Environmental Regulation to Significantly Shape M&A and Strategic Relationships in the Auto Industry

Complex environmental regulations, combined with overcapacity and highly competitive global markets, should lead to increased mergers and acquisitions in the global automotive sector for years to come, according to a new study by KPMG LLP, the audit, tax and advisory firm.

In the white paper, “The Transformation of the Automotive Industry: The Environmental Regulation Effect,” KPMG analyzed environmental regulatory requirements and market dynamics across North America, Europe, Asia, and Latin America to estimate the likelihood of intra-region and inter-region transactions at a macro level around the globe.

“Although a large portion of the global automotive industry is still experiencing some levels of economic distress, the timing couldn’t be better for stronger companies with access to capital to assess potential targets,” said Gary Silberg, national automotive industry leader for KPMG LLP. “Automotive companies need to look beyond their short-term challenges and develop long-term strategies, such as rebalancing their product portfolios, shedding unprofitable assets, and investing in strategic growth areas.”

Key findings from the KPMG study include:
— Given the variance of regulatory frameworks around the world and the
lack of will to harmonize these into a single global standard,
automotive companies may need to develop multi-pronged strategies to
minimize risks and maximize returns.

— Companies may need to consolidate regionally to rebalance their
product portfolio in light of new fuel efficiency and emission
standards, and to reduce costs. The availability of private capital
and government incentives will influence these consolidations, such as
the U.S. and the Chinese government’s funding/incentives related to
clean technologies, along with the Green Car Initiative by the
European Commission.

— Given growth and technology opportunities, the most attractive M&A
transactions appear to be between North America and Asia, followed by
Europe and Asia, and North America and Europe. This trend is in line
with recent cross-border mergers and alliances, but is expected to
accelerate as companies seek more opportunities for horizontal and
vertical integration.

— Suppliers that emerge as preferred partners may be able to leverage
their global scale to further reduce technology costs and thus
increase their influence.

— Asian companies with relatively higher growth rates, lower cost
structures, and clean technology know-how may increasingly scoop up
attractive assets from more mature markets, or acquire strategic
assets abroad to enter those markets with new models.

“In the future, the hardest-hit OEMs and suppliers may be those with undifferentiated products that do not meet the demand for increased fuel economy or emission control,” Silberg added. “However, those companies that are savvy enough to reposition themselves today are most likely to benefit from a regulatory landscape that looks to be increasingly stringent in the future.”

For a copy of the full report, “The Transformation of the Automotive Industry: The Environmental Regulation Effect,” please visit: http://www.us.kpmg.com/services/content.asp?l1id=10&l2id=620&cid=3393