During the first half of 2020, M&A activity in the automotive industry was down from previous years due to uncertainty stemming from the COVID-19 pandemic, with cross-border deals becoming more complex. However, the pandemic also resulted in new opportunities for consolidation within the industry.
There were $11.9 billion in M&A deals, which represented a 54.8% decrease in value compared to the first half of 2019. Most investments were in the pursuit of CASE (Connected, Autonomous, Shared, Electrified) technologies. This type of tech is predicted to drive M&A through the end of 2020. Dealmakers are expected to concentrate on securing supply chains and increasing resiliency rather than expanding globally.
Global Deal Activity
The majority of deal value in volume in the first half of 2020 took place in Asia and Oceania, followed by North America. The largest automotive transaction in the first half of the year was valued at $2.9 billion, with Traton SE, a vehicle-manufacturing subsidiary of Volkswagen AG, acquiring Navistar International Corporation. Volkswagen Group China continued to strengthen its electrification strategy by making two acquisitions valued at more than $1 billion each: Gotion High-tech Co. and JAC Volkswagen Automotive Company.
In the auto sub-sectors of parts and components suppliers, deal volume was up 9% from the first half of 2019. This was mainly driven by activity in China and South Korea. The largest driver of lower deal volume was in automotive retail and wholesale, with an average of 26 deals per month in the first quarter, plummeting to an average of 10 deals per month in the second quarter. The biggest swings took place in April, amid continued restrictions due to the pandemic, with signs of recovery in May and June, with deals climbing to 48.
Value and Volume
The majority of deal value (53%) and volume (79%) in the first half of 2020 stemmed from domestic deals, accounting for six out of the top 10 deals. Cross-border deals comprised 21% of deal volume and 47% of deal value. This includes the $2.9 billion VW acquisition of Navistar. Looking back to 2019, these numbers were essentially reversed. Cross-border M&A made up 74% of volume and 57% of value.
The area of vehicle manufacturing saw the least decline in volume among subsectors. There was also a small increase in value compared to the first half of 2019 due to continued investor interest in CASE-tech assets. In the first half of 2020, the Chinese real estate investor Evergrande Group bought the remaining uncontrolled interests in electric vehicle manufacturer National Electric Vehicle Sweden AB.
Parts and components manufacturers represented five of the top 10 deals in the first quarter of 2020, driving deal value and volume for the first half of the year. This was also the only subsector to see volume growth from the previous year (8.5%). Investments are focusing on new technologies such as battery manufacturing and electric powertrain development. It is anticipated that there will be consolidation among suppliers during the rest of 2020, as those facing challenges become targets for buyers seeking strategic investment opportunities.
COVID-19 has presented significant challenges for many sectors and the automotive sector is no different. The industry was already adapting to new technologies prior to the pandemic, such as autonomous vehicles and ride-sharing services. The pandemic caused a steep, short-term drop in demand, and it disrupted supply chains. During this time, M&A strategies have had to shift focus to production and supply chains, while staying on the pulse of CASE technologies.
Mergers and acquisitions will be necessary for auto manufacturers to continue to evolve their business models and adopt technologies that keep them competitive. M&A will also be needed for funding, as banks tighten their lending strategies and tend to be hesitant to give credit to automakers, and as manufacturers seek to share the costs of developing new tech.
M&A will also play a large role for distressed component suppliers under a need to secure supply chains, invest in technology and sustainability, and tap into talent.
For the rest of 2020 and beyond, there will be many unknowns and opportunities. Recovery will be slow, especially if there is a second wave of COVID-19 that creates more supply disruptions and workplace restrictions. Government stimulus will likely be needed to help sustain a recovery, particularly if there are more periods of high unemployment that would impact consumer demand. A rebound is hopeful though, as many key industry players entered into the recession with strong financials.
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