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Automakers set for 2020 dealmaking as global sales sputter

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Via Financial Times

Bar chart of  showing The largest auto industry deals in history

The merger agreement between Fiat Chrysler and Peugeot owner PSA may be a preview of what’s to come in 2020.

Analysts have expected a new era of auto industry consolidation to emerge, as automakers contend with rising costs associated with the development of electric and self-driving cars. The industry has approached large mergers with trepidation in the wake of mixed results from prior deals, such as the 1998 Daimler-Chrysler merger and ultimate divorce.

But faced with softer demand worldwide, dealmaking among automakers and their suppliers has gathered pace.

The FCA-PSA merger would mark the largest M&A transaction in the auto industry since Schaeffler’s acquisition of a controlling stake in tire maker Continental, including debt, according to Dealogic. It also ranks as the second-largest combination of automakers since the $38.6bn creation of DaimlerChrysler.

Garrett Nelson, an analyst at CFRA, expects more consolidation among major car manufacturers next year “as global auto sales continue to decline, tariffs pressure margins and costs related to EV/AV development weigh on earnings.”

“Already automakers have expanded partnerships (eg, Ford and Volkswagen) to help share the massive cost of such programs and we predict that weak market conditions will lead to some additional deals in 2020,” Mr Nelson added.

Moody’s has also forecast further joint ventures among parts suppliers due to higher development costs. The group also noted the FCA-PSA deal, and the planned merger of parts subsidiaries at Hitachi and Honda, would create more competitive entities and possibly add pressure on suppliers’ margins.

Overall, car deals hit a speed bump this year before the FCA-PSA tie-up. The value of deals in the global automotive industry fell 49 per cent year-over-year to $31.7bn during the first three quarters, according to PwC, which noted that investors had taken a more cautious approach amid technological changes in the sector.

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PwC expects new alliances to help fuel the next round of M&A, as companies look to share the burden of development costs and adjust to a slower sales environment.

“Whether to combat or set emission targets, provide manufacturing and supply-chain agility to combat global and regional political trade disputes, or protect against rising labour costs, M&A can serve as a line of defence in these challenging times,” PwC said.

FCA and PSA have made the most notable move toward consolidation since Sergio Marchionne, the former FCA chief executive who died last year, penned his “Confessions of a Capital Junkie” presentation in 2015. There was also General Motors’ sale of Opel and Vauxhall to PSA, and Johnson Controls’ sale of its automotive battery business.

The FCA-PSA merger would create the fourth-largest automaker by sales and one with a market value of $50bn. Their combined global sales in 2018 of 8.7m vehicles were ahead of GM, Hyundai-Kia and Ford.

Column chart of  showing US auto sales on pace for modest decline in 2019

Mr Nelson said US auto sales are likely to decline in 2020, though they remain strong historically. Sales defied analysts’ forecasts by climbing slightly to 17.2m units last year. Volume was down 0.8 per cent over the first 11 months of this year.

Among other predictions for 2020, Mr Nelson said at least one major automaker will cut spending on autonomous vehicle programs. He also expects that used car dealer CarMax will be one of the industry’s best-performing stocks, while parts and equipment equities will be the worst-performing sub-industry in the auto sector.

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