Mergers and acquisitions among automotive suppliers are running hot, according to the ninth annual “Consolidation in the global automotive supply industry” report by Strategy&, PWC’s strategy consulting business. Based on year-to-date data, we expect deals worth US$32 billion to close this year, the second-highest annual tally since 2007. This year’s projected total trails only the extraordinary $50 billion logged in 2015, a record number that included the largest-ever U.S. automotive supplier acquisition.
Such megadeals represent a growing share of auto supplier M&A. The number of transactions valued at $500 million or more has risen more than fivefold since 2013. Driving deals of all sizes are powerful forces — global vehicle production growth, auto technology shifts, automakers’ platform globalization, and supplier profitability — that show no signs of abating.
In part, strong M&A activity reflects an underappreciated fact: Automotive supply is a growth industry. Global vehicle production is expected to grow at a compound annual rate of 3.5 percent over the next seven years, with annual light vehicle assembly in North America on track to hit a record of nearly 20 million units by 2022, according to PwC Autofacts.
At the same time, suppliers are chasing the technological capabilities they need to stay relevant. Acquisitions offer quick access to new powertrain and chassis technologies required to meet stricter government fuel efficiency standards, as well as to software and electronics for autonomous driving and connected car systems.
Globalization continues to foster deal making among suppliers positioning themselves to serve automakers that are consolidating their nameplates into a smaller number of flexible global platforms. These platforms require suppliers with worldwide capabilities, leaving regional suppliers vulnerable and spurring consolidation.
Finally, the 815 suppliers in our study are reaching record profitability levels as painful cost cutting during the recession has paid off over the last few years. Rebounding production has leveraged the lower cost base to produce record margins in earnings before interest, taxes, depreciation, and amortization (EBITDA), giving suppliers extra cash for acquisitions.
Add to these factors the rise of Asian consolidators — most notably the Chinese — and increased interest from private equity firms, at a time when traditional M&A powers in North America and Europe are still going strong, and you have a recipe for sustained consolidation in the years ahead.
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