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Here Comes Private Equity!

Appears in Print as: 'Here Comes Private Equity!'

The forecasted effects of electrification, autonomy and connectedness are being hastened upon automotive companies. 


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With the economy in tumult and the industry in disarray, the forecasted effects of electrification, autonomy and connectedness are being hastened upon automotive companies. Amidst the chaos that has been the COVID-19 shutdowns, companies are making moves toward resurfacing and getting back to work, but most face a steep challenge even just returning to the “status quo” they’ve been used to. Many mid-market companies lack the resources they need in order to make strategic shifts that will keep them competitive; as a result, we’ll see an increasing number of private equity acquisitions in the near future.

Before the onset of COVID-19, the automotive industry was already experiencing a strain. Companies that have enjoyed relative stability for the last several decades are at the beginning of an incredibly steep drop in demand for their product; this is in part due to tightening global restrictions on emissions and shifting consumer attitudes. However, the biggest impetus for these drops can be pinned on the rapidly advancing technologies used in new vehicles, such as electronic propulsion and autonomous systems.

The New Way of Building Cars

Battery electric vehicles, to put it simply, are built in a fundamentally different way than vehicles with traditional internal combustion engines. For example, the electric powertrain and infotainment modules inside a Chevy Bolt EV represent 56% of the OEM’s purchased vehicle’s content. Furthermore, this same electric powertrain has a paltry 24 moving parts in comparison with the standard 149 of an internal combustion engine. It’s estimated that by 2030, all new vehicles will be composed of up to 40% software.

To sum it up, new electric vehicles require far less from suppliers than traditional ones do. This is going to severely impact three areas of the industry; the first is forging companies. As the automotive industry starts to shift from the internal combustion engine (ICE) to electric powertrains, they can expect to see an 80-90% reduction in vehicle content. Metal castings companies, along the same vein, are set to see a 70% reduction in vehicle content. Finally, when the traditional internal combustion engine goes away, so does about 30% of the demand on plastic resin (unless new applications are developed to offset the decline).

The most vulnerable stampers, casters and injection molders in these three areas are mid-market companies. This lessening demand and the devastation wrought by COVID-19 make them extremely resource-constrained. Pandemic shut-downs forced most, if not all, of these mid-market companies to bleed cash and draw on credit revolvers; by the time they’re able to ramp up production once again, they’ll have limited resources to invest in diversification, transformation or consolidation.  Whatever cash they do have will be wrapped up in recovery, and even if they have some extra on the side, they are likely lacking the risk tolerance required to make the strategic shifts necessary going forward.

Options for Moving Forward

These companies face steep odds. Their options for moving forward are extremely limited; between exiting, diversifying, transforming or consolidating, the option with the least risk for these companies could be the one that takes them out of the industry altogether. As entities that are already running a deficit on cash and management capability, the other three options represent highly uncertain outcomes.

Private equities have the cash and the talent required to transform or consolidate like companies into strong players in the future automotive landscape.

This is where private equity firms come in. Private equities have the cash and the talent required to transform or consolidate like companies into strong players in the future automotive landscape. Companies currently in a position where they’re running low on cash and other resources need to seriously consider what a private equity firm could do for them, especially if they want to stay in the industry and win.

Private equity firms represent stability, opportunity, and, above all, a lifeline for any mid-market company that comes to terms with the fact that the industry is undergoing fundamental and irreversible shifts. The simple truth is that very few (if any) businesses in this market range are impervious to the industry changes, and no one who wants to stay in the game can do so by changing nothing. Any companies in a position where their options and resources are dwindling should consider whether an investment by private equity firms might be their best chance at regaining a competitive edge.