Automotive Industry Update – Q3 2020

Automotive Industry Update – Q3 2020

Automotive OEMs and suppliers continue to operate in one of the sectors most heavily impacted by the negative effects of the COVID-19 pandemic and resulting recession. With production halted and consumers locked down by stay-at-home orders, the seasonally adjusted annual rate (SAAR) of light vehicle sales in the U.S. bottomed out in April at a 50-year low of 8.7 million units. Since that time, sales have rebounded at a faster rate than most expected, with the August 2020 SAAR rising to just over 15 million units. Sales are expected to level off for the remainder of 2020 before rising again in 2021 to a level anticipated to be somewhere in the mid-15 million range. This compares to unit sales in both 2018 and 2019 of approximately 17 million units, and pre-pandemic expectations of roughly the same level for 2020.

The crystal ball for automakers’ future results has perhaps never been more opaque. Those on the more optimistic side point to the momentum of sales growth in recent months driven by both pent-up demand and a desire for private vehicle ownership given the health-related concerns of ride sharing alternatives. For those with less rosy expectations, concerns center on continued economic headwinds associated with permanent job losses and wage reductions, as well as historically low inventory levels for new vehicles.

Within the industry itself,  trade organization OESA (Original Equipment Suppliers Association) monitors suppliers’ sentiment with its Supplier Barometer Index (SBI), a quarterly survey in which supplier executives indicate their optimism or pessimism for the year ahead. On a 100 point scale, where a score of 50 indicates a neutral sentiment, the index for the second quarter of 2020 dropped 32 points to a score of 15, its lowest level in the history of the survey. For the third quarter, as suppliers resumed production and automotive sales began to rebound, the SBI rose sharply to a somewhat optimistic overall score of 53; however, there were a meaningful number of respondents (30% of the total) whose outlook became even more pessimistic in the quarter.

M&A activity in the automotive sector has slowed in recent months and will continue to be challenging given both economic and industry-specific headwinds. In some cases, the need to address supply chain disruptions and/or enhance competitive positioning within the ACES (Autonomous, Connected, Electrified, Shared) environment will continue to drive M&A activity in spite of challenges standing in the way of getting deals across the finish line. A case in point is Borg Warner’s recent acquisition of Delphi Technologies for roughly $3.2 billion.  A meaningful transaction for bolstering Borg Warner’s capabilities in the arena of electrified propulsion systems, the deal was originally announced in January 2020, placed on hold during the early months of the pandemic shutdowns, and finally completed just last week. With financing sources currently reluctant to fund capital intensive automotive suppliers, we expect to see an increasing volume of divestitures of non-core assets and divisions to generate the funding needed to support ACES investments as well as other capital expenditures. Finally, the current pull-back in automotive sales and related production is certain to produce a meaningful volume of distressed M&A transactions over the next 12 to 18 months. Companies with sufficient financial wherewithal will take advantage of this environment and actively pursue acquisitions of debt-burdened suppliers that further the buyer’s strategic initiatives.

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