Technology has disrupted the automotive industry value chain. Where OEMs once held all the aces, they now face a battle to preserve their market position as global suppliers grow in strength. The choices they make will determine whether they retain their dominance – or are relegated to mere assemblers of other people’s products
The evolution of the connected car has been described as a ‘paradigm shift’ for the industry by Morgan Stanley. The change has undermined the traditional OEM business model - as consumers increasingly make their buying decisions on services rather than performance, the greatest value-add in a new vehicle is no longer in their control. The technology that enables advanced driver assistance technology – the forerunner to self-driving systems – is manufactured by the biggest global parts manufacturers such as Autoliv, Bosch and TRW (radar) and new players including Google, TomTom (navigation and mapping), Infineon, Nvidia and Intel (semiconductors).
Exane BNP Paribas suggests the market for assisted driving and automated technology will increase tenfold to $57bn by 2025. Against this backdrop an unprecedented period of corporate activity has begun, as OEMs and their suppliers fight to maintain their margins and new, powerful tech players enter the market. While the recent emissions controversy has hit the balance sheets of auto-makers across the world, the trend towards tech acquisitions is set to continue.
Today one quarter of all new cars already have an internet connection, and two years from now the figure will be 80 per cent. The German automotive industry alone … will invest €16bn to €18bn over the next three to four years in the research and development of connected and automated driving… Automobiles and the digital world are combining to enhance mobility, bringing huge advantages for people, business and the environment.’
Matthias Wissmann, President, German Automotive Industry Association, 2015
Change drives M&A activity
The advent of connected and self-driving cars has seen OEMs scrambling to build their tech capabilities. The number of high-tech companies acquired by automotive businesses is up 26 per cent over the past three years compared to the period between 2009 and 2012.
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Much of this activity has been within the supply chain. In September 2014 ZF Friedrichshafen announced its acquisition of US rival TRW Automotive for $11.7bn, creating the world’s second largest auto parts supplier. TRW’s portfolio includes video cameras and radar technology, with ZF’s CEO Stefan saying that autonomous driving and ADAS were vital to the company’s future success.
Elsewhere Sweden’s Autoliv, which specialises in seatbelts and airbags, has acquired a car radar manufacturer and an exclusive licence to use software that controls forward-looking cameras. Panasonic, which already makes automotive sensors, has bought a 49 per cent stake in Ficosa – a Spanish company that manufactures image recognition technology – and joined forces with Tesla to develop advanced batteries. And Continental completed an eye-catching $680m deal for Elektrobit’s automotive software division, building its capacity in automated driving platforms.
78+ million vehicles are sold by the top 16 car brand every year, made with components from only ten global suppliers
OEMs seek control of the software space
While many suppliers have focused on the hardware that enables automated driving, OEMs – like Continental – have largely chosen to target software and services assets. Volkswagen has acquired BlackBerry’s European R&D centre and its 200 staff, who have experience of the QNX platform which powers the infotainment systems in brands from Audi to GM. Ford has bought Livio, a software start-up behind a platform for in-car apps, while a consortium of BMW, Audi and Mercedes fended off a host of rival bidders to acquire Nokia’s mapping business HERE for $3.1bn in August 2015. The deal was something of a coup considering Nokia built the business on its $8.1bn acquisition of US-based Navteq in 2007. A number of OEMs have also formed joint ventures with tech and telecoms businesses to bring new services to the dashboard. These include Google (Android Auto), Apple (CarPlay) and a variety of smartphone manufacturers (Mirrorlink). These tie-ups are now moving into wearable technology, with BMW recently revealing a collaboration with Samsung that brings its car apps to the Galaxy Gear smartwatch.
The world’s biggest suppliers are capable of making 85 per cent of the parts that comprise the average car
Joint ventures with tech companies have enabled OEMs to provide the features their customers want – but the two industries are also direct competitors. Sony chief executive Kazuo Hirai recently revealed that his business could eventually become more than a hardware supplier by collaborating with a traditional OEM to develop a Sony connected vehicle. Google, by contrast, appears to be moving in the opposite direction, with Chris Urmson, director of its self-driving car programme, saying in 2014 that the company ‘didn’t particularly want to become a car-maker’. Analysts have long thought Google’s real aim is to develop a software platform for autonomous vehicles and license it to OEMs. Mr Urmson said that Google was talking to manufacturers including General Motors, Ford, Toyota, Daimler and Volkswagen about joining forces to build a self-driving car, but the Wall Street Journal has reported unease among OEMs about who would benefit from the vehicle’s data. Ultimately this may be where Sony, Google – and indeed the car-makers – see the real value. As Morgan Stanley says: ‘Whoever controls the car’s brain will control… the value of the car’.
The world’s top ten parts suppliers achieve margins 4% points higher than the world’s 10 biggest car manufacturers
When tech and auto collide
As the auto and tech sectors converge, some of the biggest challenges to overcome can be cultural. ‘The classic auto suppliers like Continental have been working with OEMs for decades, but that’s a completely different to working with Google,’ says Rolf Trittmann, head of Freshfields’ automotive group. ‘These businesses come from different planets - they just don’t understand how the other works.’
Auto and tech businesses approach transactions in different ways, affecting everything from deal timelines to the levels of protection each side expects. These nuances are amplified when those businesses come from different jurisdictions, with US companies often taking a more aggressive position in negotiations than those from Europe.
As Michael Haidinger – a Freshfields corporate partner who has advised both automotive and technology businesses - says: ‘The biggest auto companies are used to being in the driving seat on M&A deals, but they are often quite risk-averse and not particularly flexible. Tech businesses by contrast often move much more quickly but are not fully in line with corporate conventions. This can make executing deals extremely challenging.’
The joint venture challenge
Joint ventures allow development risks to be shared but have to be carefully structured to ensure the business to whom the technology is of strategic importance – either the OEM or auto supplier - has sufficient control and access to any know-how and intellectual property generated. Straight acquisitions give auto companies power over the development programme but are a bigger risk. Not only must they must pick the right technology, but they must also keep hold of the target’s principal asset – its people.
Many tech businesses may prefer a JV to being acquired by a large corporate, although both sides must be aware of the challenges these present. Rolf Trittmann says: ‘Developing new technology is hugely expensive, and it’s often not possible for smaller suppliers to cover this cost. We’re seeing a rise in disputes between auto businesses and their JV partners as costs escalate and projects are dissolved. Smaller companies often don’t have the means to pre-finance significant R&D projects, but aren’t in a position to turn down JVs with the biggest players. If costs run out of control they may end up being acquired by their partners anyway in order to keep the development project on track.’
Is the venture capital model right for OEMs?
Some businesses have adopted a venture capital approach to build their tech capabilities, investing seed capital across a variety of innovative firms that have the potential to deliver the next disruptive technology. The model has enabled companies such as German media giant Axel Springer to transition from a traditional print business to a multimedia publisher by giving its acquisitions enough freedom to keep key people engaged and encourage creativity. OEMs and suppliers may benefit from a similar strategy, although it may only be appropriate in defined circumstances.
‘Investing in lots of businesses with the expectation that a handful will flourish is more opportunistic than strategic,’ says Michael Haidinger. ‘An OEM’s future depends on developing the right intelligent technology. There may only be a few companies in the world that can give them what they need, and if they manage to acquire them they can’t just let the company go and see how it develops. They need to be in control. In start-ups and smaller tech businesses the founder may own the idea, so it’s important to ensure the IP is transferred. OEMs also need to devise incentive programmes that foster the entrepreneurial spirit they’re paying for. These are hard to implement in a corporate environment - it’s rare for big auto businesses to give option schemes to their employees, for example.’
The auto companies that master the software space will be able to shape their destiny. But acquiring this capability requires a nimble, creative strategy. Bespoke contracts, innovative compensation packages and robust IP transfer agreements are essential to gain an edge. As the industry evolves, the businesses that rise to the top of the food chain will be those whose thinking can do the same.