such products would exist,” Continental CFO Wolfgang Schaefer said in an interview.
As the sector shifts from supplying car seats and exhaust pipes to offering camera software and sensors, new entrants like Samsung will speed the rate of change. At the same time, companies that aren’t profitable enough to keep up could be snapped up by larger competitors looking to grow while saving costs as well as set up a better negotiating position with automakers.
“If a company isn’t innovative and its products aren’t unique, they won’t survive in the shark tank that is the auto supply sector,” said Peter Fuss, a partner at EY’s automotive advisory unit.