The automotive industry has arrived at a crossroads and could be set for a period of upheaval, as well as a significant amount of strategic and distressed dealmaking over the coming years. With an array of competing factors at play, operators in the sector could be presented with both challenges and new opportunities.
Not all of this is new and many of these changes have been years in the making as consumer tastes and attitudes to things such as climate change have evolved. On top of this, the last year or so has thrown up an array of new challenges as the seismic events of COVID-19 and Brexit continue to play out.
While these trends are set to grow as the 2020s progress, many of the changes facing the automotive industry are already beginning to be seen in the current M&A market. Some of these are illustrated in the featured case studies below.
New car industry faces major challenges
The new car industry has faced a series of recent challenges and, while things have improved somewhat since 2020, the problems afflicting this sector are only set to increase. Predictably, the huge impact of the COVID-19 pandemic saw demand for new vehicles plummet last year.
According to figures from McKinsey, intent to purchase a new car fell 17 percentage points between the start of the crisis and May 2020, as the pandemic’s impact on household income and global economies saw consumers become more conscious of their spending, while showrooms and factories were forced to shut down.
In the UK, this saw new car registrations fall to their lowest levels since 1992, with 1.63 million new cars registered in the UK last year. This was a decline of 29 per cent from 2.3 million new registrations in 2019 – the biggest one-year fall in production since World War 2.
While consumer sentiment recovered somewhat over the course of 2021, with intent to buy returning to 94 per cent by June 2021 according to McKinsey, COVID-19 delivered a further knock-on effect which is now impacting the industry. During the initial 2020 shutdown of production lines, microchip manufacturers that produce the semiconductors used in cars diverted their supply to companies in the consumer electronics sector.
Through 2021, the supply of these vital microchips to automotive manufacturers failed to fully recover, once again depressing production and registration figures. In September, data from the Society of Motor Manufacturers and Traders (SMMT) showed that new car registrations dropped by 35 per cent, compared to the same month in 2020. The month saw 214,000 new registrations, the lowest number since the current system was introduced in 1998.
Meanwhile, in the same month, new car production fell to the lowest level since 1982, with a mere 67,169 cars built in the UK in September 2021. This was a 41.5 per cent drop compared to September 2020 and the third consecutive month of falling production figures.
The SMMT states that around 83 per cent of UK automotive companies have suffered an impact from the semiconductor shortage, including cost increases, delays, disruptions and reduced orders. This has resulted in an additional £2.4 billion spent across the supply chain which is seen as “unlikely to be recovered”. 56 per cent of the companies impacted, meanwhile, say they don’t anticipate an improvement in the situation until the second half of next year.
However, crisis for some often means opportunity for others: the upheaval in the automotive industry has been good news for many.
Used car sales
The multitude of difficulties that have plagued the new vehicles sector have largely bypassed the used car market. No longer relegated to second-hand forecourts and listings in the newspaper, used cars are a modern, thriving industry.
The internet has, of course, been a major facilitating factor, enabling customers looking for a newer replacement to shop around to get the very best that their money can buy, rather than just relying on whatever they can find. By extension, this has opened up space for operators, both physical and e-commerce-focused, to refine their offerings in order to gain as big a share of this valuable market as possible.
While the used car market did suffer an initial impact from the COVID-19 pandemic, it has since moved to full take advantage of the production, supply and consumer sentiment issues currently impacting the new car industry.
Following weak sales in Q2 2020 as the pandemic hit, the corresponding quarter a year later saw a phenomenal 108.6 per cent growth, with 2.16 million used cars sold in the quarter. This growth dropped off in Q3, as the semiconductor shortage caught up with used sales, but was enough to ensure that the market has remained up on 2020 in the year to date.
The automobile market’s shift to online (accelerated by COVID-19) and growth in the used car market, has naturally seen some operators begin targeting acquisitions as they look to generate further growth. Across the UK and EU, the used car market is currently worth an estimated £500 billion and, with the sector’s strong domestic performance, it’s no wonder that UK firms are targeting expansion into the EU.
In October 2021, Constellation Automotive Group, a UK group that operates several leading used car sites including B2C online used car marketplace Cinch, moved to acquire Amsterdam-based counterpart CarNext.
The deal created Europe’s largest digital used car marketplace, with the companies registering a combined 2.5 million plus in annual car sales and around £17.7 billion in gross merchandise value.
Discussing the acquisition, Constellation’s Executive Chairman Avril Palmer-Baunack said: “I am delighted that CarNext is joining the Constellation Group. CarNext was one of the first companies in Europe to digitize the consumer used car buying experience and we are looking forward to combining the scale of our respective marketplaces to lead the digital transformation of the used car market across Europe.”
“Data and technology excellence are central to Constellation’s ability to continue to innovate and CarNext’s proprietary data and extensive European transaction data will give Constellation an edge. The Constellation team and I are looking forward to welcoming CarNext to the Group as we move to the next phase of our growth in Europe.”
Constellation is an example of a company using acquisitions as part of a strategy to expand and gain market share in its existing space. Others are targeting acquisitions as they look to move into new spaces, tap into new revenue streams and solidify their positions as leading operators in the automotive market.
Cazoo was founded in 2018 and, despite only launching its used vehicles e-commerce platform in December 2019, has grown to be one of the UK’s leading online car retailers, helped by its prominent advertising campaigns and sponsorship of numerous sporting teams and events.
In October, the company made a significant acquisition that demonstrated its eagerness to expand its offering and range of services within the automotive market. The acquisition saw Cazoo take over commercial vehicle retailer Vans365 in a £6.5 million deal, one of its first steps in a planned move into the booming commercial vehicles market.
Vans365 is a leading player in the UK’s commercial vehicles sector. The company has a highly developed offering, with a strong team of specialist customer service professionals and experienced in-house technicians, and buys and sells hundreds of vans each month.
Post-acquisition, Vans365 will be combined with Cazoo’s platform and enhance both its staff and customer offering. The company called the deal a key part of its planned expansion into the commercial vehicles e-commerce market.
Alex Chesterman, co-founder and CEO of Cazoo, said: "The market for commercial vehicles is worth £16bn annually, with more than one million vans sold each year in the UK, which expands our addressable market and is a natural product extension for us.”
"The acquisition of Vans365 will accelerate our planned launch of buying and selling commercial vehicles online later this year and will enhance both our customer proposition and team and I look forward to welcoming the Vans365 team to Cazoo."
Car hire and vehicle leasing
Another factor to be considered in the automotive industry is the increasing availability and popularity of vehicle leasing. This is another sector of the market that has flourished in recent years thanks to increasing digitalisation.
In particular, sites offering vehicle leasing have helped spearhead the market, alongside a growing number of vehicle hire apps, such as Zipcar. Operators like these have helped the B2C and B2B vehicle rental markets become a booming trade.
This is a development that is naturally spurring acquisition activity, as big companies look to consolidate their position and disruptors look to gain as much market share as possible during a period of such high growth.
In early November, Worsley-based vehicle leasing company Leasing Options announced the acquisition of Allied Vehicle Contracts. The takeover of the West Yorkshire firm formed part of Leasing Options’ growth strategy, through which it is seeking to strengthen its position within the UK’s B2B fleet leasing sector.
Discussing the deal, Leasing Options’ CFO and co-founder Karin Butschok said it “provides us with a specialist platform, additional skill sets, and a portfolio of bespoke systems and experience that will allow us to take full advantage of the opportunities that present themselves to us within the B2B sector.”
Following the acquisition, Leasing Options said that it would continue to target both organic and acquisitive growth in its efforts to continue to expand during 2022 and become a leading player in the UK’s leasing sector.
The firm’s COO Mike Thompson said: “This really is a further demonstration of the exciting plans and vision that the owners and management team at Leasing Options have for the future. We are going through a real period of growth, and this is set to continue well into 2022 and beyond. We have aspirations for further organic growth as well as through acquisition, should the right opportunities come along.”
Climate awareness prompts shift
Amid issues for the new vehicle industry, one positive has been the increasing popularity of electric vehicles, which accounted for 32.3 per cent of cars built in September, according to SMMT. This led the trade body’s Chief Executive Mike Hawes to label alternative-powered cars as the industry’s bright spot.
Hawes added: "The rocketing uptake of plug-in vehicles, especially battery electric cars, demonstrates the increasing demand for these new technologies.”
As well as rising demand, this shift towards alternative power is also being driven by regulation. Across the world, government commitments to decarbonisation are leading to legislation which will fundamentally change the product offering of car manufacturers and retailers.
In the UK, for instance, the sale of new petrol and diesel vehicles will cease from 2030. That may be eight years away, but manufacturers and new car retailers will need to move now to begin the process of expanding, and ultimately replacing, their product offering.
The rise of electric vehicles has also opened up a lucrative new market that is increasingly featuring in the news pages and in M&A deals. Just as petrol and diesel cars rely on fuel station forecourts to keep them mobile, electric vehicles rely on charging ports to keep them topped up, and this has become an incredibly active sector in its own right.
There have already been a number of major deals involving electric vehicle charging point operators in the UK. This is only set to increase, particularly in the light of the recent announcement that Gridserve, one of the biggest operators of charging points on UK motorways, will do away with exclusive rights contracts on the UK Electric Highway from 2026 and not enforce them on Rapid Charging Fund funded sites.
This move follows the Competition and Markets Authority (CMA) launching a review into the company’s suspected breaches of competition law. The decision should make the UK’s charging point sector far more competitive over coming years and will only serve to increase M&A activity in the rapidly growing sub-sector.
Electric vehicle charging provider RAW Charging is one company in the sector looking to tap into the shift towards electric vehicles in order to generate rapid growth. At the beginning of November, the company acquired the business and assets of counterpart Franklin EV Limited, ahead of that firm’s parent company – Franklin Energy – entering administration.
The acquisition saw RAW acquire 128 EV charging points owned and managed by Franklin, 370 managed EV chargers and the LiFe Network, which controls chargers and provides access to more than 10,000 registered drivers.
Another key element of the deal was RAW taking on Franklin’s sales pipeline and numerous in-principle agreements. Along with the acquisition of the company, this will enable RAW to add to its significant charging portfolio in the UK and Europe.
RAW is among the UK’s leading operators, working alongside the UK government on the transition away from petrol and diesel. The company also has several partnerships, including a deal with Greene King to install chargers at 800 pubs and hotels and an agreement to install chargers at McArthurGlen outlets in the UK and Europe.
Discussing the acquisition and RAW’s ongoing growth plans, CEO Bruce Galliford said: “This opportunistic acquisition forms part of our growth strategy to rapidly build a portfolio of EV charging assets and take advantage of the transition to electric vehicles.”
“RAW has a significant pipeline across the UK and Europe and with the addition of the Franklin assets and sales pipeline we are confident in rapidly scaling up to generate consistent returns from our chargers to fund future growth.”
The UK remains just over eight years away from the ban on the sale of new diesel and petrol cars, but that deadline is already exercising a major influence on the domestic automotive market and spurring significant M&A activity.
This is, of course, something that is only going to grow over the coming years. However, for the time being, it is taking a backseat to trends such as the rise in leasing and used vehicles, as well as the ongoing distress caused by COVID-19, Brexit and the semiconductor shortage.
Amid all this uncertainty, one thing we can say with some assurance is that the automotive sector is one for dealmakers to watch and will be for years to come.
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