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Automotive faces slow start in FY24 amid uncertain demand
In the first half of 2024, global automotive M&A volume and value were hampered by high interest rates, political uncertainty and lower consumer demand, especially in the electric vehicle (EV) sector. Automotive reflects the trends identified in the PwC US Deals 2024 midyear outlook:
- Capital considerations. The value chain faced challenges from the prolonged slump in vehicle demand, especially for EVs. This affected cash flow and financial performance of various EV enterprises, whether they were independent companies or EV segments within larger corporations. Particularly impacted were players within the EV battery, and other innovation spaces, where companies spent substantial cash on capital expenditures and research and development. Recapitalizing through M&A proves challenging as rising interest rates and tempering demand created a lukewarm M&A environment.
- Improving confidence. As demand for EVs decreased, demand for internal combustion engine (ICE) vehicles in North America increased. This is expected to lead to increased M&A activity, as companies in this space look to consolidate and seize opportunities for value capture over the coming years. Despite rising interest rates, certain sectors of the automotive industry are gaining momentum. Specifically, there is a growing focus on technology-based deals, particularly in the Asia Pacific region.
- Technology and reinvention. Primary drivers of automotive M&A activity include investments in electric vehicle technologies and broader vehicle innovation such as internet-connected cars and safety systems. In recent months, seven of the top 20 largest deals were related to EV battery manufacturing or infrastructure build-out as well as other innovation domains, such as app-based technologies around EV and ridesharing.
- Regulatory evolution. The US Inflation Reduction Act and the EU’s ban on the sale of gas-powered vehicles after 2035 generate momentum for electrification. This will require auto players to reevaluate their standing in the industry and consider where acquisitions or divestitures will strengthen their position or help shift their focus to key elements of their business.
Note: The primary M&A data source used in the midyear outlook is S&P Capital IQ.
Strategic thinking
Cash constraints and interest rates impact landscape
Rising interest rates have reduced M&A volume in the automotive industry. This is causing additional challenges for businesses that are already facing cash constraints due to reduced vehicle demand. As a result, these businesses are finding it difficult to allocate funds for R&D and capital expenditures to meet expected EV demand that has yet to materialize. Many automotive businesses seeking M&A solutions will require an immediate cash infusion; however, the high interest rates of the current economic environment present a significant obstacle for potential investors pursuing such opportunities.
Across Europe, many deals are currently being marketed as distressed or restructuring operations. High interest rates have led to a decrease in the number of interested buyers. Most potential buyers are strategic buyers who hope to take advantage of synergies rather than private equity investors with specific return targets.
Despite the decline in overall deal volume and value, companies continue to seek divestitures of non-essential assets in their portfolio. However, it’s crucial to consider the potential impact of the upcoming US presidential election on deal activity. Companies may choose to expedite or postpone M&A endeavors amid future policy uncertainty. Further, the consolidation of ICE assets presents an opportunity for increased deal activity in North America. This region continues to show a robust demand for vehicles in this category, offering a potential market growth opportunity.
“Lingering macroeconomic uncertainty continues to reduce automotive M&A volume and value. As autos continue to navigate a complicated market with stalemate-like EV consumer conditions, the pressure of financial performance, transformative innovation and business model reinvention will be top-of-mind for dealmakers.”
The bottom line
In 2024, the auto sector's M&A activity is slowing due to factors like reduced consumer demand for electric vehicles and higher interest rates. This makes it crucial for companies and private equity firms to focus on M&A strategy to redefine their business objectives and bring value to stakeholders. Moving into 2025, we can expect deal activity to be driven by continued investment in electric vehicle assets, infrastructure and the consolidation of internal combustion engine technologies.
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