How to win an uncertain market:
Corporate strategy and the connected car
How to win an uncertain market:
Corporate strategy and the connected car
Technology has disrupted the automotive industry value chain. Where OEMs once held all
the aces, they now face a battle to preserve their market position as global suppliers grow
in strength. The choices they make will determine whether they retain their dominance –
or are relegated to mere assemblers of other people’s products.
The evolution of the connected car has been described as a ‘paradigm shift’ for the industry by
Morgan Stanley. The change has undermined the traditional OEM business model – as consumers
increasingly make their buying decisions on services rather than performance, the greatest
value-add in a new vehicle is no longer in their control. The technology that enables advanced
driver assistance technology – the forerunner to self-driving systems – is manufactured by the
biggest global parts manufacturers such as Autoliv, Bosch and TRW (radar) and new players
including Google, TomTom (navigation and mapping), Infineon, Nvidia and Intel (semiconductors).
Exane BNP Paribas suggests the market for assisted driving and automated technology will
increase tenfold to $57bn by 2025. Against this backdrop an unprecedented period of corporate
activity has begun, as OEMs and their suppliers fight to maintain their margins and new,
powerful tech players enter the market. While the recent emissions controversy has hit the
balance sheets of auto-makers across the world, the trend towards tech acquisitions is set
to continue.
Change drives M&A activity
Today one quarter of all
new cars already have an
internet connection, and
two years from now the
figure will be 80 per cent.
The German automotive
industry alone … will invest
€16bn to €18bn over the
next three to four years
in the research and
development of connected
and automated driving…
Automobiles and the
digital world are combining
to enhance mobility,
bringing huge advantages
for people, business and
the environment.
Matthias Wissmann, President,
German Automotive Industry
Association, 2015
The advent of connected and self-driving cars has seen OEMs scrambling to build their tech
capabilities. The number of high-tech companies acquired by automotive businesses is up
26 per cent over the past three years compared to the period between 2009 and 2012.
26%
73
deals
20.7
92
deals
11.6
12.6
11.8
2012
2013
6.1
2.9
2009–2011 2012–2014
The number of high-tech companies
acquired by automotive businesses is
up 26% over the past three years
2008
2009
0.5
2010
2011
2014
Value of high technology auto
deals is at an eight-year peak
Much of this activity has been within the supply chain. In September 2014 ZF Friedrichshafen
announced its acquisition of US rival TRW Automotive for $11.7bn, creating the world’s second
largest auto parts supplier. TRW’s portfolio includes video cameras and radar technology, with ZF’s
CEO Stefan saying that autonomous driving and ADAS were vital to the company’s future success.
Elsewhere Sweden’s Autoliv, which specialises in seatbelts and airbags, has acquired a car radar
manufacturer and an exclusive licence to use software that controls forward-looking cameras.
Panasonic, which already makes automotive sensors, has bought a 49 per cent stake in Ficosa
– a Spanish company that manufactures image recognition technology – and joined forces with
Tesla to develop advanced batteries. And Continental completed an eye-catching $680m deal for
Elektrobit’s automotive software division, building its capacity in automated driving platforms.
78+
million vehicles
are sold by the top 16
car brands every year
made with components
ten
from only
global suppliers
OEMs seek control of the software space
The biggest auto companies
are used to being in the
driving seat on M&A deals,
but they are often quite
risk-averse and not
particularly flexible. Tech
businesses by contrast often
move much more quickly
but are not fully in line with
corporate conventions. This
can make executing deals
extremely challenging.
Michael Haidinger, Partner,
Corporate
While many suppliers have focused on the hardware that enables automated driving, OEMs –
like Continental – have largely chosen to target software and services assets. Volkswagen has
acquired BlackBerry’s European R&D centre and its 200 staff, who have experience of the QNX
platform which powers the infotainment systems in brands from Audi to GM. Ford has bought
Livio, a software start-up behind a platform for in-car apps, while a consortium of BMW, Audi
and Mercedes fended off a host of rival bidders to acquire Nokia’s mapping business HERE for
$3.1bn in August 2015. The deal was something of a coup considering Nokia built the business
on its $8.1bn acquisition of US-based Navteq in 2007. A number of OEMs have also formed joint
ventures with tech and telecoms businesses to bring new services to the dashboard. These
include Google (Android Auto), Apple (CarPlay) and a variety of smartphone manufacturers
(Mirrorlink). These tie-ups are now moving into wearable technology, with BMW recently
revealing a collaboration with Samsung that brings its car apps to the Galaxy Gear smartwatch.
85%
The world’s biggest suppliers are capable of making
85 per cent of the parts that comprise the average car
Joint ventures with tech companies have enabled OEMs to provide the features their customers
want – but the two industries are also direct competitors. Sony chief executive Kazuo Hirai
recently revealed that his business could eventually become more than a hardware supplier by
collaborating with a traditional OEM to develop a Sony connected vehicle. Google, by contrast,
appears to be moving in the opposite direction, with Chris Urmson, director of its self-driving car
programme, saying in 2014 that the company ‘didn’t particularly want to become a car-maker’.
Analysts have long thought Google’s real aim is to develop a software platform for autonomous
vehicles and license it to OEMs. Mr Urmson said that Google was talking to manufacturers
including General Motors, Ford, Toyota, Daimler and Volkswagen about joining forces to build a
self-driving car, but the Wall Street Journal has reported unease among OEMs about who would
benefit from the vehicle’s data. Ultimately this may be where Sony, Google – and indeed the
car-makers – see the real value. As Morgan Stanley says: ‘Whoever controls the car’s brain will
control… the value of the car’.
The world’s top
ten
parts suppliers
achieve margins
4%
points higher than
the world’s 10 biggest
car manufacturers
Source: according to Strategy&
When tech and auto collide
As the auto and tech sectors converge, some of the biggest challenges to overcome can
be cultural. ‘The classic auto suppliers like Continental have been working with OEMs for
decades, but that’s a completely different to working with Google,’ says Rolf Trittmann, head
of Freshfields’ automotive group. ‘These businesses come from different planets – they just
don’t understand how the other works.’
Auto and tech businesses approach transactions in different ways, affecting everything from deal
timelines to the levels of protection each side expects. These nuances are amplified when those
businesses come from different jurisdictions, with US companies often taking a more aggressive
position in negotiations than those from Europe.
As Michael Haidinger – a Freshfields corporate partner who has advised both automotive and
technology businesses – says: ‘The biggest auto companies are used to being in the driving seat
on M&A deals, but they are often quite risk-averse and not particularly flexible. Tech businesses
by contrast often move much more quickly but are not fully in line with corporate conventions.
This can make executing deals extremely challenging.’
The joint venture challenge
Developing new technology
is hugely expensive, and
it’s often not possible for
smaller suppliers to cover
this cost. We’re seeing a rise
in disputes between auto
businesses and their JV
partners as costs escalate
and projects are dissolved.
Rolf Trittmann, Partner
Joint ventures allow development risks to be shared but have to be carefully structured to ensure
the business to whom the technology is of strategic importance – either the OEM or auto supplier
– has sufficient control and access to any know-how and intellectual property generated. Straight
acquisitions give auto companies power over the development programme but are a bigger risk.
Not only they must pick the right technology, but they must also keep hold of the target’s
principal asset – its people.
Many tech businesses may prefer a JV to being acquired by a large corporate, although both sides
must be aware of the challenges these present. Rolf Trittmann says: ‘Developing new technology
is hugely expensive, and it’s often not possible for smaller suppliers to cover this cost. We’re
seeing a rise in disputes between auto businesses and their JV partners as costs escalate and
projects are dissolved. Smaller companies often don’t have the means to pre-finance significant
R&D projects, but aren’t in a position to turn down JVs with the biggest players. If costs run out
of control they may end up being acquired by their partners anyway in order to keep the
development project on track.’
Is the venture capital model right for OEMs?
Some businesses have adopted a venture capital approach to build their tech capabilities,
investing seed capital across a variety of innovative firms that have the potential to deliver the
next disruptive technology. The model has enabled companies such as German media giant Axel
Springer to transition from a traditional print business to a multimedia publisher by giving its
acquisitions enough freedom to keep key people engaged and encourage creativity. OEMs and
suppliers may benefit from a similar strategy, although it may only be appropriate in defined
circumstances.
‘Investing in lots of businesses with the expectation that a handful will flourish is more
opportunistic than strategic,’ says Michael Haidinger. ‘An OEM’s future depends on developing
the right intelligent technology. There may only be a few companies in the world that can give
them what they need, and if they manage to acquire them they can’t just let the company go
and see how it develops. They need to be in control. In start-ups and smaller tech businesses the
founder may own the idea, so it’s important to ensure the IP is transferred. OEMs also need to
devise incentive programmes that foster the entrepreneurial spirit they’re paying for. These are
hard to implement in a corporate environment – it’s rare for big auto businesses to give option
schemes to their employees, for example.’
The auto companies that master the software space will be able to shape their destiny. But
acquiring this capability requires a nimble, creative strategy. Bespoke contracts, innovative
compensation packages and robust IP transfer agreements are essential to gain an edge. As
the industry evolves, the businesses that rise to the top of the food chain will be those whose
thinking can do the same.