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Going electric: the automotive industry Gold Rush?

Xiaomi or Apple? We are not talking smartphones here; we are talking cars! The former is now launching its first car ever, of course a Battery Electric Vehicle (BEV), while the latter recently announced it was putting a plug on its 10-year car development adventure.

This is in many ways perfectly illustrative of the level of uncertainty the automotive industry has reached: the powerful switch to BEV is breaking entry barriers, opening doors for an unprecedented push from Chinese automakers beyond their national frontiers as well as enabling newcomers, including tech giants, to join the battle. Yet nobody is quite sure about what the battle will look like in the mid to long-term.

The only certainty at this stage is that forces that joined to make BEV emerge have disrupted mature markets and are rebalancing the whole automotive industry: brands and OEMs -new (mostly from China, but not only) and old-, supply chain players (hardware or software), all dealing also with now shorter times-to-market.

As a tone-down to the initial question, Apple was apparently planning to go it alone, whereas Xiaomi cars are made by BAIC, a 50+ year-old well established manufacturer, one of the largest in China, also known for its cooperations with Mercedes-Benz or Hyundai Motor. A new brand, certainly not a new manufacturer!

Will this major worldwide shuffle resemble the famous 19th century Gold rush in California, with a few winners (mostly those selling shovels and picks), many losers, and a deep, almost civilizational, change?

Let us start with market insights.

Market data and dynamics

Even though a worldwide tamer market growth is expected in 2024 for light vehicles (around +2% to +3%, starting from 86M light vehicle sales in 2023, a “recovery” year), BEV global growth is still forecast at close to +40% (i.e. about +4M vehicle sales compared to last year) and reach a 16% market share.

According to S&P Global Mobility, regional BEV market shares may thus climb up to 28.6% in China (up 28% vs 2023, whereas China has become the largest car market with 26M units sold), 22.2% in Europe (up 41% vs 2023 and 70% vs 2022), 13.2% in the United States (up 66%), and 4.1% in India (up 39%).

Beyond 2024 though, experts are quite cautious about growth perspectives, and many anticipate a turbulent journey, as some decisive questions are uneasy to answer.

How will BEV demand behave if and when governments scale down or even cut their support and incentives to to so-called green mobility, while expanding an already stringent regulatory framework (think of China’s NEV policy or European Union (EU) “Fit For 55” legislative package introduced back in 2021)?

In Europe specifically, the combination between a sluggish economy, high credit interest rates and resolute green transition efforts requiring huge financing capacity, will indeed probably grind citizens’ purchasing power in the coming years. Also, the EU mandate to forbid Internal Combustion Engine (ICE) car sales from 2035, because of their direct CO2 emissions, includes a provision to reexamine decision by 2026, with very low visibility today as to the outcome.

Most experts now consider that the “structural” cost-to-customer parity horizon between ICE cars and BEV lies around 2030 at best (excluding public subsidies), assuming reasonable market growth rates in the meantime. As a reference, it is estimated that average current BEV prices are today about 10% over market level in the US.

This however does not easily translate into market shares, as customers’ willingness to pay remains multifactorial, partly irrational of course, and covers both vehicle (sticker price, driving range, style, taste for powertrain/energy type, overall performance, adequation to needs, etc.) and environment-related (e.g., gas station/charging infrastructures) parameters.

On the “optimistic side”, the Rocky Mountain Institute predicts that BEV sales could reach 60% of vehicles sales by 2030 (of which 90% in China and close to 80% in Europe)!

At the same time, interestingly, some of the major car manufacturers are however now upping their spendings in hybrid vehicle development, thus keeping their options open between ICE and electric for the near future.

How the automotive industry value chain is adapting

A major factor to be considered is the ability and capacity of the key “enabling” forces of the industry, supply chain stakeholders.

If “agnostic” (fit for both ICE and electric vehicles) components already have vendors and suppliers all over the planet, BEV-specific supply chain power is still predominantly located in China, in terms of sheer production capacity, accumulated experience since their early start, and costs. With a currently less dynamic domestic market, this is providing massive fuel for export growth, not only from Chinese manufacturers but also foreign OEM with local capacity. But the US and Europe have been reacting to this surge in China’s role: massive investment is taking place in both the US and Europe, to foster competition, lower costs (including shipping costs) and mitigate supply chain risks in general, aside with increased scrutiny and protectionist measures.

As far legacy automotive suppliers – whose overall profitability has suffered over the past few years- are concerned, recent M&A data indicate clear business portfolio management trends:

10 years ago, worldwide M&A transactions in the automotive sector were equally split between scope (technologies, products, and services) and scale. Since 2022, as many as 75% of all deals larger than USD 100M are focused on scope: for many value chain players, bigger is no longer beautiful – or at least not as beautiful as the ability to address new market segments - be they EV-related or new to the automotive ecosystem (mobility data-related services for example)- and the perceived necessity of dropping out of “no-future” products (e.g., ICE related).

The aftermarket side of the business remains on a singular trend though, with a visibly different decision time-scale vs OEM supply industry: its business models dampen market volatility as they benefit from a slow but secure growth as well as quite predictable streams of profitable revenue (making or distributing parts for many years after vehicle production end). Also, size will no doubt matter for this part of the industry, as on-boarding some BEV-specific components requires additional investments that only large players can afford. This may suggest that the consolidation trend is not over in the distribution segment, with remaining potential on still fragmented Europe or Asia markets (vs the US, where the 10 major players reach a cumulative 80% market share).

What does the future hold?

Uncertainty regarding the future of the automotive industry potentially is at a climax. For all players in the game, adequate strategic decision making is a must. This is true for manufacturers as well as for other automotive value chain stakeholders, and this better be supported by adequate risk management approaches.

For suppliers, the equation is a balance between smart business portfolio management to secure “the right technology on the right market at the right time”, and smart size adjustment to be able to win rewarding contracts within reasonable financing limits.

Discussions between CDI Global partners and automotive industry clients or prospects worldwide prove quite insightful in this regard. For some specific car component technologies, we have met senior executives or shareholders of international suppliers with quite opposite views on what the future would hold for them: sellers (“not believing in a bright future for our technology… or too small to succeed”) and buyers (“promising solution for new generations of cars… or a key to seduce a major player”)! And we also hear clients willing to invest in ICE-only related products or services.

But the EV-driven disruption wave is not only about cars: it brings about a new ecosystem, encompassing battery-related value chain industries and services (manufacturing, charging, recycling), materials technologies, or also information technology (autonomous drive, connectivity, on and off-board data management business).

We are thrilled that CDI Global’s unique ability to leverage both a multi-faceted industry expertise and a 50-year experience in mid-market transactions gives us today an adequate capacity to handle these disruption times. Whatever their focus, acquisition, divestiture or sheer sale, clients can count on us to support their strategies and worldwide M&A roll-out through our offices on the five continents.

Why CDI Global

At CDI Global, our team of senior bankers utilize decades of experience to implement and execute upon cross-border M&A, debt and equity transactions vital to maintaining competitive positioning. Our proven transaction execution capabilities, combined with niche market and channel expertise, position CDI Global as a leading cross-border advisor for Automotive mergers and acquisitions.

By Gerard Payen, CDI Global Member

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