GlobalData’s analysis indicates that leading automotive companies lost a combined $564bn in their market capitalisations in the first quarter of 2020 – equivalent to a 30.6% average drop.
Deal activity in the automotive space – indeed in any sector – is virtually nil at the moment amid the Covid-19 crisis.
Indeed, GlobalData’s deal database shows that automotive transaction values in the first quart of 2020 fell by 82% year-on-year to $12.8bn, even though the deal volume increased 15% to 181 transactions during the same period.
But that was the first quarter. You would now be hard pressed to find any active buyers in a market where global light vehicle sales are forecast to fall by 19.1% to 72.7m in 2020, according to GlobalData’s latest forecast. In such climes, every actor in the auto value chain will be in extreme distress.
However, just as a rising tide does not float all boats, crashes in the valuation of auto companies should not reflect equally on all companies. Many companies, brands and assets in the auto sector still hold a high intrinsic value. After being the initial epicentre of the virus, China’s economy and auto sector has been the first to recover. Its market is still troubled – a 15.3% year-on-year decline in light vehicle sales is forecast – but its companies may feel emboldened to initiate an oversees spending spree.
This is a call to arms for Chinese auto companies to become technology leaders and establish a greater presence oversees
Already, China’s Geely owns Volvo Cars, Lotus and Proton and has a major stake in Daimler while on the supplier side of the business the likes of Nexteer (the former GM Saginaw) and the former Key Safety Systems (now Joyson) are Chinese owned. All of these were distressed companies acquired by Chinese investors, and there is now every reason to believe we will see another influx of Chinese investment.
The reasons are twofold: first, even though interest rates are near zero in most of the western world most Chinese companies have access to capital at an even lower cost due to state-sponsored benevolence.
Second, there’s the Made in China 2025 industrial policy. This is a call to arms for Chinese auto companies to become technology leaders and establish a greater presence overseas. And, while China’s made great technological strides, the world knows that if you can’t make you buy. And it’s a buyer’s market right now.
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Given the weakness of the Chinese light vehicle market in the past few years – it peaked in 2017 at 28.3m – and after the start to the year the Chinese industry endured the suggestion of Chinese automotive expansion overseas might be met with some surprise. Indeed, before this crisis we were at that inflection point in the Chinese market where the long-signalled consolidation of the industry would be getting underway.
Now all bets are off. There are plenty of external opportunities that will further forestall that day of reckoning.