Autonomous Driving Starts Deals in Silicon Valley

The bursting forth of self-driving technology has initiated the two largest consecutive years of automotive supplier takeovers to happen in a decade, and more seem to be coming as parts manufacturers lose ground in the race towards technological transformation.

Automotive supplier deals in 2015 and 2016 totaled $74.4 billion according to data compiled by Bloomberg. Each of those years blew the previous average, $17.7 billion, out of the water. Considering the number of transactions valued at $500 million or higher skyrocketed to 18 last year (the last decade saw only 6 a year on average) and has already hit 11 this year, a major change is clearly occurring in the global automotive industry.

baiduMany have attributed these soaring numbers to the pressure felt by all suppliers to keep up with the industry’s shift towards autonomous driving, a transition that began about five years ago. Suppliers are now existentially reliant on their ability to stay current with the race to make vehicles aware of their environment just like a human driver would be, if not better. That means sensors, cameras, radar, and computing power to comprehend all that information are now more important than ever.

At the same time, parts are becoming cheaper than ever due to economic uncertainty and Brexit concerns.

“Automotive bankers are definitely spending more time in places like Silicon Valley,” offered Citigroup Inc.’s head of investment banking for Germany, Austria and Switzerland, Christian Kames. Kames also holds the position of global co-head of automotive.

“The focus areas are electronics, communications and software. In the past, most suppliers didn’t really have that kind of technology, but they now know they need to have it to set the industry standards for the future.”

Infotainment deals are expected to weigh in for the next wave of maker adjustments, making parts makers need access to the crucial interface between the driver and vehicle. The sector has become increasingly attractive due to its relatively small amount of major players and because new combinations aren’t likely to raise any concerns for competition regulators. There are a lot of companies that could be bought entirely or partially, like Harman International Industries Inc., Visteon Corp., and Delphi Automotive Plc.

“I think we’ll probably see a few more interesting deals over the next year or so,” offered Chris McNally, London-based analyst at Evercore IS.

bmwA whole mix of deals recently went through between tech and auto companies; ZF just took a 40 percent stake in radar supplier Ibeo Automotive Systems GmbH. Samsung Electronics Co. has also apparently been in the final stations of $3 billion negotiations with auto parts maker Magneti Marelli, a major player in the production line for Fiat Chrysler Automobiles.

“If you don’t buy now, and boost your capabilities for autonomous driving and for connected cars, there’s no second chance,” warned director of the automotive practice at PWC Dietmar Ostermann. “Because the others will.”

Axel Hoefer, managing director at Goldman Sachs Group Inc. in Frankfurt, said that shifts towards EVs will also likely drive new deals.

“Put yourself in the shoes of a traditional supplier,” said Hoefer. “A gradual shift is fine. But if it’s a steep change, that will put lots of people under pressure.”

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