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Megamergers Accelerating Trends That Are Reshaping the Auto Industry

16 May 2000

Megamergers Accelerating Strong Trends That Are Reshaping the Global Automotive Industry's Approach to the Car Buyer

    NEW YORK--May 16, 2000--While media attention is focused on the megamergers that continue to sweep through the car manufacturers' end of the global automotive industry, a new PricewaterhouseCoopers survey notes that the dealmaking is accelerating strong trends which are fundamentally reshaping the ways carmakers approach the consumer.
    The Automotive Sector Insights survey shows that the consolidation of the automotive industry is fundamental and seemingly unstoppable, with global automotive deals totaled $71.3 billion in 1999, a trend that continues in 2000. But, at the same time, the report shows clearly that carmakers are being driven by larger customer- and cost-oriented trends, including Internet-enabled retailing.
    "Megamergers are taking the automotive industry by storm, with 12 deals over the $1 billion dollar threshold in 1999," said Jeffrey Sands, a director with PricewaterhouseSecurities in Detroit. "Indeed, while the total number of deals declined 12 percent last year, their average disclosed value increased 80 percent to $275 million. Pressure to improve shareholder returns, rid themselves of excess capacity and use Internet-enabled technologies have converged to drive a fundamental consolidation and restructuring of the industry. These numbers reflect key trends that are expected to continue this year."
    "Given the strength of the underlying trends, there will be more fundamental change in 2000 than in any year in the preceding decade," said Michael Burwell, leader of PricewaterhouseCoopers' Transaction Services group and a partner in the Americas Automotive practice. "The role of the automotive supplier will be changed dramatically and forever by e-purchasing. The dealership system, in large part because of Internet-enabled retailing, will be under enormous pressure but, at least in the big U.S. market, will survive. And the Asian carmaker market is now the last frontier for the M&A wave that has already swept through the European and U.S. segments of the industry."

    The PricewaterhouseCoopers survey points to these trends as important for 2000 and beyond:

- In an attempt to get closer to consumers and command greater loyalty and share of wallet, vehicle manufacturers are expanding the definition of a "car company" to cover all aspects of vehicle ownership. Last year, big carmakers used acquisitions to enter areas as diverse as roadside assistance and repair services, navigational devices, driver education, motorsports, recycling, and vehicle leasing and finance. Ford's (no - perceived endorsement) $1.6 billion acquisition of Kwik-Fit auto repair centers and a surge of deal activity in roadside assistance services, signaled this trend. Increasingly, vehicle manufacturers are exploiting the value inherent in their brand. With quality and reliability becoming less of a differentiator, vehicle manufacturers need to address the car buyer's emotional and convenience needs, as well as purely economic considerations, through strong branding campaigns.
- As vehicle manufacturers focus more on brand and marketing management, as well as service and final assembly, they are shifting even more responsibility to Tier 1 suppliers, which are now taking on production of super modules and some assembly. E-purchasing agreements among big carmakers is intensifying the redistribution of assets among a smaller number of mega-suppliers that are scrambling to adapt Internet-enabled supply chain management - or sell to those that can. TRW's $6.5 billion acquisition of Lucas/Varity and Lear's purchase of UTA's interior trim business for $2.3 billion reflect this trend as does the decision by some big players - including United Technologies and Invensys - to exit the automotive supply business. Going forward, Internet technologies will allow all points on the shortened supply chain to interact more fluidly, thereby transforming relationships as well as processes. The stakes are high. A truly integrated, Web-enabled production and distribution system could knock $1,000 to $3,000 off the price of the average car.
- While Internet-enabled auto retailing is still in its infancy, it is the catalyst for change, enabling carmakers to get closer to their customers and facilitating the introduction of new B2C models for selling, delivering and servicing new vehicles. Sandwiched between these two forces are independent dealer networks whose survival hinges on their ability to use their wealth of customer information to offer better services, build stronger links with customers and carmakers and create a brand image distinct from manufacturers. Deal activity in this sector will move away from a simple search for economies of scale toward acquisitions that improve processes and enhance dealer image.
- In an industry where growth is key, Asia looms large. While the Asia-Pacific region currently represents 28 percent of global unit volume, it is expected to contribute 45 percent of global automotive production growth over the next six years. Western carmakers are eager to tap into this growth, and a successful strategy to capitalize on the future potential in emerging markets is critical to long-term survival. Asian M&A is expected to accelerate this year, as Renault implements its rescue plan for Nissan, Mitsubishi combines with Daimler-Chrysler, and the historic ties of keiretsu companies are relaxed. However, investment in Asia is not without risk: Western carmakers may not be able to move as aggressively as they would like, and may have to contend with a lack of information, wide gaps in valuation methods, and large amounts of off-balance sheet debt. Nevertheless, opportunities to develop strategic positions that convey real competitive advantages have never been better for those with the vision and the financial strength to grasp them.