It is often said that change remains the constant. In any industry, the need to constantly change and meet market demand remains. This is especially true in the automotive industry. While there have been many drivers of growth in this sector over the last few decades, one of the key levers are mergers and acquisitions (M&As).

In January 2021, Fiat-Chrysler and PSA completed their long-awaited merger, forming Stellantis, the world’s fourth-largest automaker with enough cash to fund the transition to electric vehicles and compete with larger rivals Toyota and Volkswagen. The $52 billion deal between the Italian-American and French automakers took over a year to finalise, during which time the global economy was thrown into disarray by Covid-19.

Look at the Volkswagen Group — one of the leader auto-makers in the world. M&As have always played a significant role in their growth strategy. The group comprises twelve brands from seven European countries: Volkswagen, Audi, SEAT, ŠKODA, Bentley, Bugatti, Lamborghini, Porsche, Ducati, Volkswagen Commercial Vehicles, Scania and MAN.

Closer to home, we have Tata Motors acquiring two of the most iconic British brands, Jaguar and Land Rover, amidst recession uncertainties. While the move was often touted as an expensive mistake at the time, they have managed to turn around the two proud British brands.

While M&A has significantly accelerated the growth of the automotive sector, deep technological innovation has provided the long-term competitive edge to companies. Look at Toyota. When they introducing the principals of lean manufacturing and Just-In-Time Production, the fundamental landscape of automobile manufacturing changed. Today, Toyota is a global market leader in the segment.

In Eminent 2019, Toyota and Suzuki reinforced their ties by buying little stakes in each other to encourage use their synergies. Toyota declared the choice of buying a 4.94 per cent stake in Suzuki’s stock summing $907 million. On the other hand, Suzuki bought Toyota’s offers worth $453 million. This step comes as portion of the Suzuki-Toyota collaboration shaped in February 2017.

As portion of this worldwide association, the two companies will co-operate with each other for electric and crossover models, sharing cars, and creating self-driving innovation as well. In India, Toyota Kirloskar Engine propelled the Glanza premium hatchback prior this year, which may be a re-badged form of the Maruti Suzuki Baleno and this came as portion of the contract between the two companies.

Indian SUV master, Mahindra & Mahindra (M&M) and Passage Engine Company came together in October 2019 to begin a joint wander to create, showcase and convey the American auto-maker’s vehicles in India. The ₹1,925-crore JV points to boost optimised sourcing, item improvement, utilise of significant advances and a worldwide arrange as well.

Deep technological innovation

Participants in the automotive industry aim to prepare for the future through strategic partnerships and targeted mergers and acquisitions. Some people turn to competitors to find opportunities to fill gaps in their technology portfolio. Others are reaping the fertile landscape of a global innovation centre like Israel, identifying start-ups to bring meaningful change to the entire organisation.

However, other companies are seeking digital transformation plans to improve efficiency through their manufacturing processes, investing heavily in technology solutions, including smart factories, collaborative robots, digital supply networks, artificial intelligence, predictive maintenance, and blockchain. Even some CASE technologies make companies seriously think about how they will make cars in the future.

For example, the electrification of vehicles may require simpler manufacturing processes. However, focussing on these technological solutions in isolation may not be enough, because thriving in the new global automotive industry reality may require reshaping all aspects of the business, including product supply, business models, manufacturing processes, and customer experience. Individually or conditionally, technological repairs cannot replace long-term technological strategies.

The Indian automobile industry is one of the driving forces of the economy, contributing about 49 per cent to the country’s manufacturing GDP and 7.5 per cent to its overall GDP. The sector’s value chain employs about 35 million people. The automobile industry in India is expected to grow at 12.7 per cent CAGR between 2019-2026 to reach $512 billion by 2026. In the last decade, while the production of two-wheelers in India has nearly tripled, the production of passenger vehicles and commercial vehicles in the country has doubled.

The pandemic has transformed several automotive businesses. Several auto manufacturers have recognised the benefits of operating remotely amid stressed cash flows. The key issue facing the sector is guaranteeing the long-term viability of firm operations and the financial health of organisations, whose success is related to each member in the value chain, from vendors to dealers.

With shifting client expectations, access to global markets, and growing revenues, the industry is moving toward digitalisation. OEMs can access many untapped markets throughout the world by transforming using digital technologies. Likewise, we will also see improvements in engine and battery technology that will drive progress.

After recovering from the severe impacts of the Covid epidemic, India's auto sector is predicted to expand faster in 2021-22. It is imperative for companies to look at digital transformation mainly to meet the changing consumer experience, increase the reach to global markets and value generation.

The primary reasons for expansion will be the fast paced adoption of the electric vehicles industry. While adoption by consumers will still take some time, expansion will primarily come in B2B due to the explosive growth in last mile delivery in India. Today over 97 per cent of total EV sales in India happens in 2Ws and 3Ws as they present an attractive TCO argument.

A controlled mandated 2W and 3W adoption target will help increasing this could make a significant difference to the growth in the EV industry. The investment in EV infrastructure will also provide a push to the EV adoption. This will be combine efforts of public (State and Central) and private sector (Ola Electric, Ather Energy, Ampere) initiatives.

The next paradigm shift

While the automotive industry has been driven through M&As and technological innovations in the past, we are now on the cusp of the next paradigm shift in the industry — the transition to EVs. EVs will be the future of mobility, and will adopt a similar playbook of growth of M&As and technological innovation to accelerate its growth.

The adoption of electric vehicles in India is still in its early stages. The stage also provides several chances for industry participants, laying a solid foundation for future growth. Many global players are also planning to enter India, but they'll need to build a vendor network, infrastructure, and research and development (R&D) facilities first.

With FAME-II scheme modification in June 2021, the Central Government has increased the subsidy by 50 per cent and increased incentives for electric 2Ws to 40 per cent of total vehicle cost, up from 20 per cent. Initiatives like this in addition to the additional subsidies given by State governments will be a boon for the EV automotive industry in India. The government’s continued support to drive adoption of EVs, with a keen focus on locally built electric two-wheelers will make India the manufacturing hub of EVs. Together with the other important factors like extremely low running cost, low maintenance and zero emission, the reduced price levels due to the subsidies will surely spur a substantial demand for EVs in India.

Battery price reduction is the most important driver for mass scale adoption of EVs. One key technological innovation that will drive faster innovation of EVs will be improvement in the range travelled per charge. Li-ion presents a wide range of power–energy performance that is significantly better than previous battery technologies like Lead Acid, Nickel Metal Hydride, or Nickel Cadmium. However, shifting away from the current Li-ion composition to even better Li-Sulphur or Fuel Cells in the next few years will accelerate the adoption of EVs. Using the later will reduce the EV cost, increase the range and provide faster time to market.

With falling battery prices, the economic argument against EVs is rapidly weakening. The policy support is strong. OEMs have started taking bets on the EV space. Domestic ancillary industry, especially the battery pack manufacturing industry, has started taking shape. With all these fast-evolving changes, India stands at an inflection point of EV adoption.

There are four critical factors that will drive EV adoption in India over the next decade — policy, cost of battery, charging infrastructure and ability to procure the supply chain locally. The decline in battery prices is fairly certain, but slower decline will affect adoption, especially, in the 4W category. Good public charging infrastructure is essential for retail adoption of EVs. Lastly, there is high import dependency for key EV components like battery packs, drivetrain and the key electronics. Once these components gets localised in India, it can increase the pace of adoption and the cost of procurement.

M&As in the EV space

Historically, the automotive sector has seen some of the biggest M&As including $52 billion merger between Peugeot and Fiat Chrysler, $2.3 billion Nissan and Mitsubishi deal and the $10.4 billion merger of Fiat and Chrysler. While some of these acquisitions have helped companies grow bigger and capture a significant market share, some mergers have failed.

The EV penetration in India is currently quite low (<1 per cent), hence several OEMs start-ups have emerged in this space, primarily in the 2W and 3W segment. Since most of the start-ups are still in the process of building the right product for the Indian audience, scalability and maturity are yet to come. Once we have a few success stories, we expect the M&A activity to pick up where either large OEMs will acquire start-ups that have reached a product-market-fit, or vice-versa, where start-ups are acquiring established players, similar to Pharmeasy-Thyrocare, Byjus-Aakash Educational, Centrum-BharatPe-PMC Bank. Some M&A activity will also adopted by well-funded start-ups that are looking for a faster go-to-market by acquiring some young start-ups (Ola Electric–Etergo).

While looking for acquisitions, a CEO of a well-established incumbent will prefer to look for a start-up that has a strong IP and tech which the incumbent can build on top of. On the other hand, if a start-up acquires an incumbent, ideally the start-up is looking to leverage the incumbent’s distribution channel to better cross-sell its products or a licence that it would otherwise have not got.

Several technology and automotive companies have expressed interest and/or invested in the electric vehicle sector in India. Auto companies such as Hyundai, MG Motors, Mercedes and Tata Motors have brought electric vehicles to the market. A recent study by Castrol found that by 2022, most Indian consumers will consider buying electric cars. By 2030, India will need ₹12.5 trillion ($180 billion) of vehicle production and charging infrastructure to meet India’s EV ambitions.

The Indian government has also set an ambitious goal of selling only electric cars in the country. The Ministry of Heavy Industry has included 11 cities in the country in the shortlist of candidates for the introduction of electric vehicles in the public transport system under the FAME plan.

We believe there will be an impact on the other parts of the automotive and EV ecosystem as well. We expect M&A activity in EV components companies like battery manufacturing, BMS systems, charging infrastructure and drivetrains. The core proposition in a EV unlike in an ICE engine is the battery technology. As companies would like to get the core IP and the rights to manufacture a better grade of batteries, we can expect M&A activity to kick in that area.

As in the West, where several EV companies went public by merging with SPACs, it will be interesting to see how the these companies in India plan to raise public funding to spreading deep into the EV ecosystem.

Connected cars, autonomous vehicles, ride sharing and electrification are all stirring a revolution in the automobile industry. The automobile business has seen a substantial increase in mergers and acquisitions throughout the years, a trend that has undoubtedly been affected by technical innovation. As a result of changing political, monetary, and regulatory concerns, M&A is a crucial strategy to survive and prosper in a competitive global economy.

The writer is Partner, Kalaari Capital

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