Emissions rules and electric shift to spur car engines M&A

VW beetles are assembled in West Germany, 1954. The car industry has all but stopped developing combustion engines as new technology is developed. (AP)
Updated 10 July 2019

Emissions rules and electric shift to spur car engines M&A

  • Volkswagen, one of the largest manufacturers of petrol and diesel engines

FRANKFURT: A growing understanding in the car industry of the value of combustion engine technology able to meet new anti-pollution requirements is likely to fuel a wave of consolidation in the next two years, industry executives and bankers say.
Mergers and acquisitions have been stuck in a rut since Volkswagen was caught cheating pollution tests in 2015, triggering a global tightening of emissions regulations that depressed the value of petrol and diesel technologies.
But the market is beginning to separate companies capable of meeting new emissions standards from those struggling to do so, which could close the gap in price expectations between buyers and sellers over the next 12-24 months, industry experts say.
The auto industry has all but stopped developing next-generation combustion engines as limited resources are directed towards building electric and self-driving cars.
However, electric vehicles are still a niche product, accounting for only 1.26 million - or 1.5 percent - of the 86 million cars sold worldwide last year, and analysts forecast it will be the middle of the next decade before a tipping point comes when electric cars overtake combustion-engined variants.
That means there will still be demand for emissions-compliant combustion engines and so manufacturers and suppliers able to offer that are likely to see valuations recover, said Reinhard Kuehn, co-head of European Automotive at Deutsche Bank.
"At the same time, suppliers that struggle with this will remain a hard sell," Kuehn said.
Meanwhile, as production capacity of petrol and diesel engines is cut back, the impetus for mergers among suppliers should increase, bankers believe.
Germany's Volkswagen, one of the largest manufacturers of petrol and diesel engines, has said it will develop its final generation of combustion engines by 2026, while U.S. rival Ford last month said it would close two engine factories in Europe.
"The profit pool of companies with combustion engine-related technology – once the envy of the industry – is shrinking with the rise of electric vehicles and the digitisation of the industry," Goldman Sachs managing director Axel Hoefer said.
"You would expect someone to come in and consolidate to benefit from economies of scale."
Volkswagen is now warning its suppliers to prepare industry-wide solutions for winding down combustion-engine manufacturing as it ramps up mass production of electric vehicles.
The company is retooling 16 factories to build electric vehicles and plans to start producing 33 different electric cars under the Skoda, Audi, VW and Seat brands by mid-2023, transforming the industry's supply chain.
"It makes no sense to have factories running at only 40% capacity," Stefan Sommer, Volkswagen's procurement head, told Reuters. "The auto industry is obliged to develop structures to consolidate combustion engine assets, to decide where to bundle certain activities."
"If we end up with uncontrolled insolvencies, it will be a problem for the industry," he said.
MISMATCH
There are more than 120 plants making combustion engine components in Europe, according to consulting firm AlixPartners.
German auto industry association VDA says 436,000 jobs are tied to building petrol and diesel engines in Germany alone.
Demand for compliant combustion engine assets has already triggered consolidation among carmakers themselves - PSA Group's takeover of General Motors' Opel business in 2017 was driven by that issue.
"With emissions regulation getting more stringent, particularly in Europe, some manufacturers are getting left behind in terms of their ability to develop compliant engines," Franciscus van Meel, BMW's head of vehicle development, told Reuters.
Until recently, deals have still proved difficult to do because of lingering disagreements over valuations.
U.S. group Dana late in 2018 launched the sale of its European head gasket business, a key component for combustion engines, people close to the matter said. With the help of Bank of America it invited suitors to bid, but pulled the auction several weeks later due to muted interest.
The sale of Germany's closely-held Ifa Group, a maker of shafts mainly used in combustion engine-powered cars, was announced a year ago, but never got over the finishing line. Among the few suitors was China's Wanxiang, but differences on pricing proved insurmountable, people close to the talks said.
"The main problem is that buyers' and sellers' price expectations don't match," KPMG partner Juergen Schlangenotto said.
"A seller typically says: I have a robust order book and good margins so I want a valuation of 6 times EBITDA (annual core earnings), while a buyer says there’s no long-term growth so I am paying 4 times."
A fresh test of interest in combustion engine assets will be the sale of engine parts and gear box parts maker Tekfor. Private equity owner KKR is in talks with a Chinese buyer, according to people close to the matter.
James Kamsickas, CEO of U.S. drivetrain supplier Dana, believes internal combustion engine (ICE) demand could persist for many years.
"People are overbaking a little bit on how much the internal combustion engine is just going to go away," he told Reuters.
"If anything, I'm a very strong advocate that it's going to be a world of hybridization for the next 15 years. Last time I checked, that still requires an ICE."


World should back Vision 2030 strategy says global risk guru

Updated 22 November 2019

World should back Vision 2030 strategy says global risk guru

  • Ian Bremmer: When I see how much more dynamic Riyadh is compared to two years ago, it’s really undeniable that they are actually trying to modernize society
  • Bremmer: They are hosting the G20, and that could help to make them confident enough to push forward on a resolution to the Qatar issue

BEIJING: The world should back Saudi Arabia’s transformation strategy under Vision 2030 despite the challenges the Kingdom has faced, according to Ian Bremmer, one of the leading political risk advisers in the world.

“When I see them moving toward Saudization, when I see how much more dynamic Riyadh is compared to two years ago, it’s really undeniable that they are actually trying to modernize society. I think that’s really important and we should all be rooting for that process to continue,” he told Arab News on the sidelines of the Bloomberg New Economy Forum in Beijing.

He said that the ongoing reforms in the Kingdom were helping it rebuild its international reputation following criticism over the death of journalist Jamal Khashoggi last year. “They are hosting the G20, and that could help to make them confident enough to push forward on a resolution to the Qatar issue.”

“It would be nice if there could be some reduction in the problem with Qatar, and some reintegration of the GCC, and there has been some progress toward that. The fact that we have a peace deal in south Yemen, that will make a difference too, and hopefully it will reduce some of the tension with Iran as a consequence,” he added.

Bremmer was speaking about climate change and other issues at the forum, at a session that acknowledged the difficulty of meeting targets to get rid of fossil fuels by the year 2050. He also talked about the looming “technology wars” between China and the US.