01/06/2020

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The car that cares

COVID-19 adds to M&A rationale in automotive sector | Automotive Industry Comment

The next 50 % of this calendar year could see an upsurge in M&A action...

The second half of this year could see an upsurge in M&A activity as markets come back and automotive sector recovery builds

The next 50 % of this calendar year could see an upsurge in M&A action as markets arrive back again and automotive sector recovery builds

Exor NV – Fiat-Chrysler’s (FCA’s) most significant investor – has confirmed the timing for the proposed FCA-PSA merger for completion by early 2021 as to begin with announced. It is equally a well timed reminder that the prolonged-term motorists of mergers and acquisitions (M&A) in the automotive sector have not gone away and that the COVID-19 crisis and its impact on businesses will in fact accelerate restructuring.

The COVID-19 crisis will be introducing pressures for corporate restructuring in the worldwide automotive market – for equally vehicle manufacturers and businesses in the source chain.

The proposed FCA-PSA merger is on monitor to be done in early 2021 and the sizeable synergies and efficiencies it provides – projected at €3.7bn a calendar year just before the crisis – have become even extra essential as the businesses look at their recovery paths this calendar year.

Combining functions results in the possibility to look for even more efficiencies and reduce cost at a time when the market is acquiring to endure an exceptionally challenging business enterprise surroundings.

The two businesses also experience prolonged-term challenges these as the Case (Connected State-of-the-art Shared Electrified) megatrends and building methods for the automotive sector’s industrial transformation.

The prepared FCA-PSA merger will produce the third most significant worldwide auto business by revenues and fourth most significant by volume, yielding the increased scale and assets to tackle Case.

Similarly, Tier one provider BorgWarner has mentioned that its prepared acquisition of Delphi Systems will go ahead. The deal’s motorists are equivalent to the FCA-PSA merger in conditions of Case megatrends and the need to have to exploit scale and synergies.

Once again, they will also be very aware of the transformed business enterprise landscape brought on by COVID-19 and the rewards that combining for increased scale and cost reduction can provide.

Pressures are also developing all through the automotive source chain. As the auto market emerges from this unprecedented crisis, a lot of suppliers will be fiscally pressured, in administration or close to heading out of business enterprise. In these conditions, M&A action will get a increase as options for acquisition at minimal value arise.

The highly developed emerging systems associated in Case – these as electrification – are much extra pricey than lengthier established systems, producing a hefty cost stress for provider businesses. That will have weighed specifically heavily on some suppliers in the course of the crisis. Suppliers have also experienced to contend with delays to key vehicle programmes – these as Volkswagen’s all-electrical ID.3 – placing back again upcoming income flows.

Further more, a lot of of the businesses in this place are begin-ups. Their backers and funding therefore far will not likely have banked on these a cataclysmic collection of situations. These businesses will be really hurting, backers will be reluctant to maximize funding as Case may possibly just take a back again seat in the short-term and it will be extra tricky for first backers to see a pathway to returns. They may possibly very well want out.

The upshot is even more money pressures – in live performance with lengthier-term Case motorists – coming to bear on OEMs and suppliers as a end result of the COVID-19 crisis (as the chart beneath illustrates, product sales have a prolonged way to arrive back again to get any where in close proximity to to ‘normal’), producing the ailments for an upsurge to M&A action as the market recovers.