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Realignment and restructuring expected to drive increased automotive M&A activity
Lackluster consumer demand and increased financing costs in 2024 contributed to lower automotive mergers and acquisitions (M&A) deal value and volume across North America and Europe. Conversely, the Asia Pacific region saw deal volumes increase as China continues to emphasize domestic investment in electric vehicle (EV) technologies.
Despite falling short of expectations in 2024, auto M&A activity is expected to increase in the near to medium term. In particular, right-sizing and restructuring as well as supplier consolidation with tailwind support from macro trends, are expected to drive increased M&A activity in the upcoming year.
Key automotive M&A trends include:
- Election uncertainty eases: The uncertainty over the US presidential election led to dealmaker trepidation, resulting in an overall reduction in deal volume in North America and Europe. Now that the elections have concluded, we expect an uptick in deal activity in the upcoming year. Positive macro trends such as interest rate and inflation reductions, which support a stable and growing US economy, are expected to be key drivers of M&A in the automotive sector in 2025 and beyond.
- Technology and electrification: The continued shift in consumer preferences from EV in favor of hybrid vehicles in North America and Europe stalled demand. This slowdown coupled with substantial investment in EV technologies in prior years increased pressure on original equipment manufacturers (OEMs) and suppliers cash flows due to excess capacity and inventory. Such liquidity risk also weakened the appetite for deals in the sector. Despite lower consumer demand, EV infrastructure and related support services continue to be areas of focus and investment for dealmakers.
- Supplier struggles: Reduced consumer demand and continued cost pressures impacted the financials of automotive suppliers that heavily invested in EV technologies. As a result, about 32% of suppliers in 2024 showed signs of cash flow distress. Many suppliers are now reassessing their focus and efforts, with those with non-automotive components indicating plans to exit their automotive segments to manage liquidity issues. Conversely, suppliers solely dedicated to the automotive segments are looking for scale through consolidation to better manage cost efforts. We expect private equity and roll-up strategies to be a positive influence on the supplier deal market in the near term.
- Rising financing costs: In 2024, higher interest rates created challenges for executing large automotive transactions (greater than $1 billion) at the same levels as in recent years. High financing costs had a noticeable impact on US deal value, which only contributed to 15% of global automotive deal value in 2024 compared to more than 30% in recent years.
Note: The primary M&A data source used in the 2025 outlook is S&P Capital IQ.
Strategic thinking
Macro-economic factors such as inflation, interest rates and regulatory uncertainty led to lower M&A deal activity in the automotive sector at the end of 2024. Lower consumer demand due to rising vehicle costs, especially for EVs, and high consumer financing rates further stalled deal activity. The automotive sector is now pivoting to react to compressed profit margins and liquidity pressures, which vary by company. These pressures are expected to drive a surge of M&A activity. OEMs are expected to review their manufacturing footprint and production portfolios to evaluate strategic gaps and non-core divestitures.
“Auto dealmakers are looking to M&A as a powerful vehicle to drive profitable and innovative growth after market instability and tempered consumer demand for EVs impacted M&A activity.”
The bottom line
Automotive sector M&A activity stalled in part due to unrealized returns on investments in electronification and battery technologies, as well as consumer EV demand not materializing as anticipated. Despite hybrid vehicle sales increasing in the short-term, automakers anticipate EV demand will grow in future years. As consumer demand rebounds and financing costs fall, larger scale automotive M&A investment is expected to gain traction, particularly in battery and EV technologies. At the same time, automotive M&A is expected to be impacted by companies seeking to divest their non-core assets as automotive companies seek to realign and restructure as well as supplier consolidations.
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