01. Automotive Electronics Becomes a Hotspot for Mergers and Acquisitions for the First Time

After 20 years of silence, the automotive industry has set off another wave of mergers and acquisitions

Around 2000, the automotive industry completed global integration and entered a mature period. In the next two decades, auto mergers and acquisitions have been in a silent state, with almost no growth. Except for the impact of bankruptcy and reorganization events in 2009, the transaction amount in other years fluctuates around $40 billion annually.

However, since 2018, the automotive M&A market has set off a new climax. The average transaction value has doubled to $80 billion per year, twice the average level of the past two decades. In 2021, when global mergers and acquisitions exceeded a record high in 2007, the transaction volume of the automotive industry had exceeded $200 billion; Even if the transaction volume is halved in 2022, it will still have a scale of nearly 100 billion dollars.

Automotive electronic components have become a hot spot for the first time

Before the emergence of this round of mergers and acquisitions, the automotive industry experienced three large-scale mergers and acquisitions, mainly driven by cost reduction and efficiency increase and capacity transfer. Horizontal integration with auto parts enterprises. The first time was in the 1910-1930s. After 10 years of rapid development, the American automotive industry has entered a period of accelerated competition and started horizontal mergers and acquisitions. After the wave of mergers and acquisitions, Ford, General Motors, and Chrysler accounted for 80% of the production of the United States. The second time was in the 1960-1970s. The global automotive production capacity has shifted to Japan and Germany, where large-scale integration has begun. After the M&A boom, Japanese, German, and American car companies began to compete with each other. The third time was in the 1980-2000's. The intensification of global competition in the automotive industry, with the goal of reducing costs and increasing efficiency, has stimulated the horizontal integration of automotive components. After the wave of mergers and acquisitions, the market share of top 10 automotive parts suppliers has increased from 10% to nearly 30%.

However, this round of auto mergers and acquisitions is different from the previous three. It is no longer a simple horizontal integration. The acquisition target is mainly concentrated in the automotive electronics field. Automobile manufacturers and other related industry giants. For example, the acquisition of autonomous driving chip companies for $15.3 billion and the acquisition of transportation data analysis company Moovit for $1 billion; Argo AI, the developer of auto drive system, invested 1 billion dollars. As a result, the proportion of automotive electronics in the total number of mergers and acquisitions in the automotive industry has increased from 10% in 2010 to nearly 20%, and the transaction amount has tripled compared to 2010.

The driving force behind it is the information technology revolution

As a subdivision of components, automotive electronics has been able to set off a wave of mergers and acquisitions in the automotive industry, mainly due to the accelerated penetration of the information technology revolution into the automotive sector since 2015.

In the past, the information technology revolution has always had an impact on the automotive industry, mainly reflected in the automotive electronics segment of the upstream automotive parts industry. From car amplifiers to body electronic control systems, they are applications of semiconductor and software technology in the automotive industry. However, due to low technology penetration and slow update iterations in the past, such a large transaction is rare in several rounds of automobile mergers and acquisitions. With the continuous penetration of information technology in the automotive industry for 50-60 years, especially the accelerated development of lithium battery technology, mobile Internet, and Internet of Things technology in the past 10 years, the trend of electric and intelligent vehicles has significantly accelerated, while automotive electronics have occupied the entire vehicle. The value ratio has rapidly increased from less than 20% to more than 30%, so the number and amount of automotive electronic targets acquired have multiplied, becoming an important force influencing mergers and acquisitions in the automotive industry.

02. Inspiration from past mergers and acquisitions of automotive electronics

Although in the past wave of auto electronics mergers and acquisitions, there were not many cases of auto electronics mergers and acquisitions, we can still find the clues and laws of the auto electronics mergers and acquisitions boom along with several important impacts of technological changes on the automotive industry, so we can understand this larger auto electronics mergers and acquisitions boom.

New categories or new technologies stimulate mergers and acquisitions

The pattern has stabilized again after decades

Since the industrialization of automobiles in 1900, there have been three waves of mergers and acquisitions around automotive electronics, all of which have been impacted by information technology. Develop new automotive technologies based on information technology, break the existing Tier1 pattern, and stimulate mergers and acquisitions. The process of industrialization is slow, and it often takes 10 to 30 years for the new pattern to stabilize.

The first wave of mergers and acquisitions in automotive electronics began in 1930, when consumer radios first entered the automotive market, creating a new category of automotive radios. After that, related mergers and acquisitions began to appear; Not until 1960 did the penetration rate increase to over 60%, with the emergence of leading automotive power amplifiers represented by Bosch and Visteon. The second wave of mergers and acquisitions began in 1957, when information technology was first applied to vehicle bodies, and electronic fuel injection (EFI) systems began to replace traditional mechanical gasoline injection systems. After that, related mergers and acquisitions began to appear; Until 1978, the penetration rate of European and American markets exceeded 50%, and the market pattern gradually stabilized. The third wave of mergers and acquisitions began in 1980, when information technology was first applied to driving control. Electronic control methods have gradually replaced mechanical vehicle chassis and power control methods, resulting in a series of electronic control systems represented by the anti lock braking system (ABS). Since then, new categories and related mergers and acquisitions began to emerge, and it was not until around 2000 that the market penetration rate of ABS exceeded 50% that a global automotive electronics market pattern led by Bosch and mainland China gradually took shape.

The main line of mergers and acquisitions is Tier1 leading mergers and acquisitions of new categories or technologies

Tier1 leading enterprises in various parts and components segments often have existing products that are difficult to replace, with a wide coverage of OEM resources, and are deeply bound to the head engine factory. When they acquire new products or technologies, they can better leverage the value of commercialization and sales synergy, make it easier to successfully integrate, and further consolidate and enhance their market position.

The earliest automotive electronics companies were manufacturers of consumer radios. The first car radio in Europe was launched by German consumer radio manufacturer Ideal (Blaupunkt); The world's first car mounted all transistor car radio was launched by the then world's largest consumer radio manufacturer, Feige Company of the United States. However, in the first wave of auto electronics mergers and acquisitions, the two companies were respectively acquired by Bosch and Visteon (the former Ford parts subsidiary). At that time, Bosch was the world's largest supplier of automotive fuel ignition devices and the Tier 1 of most automotive manufacturers; Visteon is a Tier 1 supplier to Ford, a global automotive manufacturer with a market share of over 40%.

However, whether the merger can be completed depends on whether Tier1 and the technology party have language rights in the industrial chain. Due to the fact that the European semiconductor market started more than 30 years later than the European automotive industry, in the 1990s, when Tier 1 companies such as Bosch and mainland China were deeply bound to host factories, European semiconductor companies still needed to rely on Tier 1 companies to import host factories, and their general revenue was only a fraction of Tier 1's. Therefore, in order to better integrate their ABS and ESC businesses, German Tier 1 such as Continental successfully acquired Temic, an upstream sensor supplier with a revenue of 1 billion euros, in 2001. However, the development of semiconductor enterprises in the United States predates the establishment of trust and cooperation between automotive electronics companies and vehicle manufacturers. Automotive electronics companies in the United States generally do not have semiconductor technology.

Once you become a leader in automotive electronics Tier1

It is difficult to be completely subverted by technological changes

First, the layout of the main engine factory has remained stable after several technological changes. The top tier Tier1 has a strong adhesion to the top engine factory, ensuring operational stability. Secondly, safety requirements lead to a certification cycle of 5-10 years for new products, which gives giants sufficient space to transform and innovate and survive in other competitors.

Take the electronic fuel injection system that made Bosch the leader of automotive electronics at one stroke as an example. In the 1950s, Bendix * Company of the United States developed an EFI system, but encountered performance issues when applying it to Chrysler models, causing Bendix to fall into a dilemma. A few years later, Bosch acquired Bendix's EFI patent, and through five years of close cooperation with Mercedes, it "revived" the "dead" technology, not only increasing Mercedes' sales, but also almost monopolizing the global vehicle market. Electronic injection system.

03. Is there any difference this time?

The main line of auto electronics M&A is basically the same

The basic logic of the current wave of mergers and acquisitions of automotive electronics triggered by the electrification and intelligence of automobiles is the same as that of previous mergers and acquisitions of automotive electronics. Tier 1 leaders who can firmly grasp the main engine factory are still the main force of mergers and acquisitions. Enterprises that have become the leader of Tier 1 automotive electronics can still maintain a leading position as long as they catch up through mergers and acquisitions in a timely manner. But who will be the ultimate beneficiary and the most successful integrator in this process? Until the penetration rate of electric and intelligent vehicles exceeds at least 40%, or even exceeds 60%, there will be no answer. The case may eventually be brought to light, and it will take at least 5-10 years to verify.

Changes in two key elements may lead to new trends

However, in this upsurge, the stability of OEM structures and the stability of Tier1 have changed. The emergence of new integrators poses higher requirements and space, and the integration paths of new and old integrators may vary.

The trend of automobile electrification has changed the ranking of traditional main engine manufacturers. Traditional Tier 1 manufacturers can only become winners through integration by seizing the entire vehicle plants that benefit from the trend of electrification. At the same time, the emergence of new forces in car manufacturing will bring a blank market in the supply chain system, and a new Tier1 may be born and become an integrator. Referring to the history of the transfer of automotive production capacity to Japan and South Korea in the 1960s and 1970s, when Toyota rose to the top ten global automakers, its core automotive electronics supplier, Nippon Electric Equipment, also entered the top ten global.

Automotive intelligence is accelerating to break through the existing technological capability boundaries of traditional Tier1, and new categories leave room for technology giants in related fields to become new Tier1. Technology giants may reverse invest in acquiring some integrators to provide services, or acquire some supporting product suppliers to provide complete solutions.

On the one hand, automotive intelligence has led to the integration of automotive electronic and electrical architectures, making the demand for high-performance SoC chips and GPUs even more urgent. This high-performance chip has transcended the existing capabilities of traditional Tier1. Therefore, in order to ensure the selection of chips and match the intelligent needs of the entire vehicle, many car companies have to jump out of the traditional Tier1 and directly cooperate with chip companies in research and development. For example, chip giants Nvidia, Texas Instruments, Mobileye, Qualcomm, etc.

On the other hand, the intellectualization of automobiles has enabled automobiles to move towards smart phones and achieve software defined automobiles. This requires decoupling the traditional R&D and production mode of integrating automobile software and hardware. The independently developed production operating system is more suitable for automobiles, application software, and algorithm models. However, the development and design of these software is not the expertise of traditional Tier1, so many software giants have begun to replace Tier1 and directly conduct joint research and development with OEMs, including Apple, Google, Microsoft, Huawei, Baidu, etc