What price technology?

Over the last couple weeks, a repeated theme has been around mergers, acquisitions and cooperations in the auto industry.  Not just the mega-deals such as the PSA-FCA deal to form Stellantis which still awaits competition authority approvals (though this seems likely now), but lower level collaborations between OEMs, the prospects for the mid-size OE suppliers, and activity amongst dealers and repairers.  Within all of this, the value of technology plays a key role.

The driver of the PSA-FCA deal was largely related to the cost of meeting the technological demands of the industry for electrification and other advances, but there are a number of lower level collaborations driven by the need to meet emissions regulations – Mazda and Suzuki have both struck deals with Toyota to offer lightly modified versions of Toyota models in order to improve their fleet average emissions performance.  As a short-term fix for emissions compliance, FCA has a deal with Tesla, and Ford has just struck a deal with Volvo, both to pool their fleet results.  At a more strategic level there are also deals involving EV drivetrains and autonomous technology between BMW and JLR, and BMW and Daimler respectively.  VW has also offered their MEB platform that underpins their ID range to other OEMs.  All these trends support the fact that more complex technology will force more sharing, with some brands potentially losing the ability to develop proprietary technology in certain areas.

At the OES level, we have had a relatively quiet couple years in terms of M&A (mergers and acquisitions).  One of the largest players in past M&A was Continental AG, but they had been planning to reverse direction with the sell-off of their powertrain division until turmoil in the markets forced them to shelve that idea for now.  However, further down the rankings, suppliers with technologies aligned with electrification, connectivity and autonomy are becoming increasingly attractive targets, particularly where they currently lack the customer relationships and geographic reach to maximise the penetration of their technologies,  Conversely, the fortunes of suppliers tied into traditional internal combustion engines are waning, and they need to be thinking in terms of a managed restructuring over the next 10-15 years that will adjust their business model to one with leaner overheads and a focus on the aftermarket business.  This is also likely to drive M&A, as some consolidators build a portfolio of ‘sunset’ businesses – probably including some well-known brands.

Amongst dealers, repairers and parts distributors, ICDP research has consistently highlighted the pressures on medium-sized players who will struggle to make the necessary investments in technology and people to remain competitive with larger players who enjoy a scale advantage.  It is clear that where a dealer or repairer has invested in new facilities to support product technology change, such as EV chargers or aluminium welding booths, this should directly affect the value of the business, but this will be dependent on there being a revenue stream to earn a return on the investment.  In the short term, that may not be the case, so a buyer of the business would expect a discount on these under-performing assets.

However, these business are all service businesses in the broad sense, and their success lies in providing that service – a new or used car, repair or maintenance, or parts delivery – more effectively than the competition in terms of value and customer experience.  In the past that has largely relied on physical interactions, and the addressable market was dictated by the physical locations operated by the business.  In an increasingly digital age, that is becoming less true, and it can be argued that the value of any of these businesses should at least in part be influenced by the investment that has been made in the digital business and the information technology and human resources required to deliver more volume and profit through the same or a reduced level of physical assets.

Technology itself may not be the differentiator at the entry level as an increasing amount of that can be sourced from third party vendors, but to excel probably does require in-house resources that can interpret a comprehensive omni-channel vision and make it reality, and staff throughout the organisation who are comfortable in working with this.  What is the value of 50 or 100 in-house developers and a differentiated online offer applied to the entire business, compared to one ‘gin palace’ dealership?  If we could run the numbers, I am pretty sure that the answer would be clear, and that on that basis, a dealer group, repair chain or parts distributor that is using digital to grow its business without adding to the physical assets, will command a valuation premium.  They may also be targeted by prospective buyers who have allowed themselves to fall behind, focusing on the value that the platform will bring to them, rather than on the traditional business assets.

Across the sector as a whole, it is clear that technology will become an increasingly important driver of business fortunes, but what that means for different types of player will vary, with both winners and losers.