Strategic partnerships and M&A

Expect to see more strategic partnerships in the auto industry in 2020. More OEM mega-mergers are possible, but after FCA and PSA (if it happens) the field may be fairly settled in Europe and North America. In Asia, though, the corporate landscape is much more fluid, with China's still highly fragmented industry likely to see more consolidation - with large enterprises also looking to acquire Western and partner with companies as a shortcut to obtain technological resources (especially in connected, electric and autonomous drive fields) quickly.

There’s a big sense of rapid technological change hitting the automotive industry and creating dynamic forces that can upset industrial structures and open up M&A activity. Electrification and autonomous (driverless, ADAS) technologies are obvious examples, but there is also a constant hum of change being driven by rising connectivity (personal and vehicles) as well as digitisation which is affecting all areas of the automotive value chain, from manufacturing, procurement, logistics to design, engineering, marketing and distribution.

The regulatory landscape is also an important factor. Manufacturers face higher costs to develop more efficient combustion engines that can meet tougher targets on toxic emissions and on CO2 greenhouse gas contributions. This is perhaps most evident in Europe with the tougher CO2 targets set for 2021, but the direction of travel is for tougher fuel economy standards elsewhere in the world. Around the world, there are growing restrictions on the use of fossil fuel burning vehicles in city centres. Engineers have performed wonders to get the combustion engine to the levels of efficiency - and cleaned up emissions - that we have today. Eking out further gains comes with significantly higher costs and the major carmakers have concluded that they can only meet future regulatory targets by addressing powertrain mix. That means more electric vehicles and hybrids to complement the conventional combustion engines offerings.

Electric drive and autonomous drive technologies are also expensive, so there's a big P&L driver in taking cost out where possible. 

Developing defensive strategies brings us to OEMs working together. Some analysts note that selective alliances are likely to be a medium-term alternative to full-scale mergers and mega acquisitions to support automotive manufacturers' credit profiles and liquidity. Investment sharing is a big motivation in costly R&D areas such as electrification, autonomous drive, new AI applications and extending digital processes throughout the manufacturing value chain.

Central to the renewed cost-savings argument is the need to develop new, more fuel-efficient powertrains, notably electric engines, requiring heavy investment but as yet unprofitable.

M&A should also enable repositioning on other developing mobility trends such as ride sharing and car hailing. OEMs are investing in new mobility companies - eg ride-hail companies (GM and Lyft, Toyota and Uber) and also seeding start-ups via dedicated venture capital arms (BMW particularly active in this regard). Chinese transportation and online mobility specialist Didi Chuxing has formed a 'strategic partnership' with Volkswagen in China. Indeed, Didi has formed 'strategic partnerships' with a number of companies, including Toyota. Fear of being left behind or missing out in major future mobility trends is a big driver for the vehicle makers.

Consolidation of the global auto industry is a theoretically logical answer to the challenges car manufacturers are facing. However, constraints remain, which will make the next round of large M&A very uncertain and likely to be replaced by various smaller and more focused agreements, some analysts say. Execution is key and big corporate combinations can be problematic to effectively manage demonstrated, for example, by DaimlerChrysler’s eventual demise which was characterised by internal disagreements over corporate strategy. Size typically enables synergies and cost savings, but only up to a certain point, after which it can become counterproductive and constrain lean management and agility.

In partnerships each manufacturer can turn to a different partner according to its needs and projects to pool resources and share costs.  

The long-term underlying pressures that are at work on automotive OEMs’ financial performance look set to intensify.  This  creates  pressure  to  restructure - either  in  terms  of  internal  cost  reduction  strategies  and reorganisations and/or via external developments, including M&A activity. With Silicon Valley giants Apple and Google (as well as ride-share companies Uber and Lyft - both now subject to public listing scrutiny) capturing software and technology space in the automotive industry, automakers have the choice of either transforming themselves into software developers or acquiring high technology providers to compete against the disrupters.

Consumer electronics companies are making their way into automotive supply chains with the acquisition of auto tech companies. A case in point is Samsung's strategic USD8bn acquisition of Harman  to  build  assets  in  electronics  to fulfil the  major  requirements  of  autonomous  vehicles.  Auto  OEMs, acknowledging the increasing interest of tech companies in the automotive industry, are exploring acquisition opportunities to bring innovation in-house and save production costs. 

The growing adoption of electrified vehicles, the rising importance of mapping software, artificial intelligence (AI) technologies, and the advent of autonomous and connected vehicles are examples of the continued coming together of the automotive and technology sectors -alongside an increasingly dynamic and high value space in critical software development. Automotive OEMs and suppliers are having to go outside of the ‘traditional’ automotive value chain to get the right skills and sunrise product attribute suppliers. As the growth opportunities and profit potential from CASE technologies is becoming clear, there will be more M&As, partnerships, and investments from industry participants to advance their market position in the new mobility landscape. Cost reduction strategies, however, have to be balanced with the need for more investment in highly expensive technologies (electrification and autonomous) which is a big driver for collaborations.

1. BMW and Daimler 

These two big German premium rivals have a record of quietly cooperating when they see common ground - in areas like industry standards. However, there are some signs that they are prepared to deepen their cooperation. BMW Group and Daimler have created an urban mobility services joint ventures. The two companies say they are investing more than EUR1bn in total to 'develop and more closely intermesh their offerings for car-sharing, ride-hailing, parking, charging and multimodal transport'. The cooperation comprises five joint ventures: REACH NOW for multimodal services, CHARGE NOW for charging, FREE NOW for taxi ride-hailing, PARK NOW for parking and SHARE NOW for car-sharing. 

In addition to the JV for mobility services, the two are planning to join forces on automated driving. Initially, the companies say the focus will be on advancing the development of next-generation technologies for driver assistance systems, automated driving on highways and parking features (up to SAE Level 4). The two companies have signed a Memorandum of Understanding to jointly develop this technology, which is key for future mobility.

2. Ford and Volkswagen 

Ford and Volkswagen Group have announced an expansion of their alliance to include electric vehicles – and will collaborate with Argo AI to introduce autonomous vehicle technology in the US and Europe. The two companies said the expanded collaboration allows both companies to better serve customers while improving competitiveness and cost and capital efficiencies. Two automotive giants like Ford and VW coming together is going to be interesting to watch - in terms of how far they are prepared to go to share technologies. Initial signs suggest the collaboration is ambitious. 

Ford will use Volkswagen's electric vehicle architecture and Modular Electric Toolkit (MEB) to design and build at least one high-volume fully electric vehicle in Europe for European customers starting in 2023, more efficiently advancing its promise to deliver expressive passenger cars while taking advantage of Volkswagen's scale 

Volkswagen is to join Ford in investing in Argo AI, the autonomous vehicle platform company, at a valuation of more than USD7bn. Tie-up allows both automakers to independently integrate Argo AI's self-driving system into their own vehicles, delivering significant global scale, they said. 

3. Toyota and Suzuki 

Automotive giant Toyota has alliances with Subaru, Mazda, and Suzuki. However, it maintains that the purpose of these alliances is not to expand volume through investment and that in every case, a paramount principle is to ‘respect each other's strengths in technological development, production engineering, and sales networks’. The objective of these alliances, it says, is to become more competitive to help build better cars.

Toyota and Suzuki have announced an agreement to "begin considering concrete collaboration in new fields". They earlier concluded a memorandum of understanding towards a business partnership in February, 2017.

"Toyota and Suzuki, in addition to bringing together Toyota's strength in electrification technologies and Suzuki's strength in technologies for compact vehicles, intend to grow in new fields, such as joint collaboration in production and in the widespread popularisation of electrified vehicles," the pair said. Toyota is seen as strong in the provision of electrified technology and electrified vehicles and will supply its hybrid system to Suzuki, procure HEV systems, engines, and batteries in India and supply on an OEM basis, Suzuki Europe with vehicles built on Toyota RAV4 and Corolla wagon platforms.

Mazda, Denso and Toyota have also set up a company called EV C.A. Spirit. Combining the strengths of each of its founding members, this company is taking on the challenge of identifying new development methods.

4. Toyota and Subaru 

Toyota and Subaru have agreed to jointly develop a platform dedicated to battery electric vehicles (BEVs) for midsize and large passenger vehicles and to jointly develop a C-segment-class BEV SUV model for sale under each company's own brand. 

"By combining their respective strengths, such as the all-wheel-drive technologies that Subaru has cultivated over many years and the vehicle electrification technologies that Toyota is employing to bring together other companies that share its aspirations, the two companies intend to take up the challenge of creating attractive products with appeal that only BEVs can offer," Toyota and Subaru said in a joint statement.

Since concluding an agreement on business collaboration in 2005, Toyota and Subaru have deepened cooperation in various fields, including development, production, and sales.

Examples include efforts that led to the start of sales of the jointly developed rear-wheel-drive Toyota 86 and Subaru BRZ in 2012 and the start of sales of Subaru's Crosstrek Hybrid original plug-in hybrid electric vehicle (HEV) in the United States, to which was applied knowledge related to Toyota's HEV technologies. Subaru's US plant in Indiana also contract-built the top selling Camry sedan for some years.

The two companies will jointly develop a BEV-dedicated platform. The platform will be developed in a way that they say will make it broadly applicable to multiple vehicle types, including C-segment-class and D-segment-class sedans and SUVs, as well as to efficient development of derivative vehicle models.

While Toyota has led in technologies for hybrid and fuel cell vehicles, it has trailed behind rivals such as Nissan Motor, Volkswagen and Tesla in bringing fully electric vehicles to showrooms. 

As the smallest of Japan's major automakers, Subaru is struggling to independently invest in and develop lower-emission vehicles and on-demand transportation services widely seen as necessary to survive technological upheaval in the global auto industry.

It is also struggling with a spate of recent production- and quality-related issues, the side effects of rapid growth to keep up with booming for its Legacy sedans and Forester SUV crossovers in the United States, its biggest market. 

While giving instructions in our cars is nothing new, putting questions to the likes of Alexa and Cortana while on the road is. Automakers are fast adopting virtual assistants, confirming that speech is becoming the preferred interface for tomorrow’s cockpit.

Voice recognition is seen by some as the answer to eliminate many controls that have traditionally been manually operated. Voice can play an important part of a multimodal HMI solution for inputting information or for cutting through layers on the menus by requesting a function directly. Traditional voice control was centred on a set of fixed commands with catatonic responses which required some level of driver training prior to operation of the system. With the advent of the new low power, high performance microprocessors, smarter voice command engines linked into the HMI logic are now available. Even natural language and grammatical analysis are becoming more achievable.

Voice recognition, although already an option, looks set to play a bigger role as cars gradually become more autonomous.

Looking down at a touchscreen (without haptic feedback) can be distracting. Gesture recognition is therefore said to be the Next Big Thing, regarded as the logical next step from touchscreens and buttons. Gesture control operates via a stereo camera within the cabin that can recognise certain hand movements for pre-programmed adjustments and functions. Rotating your finger clockwise at a screen could turn up the volume or a finger gesture could answer or decline a call. While such novelties will make life simpler for the driver, it should also simplify interior design and liberate space for storage options.

Advances have also been made in the interior lighting department. Not so long ago, interior lighting consisted of central and side headliner lights, complemented by low-level ambient lighting located mainly in the cockpit area. Today, the accent has changed, thanks to widespread use of LEDs enabling personalisation of car interiors. For example, during night time driving, the Mercedes-Benz E-Class takes on an entirely different feel thanks to the ambient interior LED lighting that can be personalised using a palette of no fewer than 64 colours. It really does start to feel like a cockpit, adding illuminating highlights to the trim, the central display, the front stowage compartment on the centre console, handle recesses, door pockets, front and rear footwells, overhead control panel and mirror triangle.

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