JOHANNESBURG - Rapid changes in the way people travel and the threat this posed to the future of the automotive industry were shaping the corporate strategies of motor manufacturers and giving extra impetus to merger and acquisition (M&A) activity, according to international law firm Hogan Lovells.
However, Hogan Lovells partner Sarah Shaw said cross-border M&A’s fell 17 percent in the final quarter of last year compared to the same period in the previous year against a backdrop of growing socio-political tensions.
Shaw said although activity in the quarter was subdued, with $270bn worth of M&A activity, there were bright spots in the automotive and mobility industries, among others, where M&A value reached new heights in the fourth quarter.
There was an estimated $26.5bn worth of cross-border deal value globally in the automotive and mobility sector in the quarter, with two transactions accounting for more than 76 percent of the total deal value.
They were the $13.2bn purchase of the automotive battery-making arm of Johnson Controls by Brookfield Business Partners, alongside the pension fund Caisse de Dépôt et Placement du Québec, and the $7.1bn sale of Fiat Chrysler’s Italian components maker Magneti Marelli to Japanese car parts company Calsonic Kansei.
Shaw said aggregate deal value in the automotive and mobility sector was 70 percent higher than the $15.6bn quarterly average since 2010 although the number of deals declined by 16 percent compared to the quarterly average over the same period.
Shaw added that car makers were increasingly moving from the combustion-engine-powered drivetrain to electric vehicles after decades of manufacturing vehicles founded on the same technology.
According to the International Energy Agency, the world’s fleet of electric vehicles grew 54 percent to a total global stock of 3.1 million units from 2016 to 2017, with annual sales exceeding 1 million.
By 2030, the global electric vehicle fleet was due to rise to 125-million.
Shaw said the race among original equipment manufacturers (OEMs) to equip themselves with the technology required to remain competitive would spur M&A activity in the automotive and mobility sector despite near-term obstacles standing in the way of cross-border dealmaking.
“The auto-tech revolution has already begun. While regulatory challenges and uncertainty exist, those hurdles will not stop the revolution that will fuel automotive M&A activity over the next decade,” she said.
However, Shaw said there were early signs the attention of Chinese investors was shifting away from the US to Europe in a possible reaction to recent trade tariffs and policies targeting Chinese foreign investment.
“If prolonged, such a shift would be impactful given China's position as the world's largest automotive market,” she said.
Shaw said the Committee on Foreign Investment in the United States (CFIUS), which was responsible for reviewing the national security implications of foreign investments in US companies, had heightened its scrutiny of deals in recent months, particularly those emanating from China.
She stressed that protective action was not limited to the US and key European markets had also taken a stricter stance against M&A in strategically sensitive industries in recent months.
However, Shaw said the picture was very different in China, with the government in July last year cutting back by almost 25 percent its blacklist of industries in which foreign ownership was prohibited or restricted.
Under the new rules, a 50:50 cap on foreign ownership of Chinese manufactured vehicles was lifted effective from 2022.
Shaw said BMW was quick to respond to this regulatory easing, increasing its stake in its joint venture with Brilliance China Automotive Holdings to 75 percent from 50 percent, with the deal anticipated to close as the new rules were brought into force.
But Shaw was uncertain whether this was a forerunner to similar moves by other global OEMs with holdings in Chinese joint ventures.
- BUSINESS REPORT