According to ‘net zero’ plans, all new vehicles sold in the UK will be electric by 2030. But how is the transition from internal combustion engines to electric vehicles, alongside changing consumer habits, affecting investment and M&A in the UK automotive industry? Tom Joy, Corporate Finance Senior Manager at PKF Smith Cooper, explains in our latest ‘5 minutes with Corporate Finance’ article.

Key market drivers

It is widely considered that the automotive industry is experiencing the biggest period of change in more than a century, with the emergence of the connected, autonomous, shared and electric (CASE) trends changing what consumers demand from a vehicle.

Alternative forms of vehicle ownership are also gaining popularity as consumers become comfortable with ‘Mobility as a Service’ (MaaS) models including subscriptions, innovative vehicle financing options, on-demand car sharing services, peer-to-peer services and car clubs.

The UK’s net zero commitment provides businesses with less than seven years to create an entirely new business model and find new ways to manufacture, service and finance. These changes will cause significant disruption to the automotive industry’s 780,000 strong workforce and industry-wide processes that have remained largely the same for the past 130 years.

Toyota and Hyundai are investing significantly in hydrogen technology which may provide an effective green solution for larger vehicles.

It is worth noting that Europe has already extended its net zero deadline to 2035 and it seems likely this might be delayed in the UK as well.

Onshoring and nearshoring of critical materials impacting M&A

Companies are increasingly looking to move their suppliers closer to home in order to make their supply chains more robust and shield them from the volatility of geopolitics and foreign price rises.

Tata and Jaguar Land Rover announced recent plans to develop a battery gigafactory in Somerset, which will support local supply chains. Trafigura-backed Green Lithium also has plans to build a £600m lithium refinery in Teesside and Altilium Metals is building a lithium recycling centre in the same region. Whilst having battery gigafactories in the UK and Europe will strengthen the supply chain, most materials are currently still sourced from outside of Europe.

The ‘Lithium gold rush’ observed in China and US has driven M&A activity as key providers, such as Ganfeng Lithium, Glencore and Lithium Americas, sought to ensure access to rare earth materials.

Resource-rich states, such as Bolivia, are now seeing increased investment and M&A opportunities as other businesses seek to secure access to lithium and other rare metals. It is likely that this will create more cross-sector M&A with companies buying product offtake from the miners of the minerals used to produce batteries. The key takeaway here is that equipment manufacturers are no longer leaving the job of securing critical materials in the hands of suppliers.

Factors driving M&A in the UK automotive industry

‘Acqui-hire’ acquisitions

The trend towards digital or software-powered vehicles is fuelling investment in new tech, which means increased demand for software engineers. This is likely to increase acquisitions that are based on the skilled workforce behind a company. A recent example includes VW’s software unit CARIAD acquiring the automotive division of Intenta GmbH to gain excess to 100 experts that specialise in sensor data fusion.

The CASE trend and software

Connected and autonomous vehicles are highly complex as outlined by Marius Mihailovici, Managing Director of Porsche Engineering Romania, commenting: “One number may make this clear: 100 million. This is how many lines of code feature in today’s car. By comparison, a Boeing 787 Dreamliner only has 14 million.” Companies exploring the use of this technology and connected data, as well as working towards HPCs (High-Performance Computing Platforms) in vehicles, are attractive targets for potential investors.

Skill and capability gaps

The main area of M&A is fuelled by the need to fill gaps in technologies, products and capabilities that are essential for future business models. The fundamental differences in the manufacturing and servicing processes of electric vehicles versus combustion engines have created the demand for new skillsets in the workforce.

Challenges for M&A in the UK automotive industry

Difficulty evaluating financial performance

As the industry transitions to greener solutions, the underlying financial performance of established players and emerging players becomes more challenging to assess. We have a scenario where there is a phasing out of legacy combustion engine businesses and practices over the next 15-20 years, alongside the ramping up of businesses focused on CASE.

Established companies will need to continue investing in existing product portfolios to sustain profits, which will presumably deteriorate unless protected against the future technologies. Those companies then need to consider divesting or investing to take advantage of the new technologies and services to sustain profitability. This potentially means a duplication of costs and double the investments for these companies, which can result in financial strain and instability, making it difficult to value such businesses.

The UK risks falling behind its global competitors

The trend towards digitising vehicles is positive for the UK from an investment perspective because our automotive industry is well-established with a skilled, academic workforce behind it.

However, while the US, EU and China all have industrial policies in place, the UK does not. Significant amounts of money are being invested in automotive manufacturing globally and the UK needs to establish a formal industrial policy if we want to compete.

Expansion of charging infrastructure and electricity grid

There has been considerable investment and deal activity in the charging network in recent years, but at present the UK is not yet equipped to support the future influx of electric vehicles. However, the pipeline for electric charging projects does look promising.

Companies such as EQT-backed InstaVolt are leading the way in developing, constructing and operating electric vehicle charging stations across the UK. InstaVolt energised its 1000th rapid charger in March 2023 and is on track to install 10,000 by 2032.

The UK also needs to make sure its electricity grid can accommodate the charging demand of electric vehicles, especially during periods of peak demand, and provide fast charging at affordable prices.

What does the industry’s transition period mean for your automotive business?

The industry’s current major manufacturers are in the best position to adapt for the future. They have the capital, combined with knowledge and experience of building and selling cars and establishing supply chains.

If you are a new entrant to the industry or planning your future entry

This lengthy transition period within the industry could be the opportunity to establish yourself quickly. As such, we are aware of significant interest from investors, as well as trade parties looking to secure a competitive advantage, who can provide both capital and expertise to accelerate your growth.

If you own a large, well-established company

As an established player in the automotive industry, you should consider making acquisitions that provide access to new technology and expand service capabilities in order to remain at the forefront of the industry. It is also important not to overlook opportunities to acquire targets that have the ability to improve your company’s efficiency and therefore profitability through consolidation.

If you own an SME

In the current market, it is often SMEs that are driving innovation and are the first to develop and adopt new technologies. The largest challenge is typically scale, with customers in this sector seeking to procure products and services from a small number of Tier 1 or Tier 2 providers.

There are opportunities to bring on third-party investment that can accelerate growth and allow you to scale. Partnering with like-minded larger players in the industry can also give you access to new customers and capabilities, providing more possibilities for growth.

Expert M&A advice from our award-winning corporate finance team

We are specialists in helping owner-managers achieve commercial success. Named ‘SME Advisory Team of the Year’ at the Insider Media Midlands Dealmaker Awards 2022, our corporate finance division can provide you with strategic advice and industry-specific knowledge to inform the next steps for your automotive business. Contact us today to speak to one of our team.