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How M&A is Turbocharging the Race for Auto Industry Dominance

Like proverbial sharks in the water, some 1,700 startups are circling auto industry incumbents. Emboldened by funding, shifting consumer tastes, compelling tech and the trail-blazing success of pioneers such as Tesla, this burgeoning auto-tech set is ready to make auto manufacturing, ownership, financing and servicing better, cheaper, faster and safer.

The emergence of automated, connected, electric and car-sharing automotive technologies and business models is arguably the most notable development the industry has seen in a century and continues to be a primary driver of M&A activity. The trend captures what is now central in the race for survival: capturing emerging technology and new market share inorganically through acquisition and corporate venturing. Historically, this was do-able with in-house R&D and marketing, but not today.

Efficient, Strategic M&A Is The New Lever For Progress

Barriers to entry in the automotive industry are crumbling. Digital advancement and technological disruption are challenging every aspect of the business model, operating approach and production cycle. The innovation vacuum, readily deployable technology and the agility of small, skilled companies has the automotive ecosystem buzzing. Outside pressures on standardized approaches to travel are so significant that Bob Lutz, the former Vice Chairman of General Motors believes “we are approaching the end of the automotive era.” Travel, he predicts, will change so substantially that “within five years people will start selling their cars for scrap or trade them in for autonomous passenger modules as self-driving cars take over transportation [and] human-driven vehicles will be legislated off the highways.”

While other notable industry voices believe this death sentence is premature, the transformative shifts within the industry are seismic. Today, technological developments and evolving business models are redesigning the ecosystem, requiring traditional industry players to invest aggressively in inorganic growth to keep footholds during the sector’s reinvention.

Industry research consultancy Frost & Sullivan notes that:

"Though the automotive industry has seen exceptional technological advancements and innovation, the gestation period for its emergence has remained painfully slow. The process to adopt a new innovation typically requires considerable time (four to six years) as well as money spent on testing, qualification and certification for the new product. Moreover, the traditional mindset of the automotive industry, [...] combined with an inflexible research and development process, impedes ‘out of box’ thinking, further slowing down the innovation/adoption of new products."

 

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Feasting on Industry Sluggishness

Startups are increasingly contending with incumbents by bringing digital enhancement, meeting consumer needs and leveraging data, connectivity, mobility and smart technologies. In every market vertical, startups are playing a role in breaking open innovation more quickly and at a lower cost. 

In a classic case of ‘if you can’t beat them, join them,’ this trend, as Frost & Sullivan reports, is being leveraged by existing automobile manufacturers through corporate venturing and programs such as GM Ventures, BMW Start-up Garage, JLR Tech Incubator and Volvo Venture. These initiatives drive partnership, investment and joint-ventures with emerging companies, with investments ranging from the hundreds of thousands to billions of dollars. In January 2018, for example, Renault-Nissan-Mitsubishi announced a $1 billion venture capital fund, set to invest $200 million a year over the next five years.

“Auto-tech” (where technology is applied on top of the existing automotive ecosystem comprised of ownership, operations and manufacturing) is the fortunate recipient of new waves of spending. In the third quarter of 2017, PwC reported on the sharp rise in auto-tech VC investment. PwC's report references the growing appetite for investments to deploy assisted driving/autonomous software, driver safety tools, driving data/connected car, fleet telematics, vehicle-to-vehicle communication and auto cybersecurity.

VC-backed auto-tech companies raised $329M across 17 deals in Q4 of 2017 based on the latest PwC/CB Insights MoneyTree report. This represents a 51% increase in funding over the previous quarter, when $218M was raised. PwC also recognizes that at the time of reporting (Q4 of 2017) VC deals had raised $908m to invest in auto-tech (an increase on the record of $882m set in 2016). The Financial Times also reports that VC firms have poured a record $1 billion into battery technology in 2018 – and it’s only March.

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Tearing Up The Old Industry Playbook

In order to survive, new rules around cooperation and partnership are being written. Automotive companies are re-evaluating their approaches in everything from the mechanisms of ownership (i.e. - subscription based, transportation-as-a-service) to cooperating with competitors. The primary drivers of this new wave of cooperation in the industry are globalization and tech-disruption. For decades, the idea of automotive companies cooperating would have seemed implausible. Now, however, competitors are embracing the notion of cooperation - whether they are based in the automotive heartland of Detroit or in emerging markets such as China. 

Leadership from Hogan Lovells’ Automotive & Mobility M&A Group writes:

"Some of the most critical challenges the industry faces today require formal cooperation between rivals. For example, development of an infrastructure to readily support widespread adoption of battery-electric vehicles is a problem unlikely to be solved by a single organization. Club deals or joint ventures, as happened with Audi, BMW and Daimler joining forces to buy the digital mapping business HERE for $3.1 billion in 2015, are increasingly prevalent."

Volkswagen’s partnership with artificial-intelligence provider Nvidia and car rental company Avis’ management of Waymo, Google’s autonomous vehicle fleet unit also stand out as examples of the new norm.

Daimler, the world’s oldest automaker and parent company of Mercedes-Benz, Smart, Western Star and FUSO, has shown a sharp ramp-up in its investments and acquisitions activity recently. The automotive giant has continued its upstream climb into earlier stage companies via accelerator partnerships and a number of significant 2017 investments – including, for example, into ride-hailing company Via and car-sharing service, Turo.

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Why This Matters To Execs & Deal Teams

Corporate venturing and M&A are tools to be wielding in the battle for next-generation leadership in the global automotive and transportation market. Marquee companies such as Daimler are now fully onboard with the paradigm. Their Ventures Team, a corporate division dedicated to attracting innovative startups and showcasing M&A commitment, highlights the focal points of their investment strategy: 

  • Connected: By connecting our vehicles, we’re not only enabling our customers to access their cars; we’re also laying the foundation to offer new kinds of services.
  • Autonomous: Autonomous driving is redefining the role of the automobile. It will not only enhance safety and comfort, but also provide us with more free time which was previously spent driving.
  • Shared & Services: Owning, sharing, or renting — the mobility of the future offers greater flexibility. From car2go and myTaxi to the moovel mobility platform, we already offer our customers a wide range of shared mobility services. We are continuously expanding our range of offers.
  • Electric: It’s a sure bet that the future of mobility will be electric. In addition to the electrification of internal combustion engines, e.g. using plug-in hybrids, we aim to launch a large number of battery-electric vehicles, ranging from the smart to trucks.
  • Industry 4.0: The potential of the digital revolution is huge: If human beings, machines, and industrial processes are intelligently networked, individual products of high quality can be created rapidly. Production and manufacturing costs can be made more competitive. The digitalization of the value chain is opening up a whole range of new potential and opportunities.
  • Customer Experience: Every customer is unique, has distinct wishes, and utilizes specific communication/social media channels. Creating a good customer experience requires an approach that is completely individualized.
  • FinTech/InsureTech: Financing, leasing, insuring, and flexible ownership options — Daimler offers a wealth of financial services. As we continue to make the services more flexible, we are creating greater freedom for our customers.

The big auto manufacturers are unsettled. One in every five cars sold in the U.S. is a GM, compared to Tesla’s market share of around 0.5%. These juggernauts will pursue deal making to maintain dominance at a global scale, just as they have always done.

Record deal-making and compulsive acquisition in the automotive space requires that companies keep a competitive edge within their deal and corporate development teams. These companies need healthy practices to handle the volume and scale of pipeline flow. From digitalizing M&A to scoring targets and creating rigorous, repeatable due diligence practices, industry leadership – particularly in a space as tumultuous and dependent on acquisition and investment growth as the auto industry –  depends on best-in-class deal-making capabilities. Ineffective systems, people and software block competitive positioning and inhibit critical partnership amongst industry peers. This collective preparation and excellence is crucial to being future-ready – no matter what the future holds. 

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