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innovation Exploring the changing landscape of the automotive industry By: Steve Barclay Expect more mergers and acquisitions in the Indian and Chinese markets as global auto production shifts to the East, predicts IMAP, a global mergers and acquisitions advisory. The region has emerged as the automotive growth market of the future due to growing populations, increased per capita spending and improving infrastructure, says the company. IMAP was formed in the early ’70s and has more than 50 offices in nearly 30 countries throughout North and South America, Eastern and Western Europe, and Asia. In 2008, the organization’s advisors completed 252 transactions worth US$13 billion. IMAP advisors provide strategic merger, acquisition, divestiture and related corporate finance services. In October 2009, 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 U.S. to the Asia Pacific region. Within the last year, 44 completed transactions have been announced in the automotive industry, accounting for nearly US$2.9-billion in total transaction value. IMAP advisors alone closed six of these transactions. “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,” says Scott Eisenberg, partner with IMAP’s office in Detroit, Michigan. IMAP says that it has seen a shift in leadership and M&A activity in the automotive industry from the U.S. to the Asia Pacific region, which is quickly emerging as the next automobile production hub. 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 “ 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 close proximity to each other for overall coordination and economic efficiency. ” Karl Fesenmeyer, chairman of IMAP. 68 to read full version of AI stories go to www.ai-online.com demand for automotive products from the domestic market. Automotive Industries (AI) asked Karl Fesenmeyer, chairman of IMAP, to expand on the company’s predictions for the Chinese and Indian automotive markets. Fesenmeyer: This 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 both have large populations moving into higher income brackets that are pushing up the demand for new and used automobiles. Both countries have invested heavily in infrastructure to support the automotive industry and they are leading the development of new low cost units. This is opening up purchasing opportunities
“ 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. ” to more consumers due to reduced purchase price thresholds. The techniques (in addition to lower labor rates) that generate these cost advantages are not only helping to expand unit sales, but are also generating advantages that can be exported into developed and more mature markets. This is what will drive the export function for China and India. AI: What are some of the challenges facing the automotive industry in these countries? Fesenmeyer: China needs to maintain strong economic growth to continue increasing jobs, which will then lead to the expansion of its domestic automotive ownership. India also has a strong emerging middle class that wants more mobility. Many wish to trade up from two-wheeled vehicles to automobiles. India’s financial sector has developed a variety of funding programs for automotive purchasers, but continued success is dependent upon sustained economic growth and supportive taxation programs. Infrastructure issues are also a big concern. China’s developed road system has led to automotive traffic clogging the larger cities and pollution is becoming a primary concern. India needs better roads throughout its geography and a public/private funding mechanism that encourages traffic on the roads they build. India’s domestic markets and its growing export business have placed a strain on qualified workers. 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? Fesenmeyer: 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 close proximity to each other for overall coordination and economic efficiency. Collaboration between suppliers and manufacturers is vital to generate the innovation necessary for cost reductions required in these developing markets. Some of this can be accomplished with alliance strategies, while M&A will be important for those that need to move rapidly. M&A provides the most rapid solution for exiting from undesirable situations and entering into more favorable opportunities. To adapt to the changes underway in the automotive industry —in order to compete in this sector —M&A has to be a fundamental component to any business strategy. AI: Tell us about the growth prospects in Eastern Europe? What are some of the advantages of doing business there for automotive companies? Fesenmeyer: 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 Eastern Europe and Western Europe have actually increased. 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 such as qualified workers and logistical bottlenecks. They have also adopted tax and tariff strategies to encourage more investment by foreign producers. AI: What are some of the challenges facing automotive companies in Eastern Europe? Fesenmeyer: Stability of government is critical before investing in an automotive Automotive Industries 69 Scott Eisenberg, partner with IMAP’s office in Detroit, Michigan. plant. The global 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). AI: What do you think will fuel the growth in the market for hybrid vehicles? How big will the growth in this sector be and how can automotive companies take advantage of this potential? Fesenmeyer: I think government subsidies will be the primary driver in this segment in the near future. Even with the reshaping of the industry that is underway, the production and operating costs are still much higher for hybrid vehicles than the costs are for the legacy models that they are intended to replace. Tax policies may stimulate consumption more in the hybrid direction. In my opinion, it will take breakthroughs in battery technologies and localized strategies for supporting fuel replenishment to make this happen rapidly. 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 rather than rapid government-mandated movements, which will probably be more costly than citizens are willing to support. AI
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