Automotive Capital Confidence Barometer

The great rebalancing

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The Global Capital Confidence Barometer gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their Capital Agendas — EY’s framework for strategically managing capital.

The great rebalancing

Learning to thrive in a low-growth and volatile environment, companies are taking a pragmatic view, balancing risk and returns.

Key findings

71% expect to allocate the majority of acquisition capital to emerging markets.

54% view political instability or quantitative easing as the greatest business risks.

57% view capital optimization as a key focus for the next 12 months.

45% consider cost reduction their primary operating focus.

58% see the global economy improving.

Economic outlook — resilient confidence in automotive

Automotive executives maintain confidence in a real and sustained economic recovery; global megatrends may have a more transformative impact on their growth strategies.

Despite continued economic and geopolitical shocks — such as slowing emerging market growth, the tapering of quantitative easing in the United States, and unrest in the Middle East and Eastern Europe — economic confidence among our respondents remains strong. Positive sentiment with regard to corporate earnings, stock market stability and equity valuations is driving this confidence.

The relative consistency in our executives’ overall confidence numbers — down slightly from six months ago, but still up solidly from 12 months ago — points to a positive outlook.

Sustained confidence

58% of respondents view the economy as improving, compared with 52% a year ago.

58% of executives expect “future of work” issues to affect their business strategy.

    Evidence of real recovery

    38% of executives expect to create jobs and hire talent.

    33% of executives perceive global political instability to be the greatest economic risk to their business.

    61% of executives have confidence in corporate earnings — the highest level in five years.

    Access to capital — confidence in credit availability remains strong

    Over several Barometers, automotive companies have indicated that credit is broadly available — but now executives are expressing a greater interest in putting debt to work.

    Executives’ willingness to add leverage to their balance sheets strongly suggests we will see a rise in deal activity over the medium to long term. With debt financing increasingly available — often at very low cost and with very favorable terms — more and more companies are looking to use debt to finance deals.

    Confidence to use leverage

    88% of executives consider credit either stable or improving.

    22% of companies’ debt-to-capital ratios are expected to increase over the next 12 months.

    42% of companies expect to use debt as their primary source for deal financing.

    Cost control and growth contend for top priority on the automotive boardroom agenda

    Cost management is now a permanent feature amid a low-growth future.
    For several years now, companies have been rewarded for cost-cutting and an aversion to risk. Cost reduction is no longer just an operational issue, but also a strategic imperative, and often a key area of focus for activist shareholders.

    Growth takes new directions; innovation and R&D are key drivers.
    In parallel with managing costs, automotive companies are turning their attention to technology exploitation and R&D investments to boost organic growth.

    Parallel priorities

    45% of executives view cost reduction as their primary objective, while 38% are focused on growth.

    82% of companies’ organic growth strategies are higher-risk.

    M&A — measured moves, bigger deals

    Increasing deal value could be the M&A story of the next 12 months.

    Deal volumes are expected to increase only marginally, and large, transformational deals will make headlines rather than any significant increase in global deal activity. Although companies do expect global deal volumes, as well as their own deal pipelines, to improve, near-term deal volume expectations are flat. From a value perspective, the deals they do pursue will continue to be larger and more strategic.

    Deal metrics improving

    19% of executives expect to pursue deals greater than US$500m in size.

    29% of companies expect to pursue acquisitions this year.

    37% of executives planning to pursue acquisitions are focused on cost reduction.

    Strategic deals to complement growth

    48% of executives believe the valuation gap is less than 10%.

    27% of executives expect their deal pipelines to increase in the next 12 months.

    44% of companies expect the majority of their acquisition capital to be deployed in BRIC emerging markets.

    European economies attract capital, along with certain BRIC economies

    The most notable entrant into our top five capital destinations since the last Barometer is Germany. This signals a rebalancing of emerging and mature market investment priorities and a return to confidence in Europe after austerity measures.

    However, among our top investment destinations, companies plan to allocate their most significant capital (more than 10%) to China, India and Brazil. The benefits of these BRIC economies — especially their growing middle-income populations — continue to outweigh their considerable challenges, including political and currency risk and slowing growth. Holding steady within the top five is the United States, a perpetual destination for global capital.

    Top five global destinations:

    • China
    • US
    • India
    • Brazil
    • Germany