The recent announcement from Volkswagen, outlining its plans to invest US$7bn in the North American car industry over the next five years, epitomises the strength of the global automotive market. Despite economic uncertainty during the last few years, the industry has continued to expand.
With a number of car manufacturers reporting record sales, the automotive industry is among the best performing sectors worldwide and, with further investment, can play an integral part in bringing growth back to the world’s economy.
On present estimates, the global automotive industry is worth US$800bn a year. Analysts forecast that the world market for cars and other light vehicles will expand from the current rate of 80 million units a year to well over 100 million by 2020, reflecting the enormous growth potential of emerging economies; according to the World Bank, just 18 people in every 1,000 own a car in India, in China the figure is 58. Yet in Europe that figure is more than 500.
Against this backdrop, it is little wonder that automotive companies, particularly OEMs, continue to pour investment into these newer markets. Volkswagen’s North American investment comes after plans to double its existing car production in China, pledging a further €10bn (US$1.37bn) investment in Chinese plants. Though the German company failed in its aim to overtake Toyota as the biggest car manufacturer by volume last year, expanding into these markets is critical. Whether it is the Far East, sub-Saharan Africa, the Middle East or South America, OEMs are engaged in a frantic scramble to capitalise on the growth of emerging economies.
In contrast, the more established markets have struggled, with Europe showing particularly poor growth levels. Annual car sales in Western Europe have fallen by almost a quarter since 2007, and are expected to continue to fall until 2019. The worst affected market was Spain, where the number of new cars sold last year was a meagre 700,000 – the lowest level for almost 25 years.
These figures continue to dampen global automotive market statistics, with projected growth varying between 2-4% from now until 2018.
Potential in the east
The growth of the Chinese market represents a once in a lifetime opportunity: customers in China today buy more than 20 million new vehicles a year, making it the world’s largest automotive market. Over the next six years, a market the size of Europe will be formed in inland China, with consumption forecast to top 30 million vehicles before 2018.
The latest figures from the China Association of Automobile Manufacturers (CAAM) show that the delivery of cars, multi-purpose vehicles and SUVs was 16% higher in Q1 2013 compared to the same period in 2012. Total vehicle sales, including trucks and buses, rose 13% to 7.3 million units.
The affordability and practicality of saloon cars have made them the overwhelming favourite when it comes to global car sales. However, what is most striking is that Chinese consumers are not merely buying ordinary saloon cars. Recent statistics rate China as the world’s second largest market for premium cars, with many believing it could surpass the US by 2016. This is aided by the expectation that, by 2020, China will have 23 million affluent households with a disposable income of at least Yuan 450,000 (US$72,000) a year.
With projections suggesting that the Chinese market will grow to 29 million in 2018, and account for almost 50% of total industry growth globally, there is little wonder that investors are flocking to the far east.
Island boom
The gloom experienced across the European car market has not been replicated in Great Britain – in fact, British sales and production are now the highest they have been for six years, and the industry is continuing to register strong month-on-month growth.
Though high profile success stories like Jaguar Land Rover – which saw a 19% rise in sales, to 425,000 units – stole the headlines in 2013, there has been a plethora of growing businesses operating in the UK market of late. Output has been boosted by £10bn (US$1.67bn) with planned investments from the likes of Toyota, Honda, Nissan, BMW and General Motors, whilst BMW has announced investment in jobs and growth in its British bases, with £750m (US$1.2bn) set aside for the next generation Mini.
UK automotive component manufacturers are becoming increasingly attractive acquisition targets for overseas buyers. Britain has always had a strong reputation for vehicle engineering, particularly in engine development and associated technologies. With the success of JLR indicating it is no longer a niche car manufacturer, UK suppliers to the company are now becoming even more interesting. The development of JLR’s presence in China, India and South America means that its supply chain needs to follow in these countries, making the suppliers highly attractive acquisition targets for overseas investors aiming to build relationships with the OEM.
An estimated 80% of UK cars are being exported, and this clear global appeal of British vehicles is helping the industry overcome weak demand elsewhere in Europe. Cheap finance deals and strong competition are also boosting sales, while targeting the US and China has proven a winner. However, those two countries contribute to less than 20% of the UK’s exports, leaving a substantial opportunity to tap into growing markets and optimise growth.
Boosted by a 22% increase in domestic sales of British-built cars, recent reports have suggested that the UK is currently on target to break the two million mark in car sales this year, representing a 3% increase from 2012. With UK car manufacturers thriving both at home and abroad, the market attracted over £2.5bn (US$4.16bn) of investment last year. Further success stories are expected as Britain continues to buck the European trend.
The world market
Despite global growth of the automotive industry – and high profile cases like Fiat’s recently completed US$4.35bn acquisition of Chrysler – deal volumes have slumped in recent years, with 2012 yielding 33% fewer agreements than the previous year, putting them at a level lower than during the recession of 2008.
The cause of this is quite simple: the lingering economic situation in Europe, historically the most active region for mergers and acquisition activity, took its toll on the global automotive deals market. However, the recent improvement in the macroeconomic environment has seen a wave of pent-up demand, resulting in increased deal volume and value. Statistics for the first half of 2013 indicate a growth of 24% in deal value compared to the same period in 2012.
M&A activity in the automotive supply chain is set for further growth in 2014. This is in part due to pressure from OEMs that want their suppliers to build scale through acquisitions. As OEMs have assembly plants in different parts of the world, automotive component manufacturers will naturally want to develop relationships with them, especially as production and sale volumes increase in markets such as China and India, as well as the MINT countries of Mexico, Indonesia, Nigeria and Turkey.
With emerging markets holding enormous potential for future growth, a glut of deals are also expected in countries like Thailand, South Korea and Saudi Arabia over the coming years. The European market may have slowed, but it is by no means dead – and as the economy continues to recover, investment in the automotive industry should also be on the increase.
It is clear how the automotive industry can directly impact the economy as a whole. On a national level, the US is a prime example. Estimates suggest that up to a quarter of the 500,000 manufacturing jobs created in the US since 2010 are directly attributable to the recovery of the motor industry. Car sales are currently showing double-digit growth, which is helping drive the US economy out of recession.
This can also happen globally. The automotive industry is in an extremely positive position, with emerging economies offering a unique opportunity to investors, and traditional powerhouse markets like the UK and US recovering well from the recession. If investors take advantage of the growth potential of emerging markets, the American and European markets can and will return to past glories, and China may very well solidify its place at the top.
With greater investment, the automotive industry can help the global economy out of its recent hardship, and can reap the rewards when it recovers.
Constantine Biller is a Partner at Clearwater Corporate Finance
