By 2010, most of the action in the automotive industry will come from India and China which are being driven by rising populations, increased per capita spending and improving infrastructure. This is the prediction that IMAP, a global organization of leading merger and acquisition or M&A firms, has made. IMAP was created in the early 70’s and has 55 offices in 40 countries throughout North and South America, Eastern and Western Europe, Australia and Asia. To get an idea of the scope of IMAP’s reach – the organization’s advisers completed 252 transactions worth USD 13 billion in 2008. IMAP advisers provide strategic merger, acquisition, divestiture and related corporate finance services – sellers of mid-size companies and corporate acquirers alike rely upon IMAP.
In October this year, IMAP announced the findings of its Automotive and Components Global Report. This report provides details on M&A activity in the automotive industry, growth projections for 2010 and beyond, and a commentary on the shift in leadership from the US to the Asia Pacific region. Within the last one year, there have been 44 completed transactions announced in the automotive industry, accounting for nearly USD 2.9 billion in total transaction value. IMAP advisers alone closed six of these transactions.
Some of these transactions include the following: IMAP advised automotive parts remanufacturer, Remaco Group, LLC (US), which acquired the shares of automotive parts remanufacturer, MD Rebuilt Parts Detzen GmbH (Germany). It also advised automotive roll former, Wagon Wixom, the US subsidiary of Wagon, PLC (U.K.), which acquired the assets of roll former of metal parts, Modineer (US). IMAP advised automotive tier one supplier, Antolin Group Automotive (Spain), which acquired 40 percent JV ownership interest in automotive interior trimming components manufacturer, Gong Zhu Lin Automotive Components Co., Ltd. (China). The organization advised high-precision automotive engineer, Wild Manufacturing Group, Ltd. (United Kingdom), which acquired the shares of an undisclosed press parts manufacturer for the automotive industry (Hungary). Apart from this, IMAP also advised automotive tool supplier, Talhin/T (Canada), a subsidiary of ARRK (Japan), which was acquired by automotive metal fabrication and supplier, Revstone (US).
“The level of M&A activity in the automotive sector has been driven in large part by the consolidation of excess capacity due to the global recession and the growth of emerging markets,” said Scott Eisenberg, partner with IMAP’s office in Detroit, Michigan in a press release.
IMAP says that it has seen a shift in leadership and M&A activity in the automotive industry from the US to the Asia Pacific region, which is quickly emerging as the next automobile production hub. “In particular, China has been the frontrunner in the recovery of the automotive industry, doubling its automobile production from 2003 to 2008. This growth can be attributed to increased government emphasis on developing Chinese infrastructure, a decrease in retail taxes and an increase in vehicle subsidies in rural areas of China,” says IMAP.
IMAP’s report indicates a majority of the automobile component production activities are concentrated in Japan, China, India and Thailand, due to the availability of cheap raw materials and increasing demand for automotive products from the domestic market. IMAP also says that in addition to the Asia Pacific region, Eastern European countries such as Poland, Czech Republic and Hungary are becoming favored manufacturing destinations, having attracted foreign direct investment due to their proximity to Western Europe, low labor costs and a skilled workforce.
Automotive Industries spoke to Mark Esbeck, president of IMAP Inc.
AI: What are your reasons for being bullish on the Chinese and Indian automotive markets?
It is where the unit sales growth is occurring. If you want to sell more cars, you need to be in these markets. China and India have large populations moving into income levels which support the ability to purchase and drive the demand for new and used automobiles. Both countries have invested heavily in infrastructure to support automotive and they are leading the development of new low cost units. This confluence (increased consumer incomes and lower purchasing costs) is expanding the automotive markets even more rapidly in India and China.
It is opening up purchasing opportunities to more consumers than ever before because of reduced purchase price thresholds. The techniques (in addition to lower labor rates) which generate these cost advantages are not only helping to expand unit sales (which absorb more overhead, increase the marginal contribution of each unit and the profitability of the auto manufacturer), but also generating advantages which can be exported into developed and more mature markets. This is what will drive the export function for China and India.
There are more first time automobile buyers in India and China than elsewhere in the world and so the units per household number is expanding. By contrast, households in Europe and North America are reducing car ownership in response to the troubled economies in these more mature markets. Unit volume drives the industry and China and India have the underlying factors which provide the most likely expectations for future volume growth.
AI: What are some of the challenges facing the automotive industries in these countries?
China needs to maintain strong economic growth to continue to increase jobs and income in order to continue the expansion of its domestic automotive ownership. Heavy government subsidies in 2009 impacted automotive purchases most likely to the detriment of 2010 sales.
However, the longer term trends appear to remain in place. India also has a strong emerging middle class that wants more mobility. Many wish to trade up from two-wheel vehicles to automobiles. India’s financial sector has emerged with a variety of funding programs for automotive purchasers, but they also are dependent upon continued economic growth and supportive taxation programs.
Infrastructure issues are a concern. In China with a better developed road system, automotive traffic is clogging the larger cities and pollution is becoming a primary concern. India needs better roads throughout its geography and a public/private funding mechanism which encourages traffic on the roads they build (i.e. reasonable toll fares). India’s domestic markets and its growing export business (primarily to SE Asia) has placed a strain on qualified workers. Both countries are building out complete logistical systems and service/maintenance networks to support the industry and reduce customer dissatisfaction levels.
AI: Why is there increased M&A activity in these regions? Will we see more companies from the West entering into alliances with Asian companies in the auto sector?
Again this is where the growth is taking shape. Logistical cost can be an expensive element of an automobile’s total cost (especially at the low end of the market). It makes sense to have suppliers and producers located in proximity to each other for overall coordination and economic efficiencies. Collaboration between suppliers and manufacturers is vital to generate the innovation necessary for cost reductions required in these developing markets. This requires local vendor support. Some of this can be accomplished with alliance strategies while M&A will be important for those that need to move rapidly.
As the industry undergoes significant restructuring in the developed markets and experiences major growth opportunities in the emerging markets, M&A provides the most rapid solution for exiting from undesirable situations and entering into more favorable opportunities. In order to adapt to the changes underway in the automotive industry, M&A has to be a fundamental component to any business strategy for competitors in this sector. I think you will see more and more collaboration between producers from all countries and you will also see more buyers coming from China and India for companies in Europe and North America.
AI: Tell us a little about the growth prospects in Eastern Europe? What are some of the plus points of doing business there for automotive companies?
Cost and location are the two major advantages for Eastern European automotive operations. Demand has been negatively impacted due to the financial crisis, but the relative cost advantages between the Eastern European countries and Western Europe have actually increased. Eastern European countries have more ability to reshape their cost structure than most European countries which have a high social cost structure not easily dismantled. Government stimulus schemes cannot continue at the levels of 2009 as sovereign debt amounts may not be supported by foreign buyers of debt.
Raw material costs are escalating due to the increasing domestic demands in China and India. Costs have to come down in order for European manufacturers to remain globally competitive. Eastern European countries have moved to address other competitive problems (e.g. qualified workers, logistical bottlenecks, etc.) and have adopted tax and tariff strategies to encourage more investment by foreign producers. I expect cost advantages to be the primary reason for production activities in Eastern Europe, but the domestic markets will also likely grow at a faster pace in Eastern Europe than in Europe over the coming decade and provide additional justification for investment in this region.
AI: What are some of the challenges facing automotive companies in Eastern Europe?
Stability of government is critical before investing in an automotive plant which requires years of investment recovery. The financial crisis has placed an even greater strain on governments in this emerging region resulting in reduced confidence of foreign investors to predict future political landscapes and operating environments. While leaders of governments have turned over pretty rapidly in Eastern European countries over the last two years, it does not appear to have undermined the long term desire of the populations to support private investment which is encouraging to foreign direct investment (FDI). Balancing the need to provide stability and opportunities for its citizens (which can more easily be met with FDI and M&A) with the need to develop their own globally competitive businesses (which can generate important value-added inflows of monies) will be a challenge for the upcoming years.
AI: What do you think will fuel the growth in the market for hybrid vehicles? How great will the growth in this sector be? What do automotive companies need to do to take advantage of this potential?
I think government subsidies will be the primary driver in this segment for the near future. Even with the reshaping of the industry that is underway, the production and operating costs are still much higher for such hybrid vehicles than the costs are for the legacy models which they are intended to replace. Tax policies may stimulate consumption more in the hybrid direction. However, such approaches may create even greater economic harm by making the automotive producers of such countries even more globally noncompetitive. In my opinion, it will take breakthroughs in battery technologies and localized strategies for supporting fuel replenishment to make this happen rapidly.
It is like remaking an entire industry without the compelling economic drivers present to stimulate the activity. Because our markets are now so globally intertwined, it is not easy to accomplish such fundamental reshaping of an industry without a strategy to absorb the value destruction that will occur for those countries that adopt modern environmental policies. It will likely be accomplished through dedicated efforts to stimulate ingenuity at smaller scale levels (technological advancements) rather than rapid government-mandated movements which will probably be more costly than citizens are willing to support (especially in an already depressed economic environment).