Auto industry rebalancing act has executives focused on operating cost reductions and M&A activity that will make significant headlines
Detroit, 11 July 2014
EY predicts high-value deals coming in the next 12 months
Despite continued economic and geopolitical shocks, leading automotive companies are maintaining confidence in a real and sustained economic recovery, according to EY’s ninth Automotive Capital Confidence Barometer, which surveyed 143 automotive C-suite executives. The report also shows that 45% of executives consider cost reduction their primary operating focus and, as credit becomes more available, will be engaging in large M&A deals.
The biannual survey shows that positive sentiment with regard to corporate earnings, stock market stability and equity valuations is driving confidence. The relative consistency in executives’ overall confidence numbers — down slightly from six months ago, but still up solidly from 12 months ago — point to a positive outlook.
“Our latest Barometer for the automotive industry shows the sector has embarked on a great rebalancing act,” says Mark Short, Global Automotive Transaction Advisory Services Leader for EY. “We’re seeing a renewed focus on optimizing capital while taking advantage of favorable credit terms.”
Additional key findings from EY’s ninth Automotive Capital Confidence Barometer include:
- 71% expect to allocate the majority of acquisition capital to emerging markets.
- 89% believe the global economy as either stable or improving.
- 57% view capital optimizations as a key focus for the next 12 months.
- 54% point toward political instability or quantitative easing as the greatest business risk.
Automotive respondents continue to focus on developing new products through advancements in technology, increasing R&D spends and investing in new geographies. Savings from cost reduction programs are fueling these investments, leaving capital available to make incremental transactional investments as opportunities arise.
Job creation expectations have decreased across the majority of sectors, and in the automotive industry, plans to add to the workforce have dropped significantly, from 59% expecting to create jobs in October 2013 to 38% in April 2014.
“Automotive companies’ reluctance to invest in jobs may reflect longer-term structural changes in the workforce,” adds Short. “The digital transformation is making many jobs obsolete, while at the same time creating new ones.”
Mergers and acquisitions
Increasing deal value could be the M&A story of the next 12 months. Automotive companies’ intentions to engage in larger deals (greater than US$500m) over the next year have increased from a total of 14% last April to 19% in this Barometer.
Of the 143 automotive executives surveyed, 58% view the global economy as improving and 61% have confidence in corporate earnings, the highest level in five years. These trends — along with 88% of respondents seeing credit availability as either stable or improving — should help drive automotive mergers and acquisitions.
Given that the number of automotive companies planning acquisitions greater than US$1b has tripled in six months, EY predicts an increase in headline-generating, high-value strategic deals in the coming year. This shift toward larger deals has resulted in a more even distribution of expected deal sizes.
“We see capital raising, principally in the form of new debt financing, becoming a focus as executives take advantage of the availability of credit at favorable terms,” explains Short. “We believe these trends are preparing the automotive sector for significant transaction activity in the near future.”
About this survey
The global Capital Confidence Barometer gauges corporate confidence in the economic outlook and identifies boardroom trends and practices companies employ to manage their capital agendas. This survey is conducted by the Economist Intelligence Unit (EIU) comprising select global EY clients and contacts and regular EIU contributors.
In March, the EIU surveyed a panel of more than 1,600 executives in 54 countries. Half were CEOs, CFOs and other C-level executives, and automotive companies accounted for 143 of the respondents.
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