An Insight of Mergers and Acquisitions in Automobile Industry
Dashmeet Kaur | Updated: Apr 21, 2020 | Category: SEBI Advisory
The Indian automobile industry is running at the top gear, and it is anticipated to become 3rd largest automotive market worldwide by the year 2026. Presently, the industry manufactures around 25 mn vehicles and exports 3.5 mn vehicles. India sustains a robust position in the international heavy vehicles domain since it is the largest manufacturer of tractors, 2nd largest bus manufacturer, and holds 3rd position in largest manufacturers of heavy trucks. The automotive market contributes to a share of 7.1% to India’s GDP. Despite being a dominant sector, the automobile industry has faced several challenges. This write-up will highlight the role of Mergers and Acquisitions in scaling up the automobile industry and overcome many challenges.
Importance of M&A in the Automobile Industry
The automobile industry is driven by technological advancement and the ever-changing demands of the consumers. It raises the complexity of the automotive environment and tightens the competition. M&A acts as a strategic instrument to grow and expand the business; hence its importance has been escalated in the automobile industry. Merger and Acquisition is a potent instrument to accommodate new market requirements and generate profit from them. However, each M&A transaction can also result in a considerable risk that can have a severe impact on the company’s growth.
The automotive players aim to safeguard their business using the strategic technique of Mergers and Acquisitions. Companies conduct M&A transactions after proper due diligence. Some automobile entities choose to merge with their competitors to fulfil the gaps in the technology portfolio.
For many years Mergers and Acquisitions plays an essential part in the development of the automobile industry. The automotive industry is one of the most active and substantial markets for M&A in terms of number and volume of transactions. It is mainly due to a massive consolidation for manufacturers and suppliers during the last decades, prompted by the tightening of competition from globalization.
Reasons for Merger and Acquisition in the Automobile Industry
The automobile sector is dynamic in nature that compels manufacturers to produce vehicles that are well-equipped, less expensive, and meets various other norms. Here is the list of factors that have led to the Merger & Acquisitions among the automobile players:
- Cost Efficiency: By doing M&A, automobile manufacturers avail the benefit from the economies of scale. As customers are becoming more vigilant, they seek for better equipped and environment compliant vehicles. To satiate the same, a large sum of investments is required along with expensive R&D programs. The world biggest automobile manufacturers rely on M&A. Thereby; they invest in production facilities in the emerging markets to minimize production costs. Such emerging markets include China, Latin America, Malaysia and Southeast Asia.
- Collaborate in new markets by establishing Global Alliances: As per the report of investment bankers, many international automotive firms like Valeo SA, Johnson Controls Inc., GKN Driveline and Magna International Inc., want to enlarge their presence in India. The Indian automobile industry is the hub for multinational automobile players.
- Consolidation of Industry: The automakers across the world are divided into three tiers, wherein the first tier includes Ford, GM, Toyota, Volkswagen and Honda. The manufacturers of the other two tiers strive to merge with lower-tier automakers in order to defeat the first tier companies.
- Reinforce Core Competency: A significant aspect of the automotive industry is the rapid up-gradation of technology. Therefore, companies deploy M&A to strengthen their operations as per the latest technology; else, they can get eliminated from the stage of the international market.
- Geographic Outlook: Indian automotive companies preserve their share of cross-border Mergers and Acquisitions. It is the fastest-growing automobile market that drives massive foreign investments by several renowned automakers & suppliers. The increasing global competition enforces domestic manufacturers to pursue M&A as a strategic tool to boost in-house production.
A General overview of Automobile Sector in India
The Indian automobile industry had witnessed tremendous growth since its launch back in 1898. Presently, the automotive sector is contributing a major portion to the economy of India, both in terms of revenue and employment opportunities. The sector employs more than 10 million people in the nation.
Indian automotive domain mainly comprises of passenger cars, heavy vehicles and two-wheelers. The heavy vehicle manufacturing is dominated by the popular automobile players such as Mahindra and Mahindra, Eicher Motors, Tata Telco and Ashok Leyland. On the other hand, Maruti Udyog, Hindustan Motors, Ford India Ltd, Hyundai Motors and Tata Motors stand on the forefront for car manufacturers. In the two-wheeler category, Bajaj, TVS, Yamaha and Hero Honda are some dominant players.
There are numerous limitations that the automotive industry has overcome until today. Measures like a reduction of tariffs on the imports, refining the policies of banks and relaxation of the forex/equity provisions have a big role to play to shape up a better picture of the Indian automobile industry.
The industry is prepped up for major challenges in the coming years. Many budding automobile entrepreneurs are finding difficulty to cope up with changing regulations of the government, market dynamics and relative prices. In such cases, Mergers and Acquisitions come to the rescue.
Top 5 challenges in the Automotive Industry
Following are key challenges faced by the Indian automobile manufacturers:
- Competing with the huge Chinese Market: The biggest challenge for Indian automakers to compete with the ever-expanding market of China. In the last 15 years, China has been a leading automobile market. The planners of the automotive industries need to plan a strategy considering the outlook of China.
- Evolution of the concept of Connected Cars: It has brought a revolutionary change in the automotive industry. Connecting cars is a technology-driven concept that serves as a communication hub which receives and transfers data from its surroundings. However, in India, this technology is still in its inception stage and there are many uncertainties circumscribing
- Increased rate of competition. Another myriad problem occurring in the automotive industry is the flattening of sales demand in the markets like Japan and Europe. The increase in automobile manufacturers in international markets has a direct impact on the Indian market and slows down the sales rate with increased competition.
- To balance the demands of Government and Technology: Automakers have to meet stringent legislation that focuses on controlling carbon dioxide emissions to improve fuel economy. So, it is imperative to choose the right technology to cater to ever-changing social preferences and comply with the regulatory system.
The current changes in the automotive environment and the global shift in the technology are the biggest issues Indian automakers. One can determine that Mergers and Acquisitions is the best option for the automobile industry to survive in the cutting throat competition.
M&A renders a big share to the automotive industry by facilitating cost saving through the economies of scale. One critical factor in achieving success in M&A and increase the outcome is through standardization of the process. Considering future prospects, one can expect a rapid increase in M&A activity, particularly on the supplier’s side of the automobile markets.
The automotive industry is one of the richest industries in India. However, it has to fraught with challenges and issues. By overcoming these challenges, the Indian automotive industry shall become one of the biggest automotive distributors in the global market.
Swarit Advisors is a consulting firm in India that has a wide knowledge of Mergers and Acquisitions in the automotive ecosystem. Being reputed consultants for more than a decade, we can resolve different issues concerning M&A. Our domain knowledge can help your automotive company to make the right strategic decisions.
Also, Read: Analysis of Merger and Acquisition.
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