Buy-Sell Q&A: Where the Automotive M&A Market is heading

Q: Are there any pitfalls that sellers ought to be aware of that could influence their profitability and valuations?

A: The short-phrase risk we see is the risk of a economic downturn. Some economists predict that we’re most likely to have a economic downturn in 2023, which would lower desire for vehicles and most likely impair the extremely high revenue on vehicles that sellers are savoring these days. As earnings decline, so would valuations.

In the Q4 2021 Haig Report, we highlighted some medium to extensive-phrase threats that sellers will will need to think about:

Tesla and Other New Entrants: Tesla now has develop into the major luxury model in the U.S. and its subsequent item launch, the Cybertruck, is aimed at the coronary heart of the domestic models. Other new entrants, these types of as Rivian Automotive and Lucid Motors, also are coming into the market, as well as new brands remaining introduced by common OEMs, like Polestar. These new entrants will possible experience combined benefits in the market, but there’s a good opportunity that competing dealers throughout the region will shed consumers and gains as a outcome. Maybe a better menace to dealers is that new entrants may perhaps force conventional OEMs to force the company model on dealers (see underneath).

The Agency Product: Regular OEMs have seen that thousands and thousands of buyers are ready to go to a internet site, purchase a auto and then wait around for it to be shipped. And these OEMs also see they no extended need to have to deliver tens of millions of automobiles for dealers’ storage heaps, guessing at which autos shoppers will in fact want, and then intensely advertise and offer incentives in order to get prospects to invest in the autos. Their profits per auto are far increased when they create only what consumers want to buy. And finally, they see that stores are generating substantial profits. This new set of information is causing a selection of OEMs to rethink their relationships with their dealers and people. Ford’s approach to separate into two divisions, the Design e Division that will produce only EVs and the Blue Division that will make only inner-combustion motor (ICE) vehicles is an illustration of a opportunity Company Model in engage in. Customers who want to acquire an EV will have to order from Ford’s Design e web-site.

It doesn’t appear that buyers will be ready to purchase Product e autos specifically from dealers. This is a profound adjust as the OEM will now set, alternatively of “suggest,” retail pricing and the OEM will be the point of get hold of with customers. The customer can decide on which vendor will produce the car or truck, but the price will be decided by Ford, which also will come to a decision how a great deal to spend the retailer. The purchaser will develop into Ford’s consumer, relatively than the dealer’s customer. This company model, in which the vendor will become an agent and is not a retailer, is typical in other locations of the entire world. It is our comprehending that sellers in these places make considerably considerably less income than sellers in the U.S. And Ford is not by yourself in its imagining. OEMs have been envious of Tesla’s inventory market valuation that is partly based on this immediate sales design.

Electrical Cars: Some sellers are involved that EVs will require a lot a lot less pieces and services function than ICE autos, which will hurt their company departments.

Consolidation: Though still a really fragmented field, consolidation in auto retail accelerated in 2020 and 2021. Teams like Lithia Motors, Team 1 and Asbury Automotive Group acquired dozens of stores to increase their nationwide community of dealerships, accompanied by electronic retailing applications that will enable them to market and service buyers who desire on the web purchasing. These auto groups and other dealers are more and more certain that significant scale will subject more in the long run than it has in the earlier. They program to give individuals a more substantial choice of motor vehicles and a lot more means to shop than scaled-down sellers can supply. If productive, they will gain current market share and make sure you their OEM associates and shareholders. Their gains would appear at the expenditure of smaller dealers that simply cannot match these abilities. Haig Partners gives opportunity cures for sellers for each and every of these problems. But due to place constraints, we just cannot make clear them in element right here. Nevertheless, you can study about these remedies on pages 14 and 15 in the Q4 2021 Haig Report. These challenges are genuine. Nevertheless, dealers are highly resilient and we anticipate they’ll discover techniques to mitigate these pitfalls. We are continue to bullish on the franchise process.

Haig Partners gives possible therapies for sellers for just about every of these issues. But thanks to place constraints, we just cannot explain them in element listed here. Nonetheless, you can browse about these cures on web pages 14 and 15 in the Q4 2021 Haig Report.

These pitfalls are genuine. Nonetheless, dealers are very resilient and we hope they’ll come across techniques to mitigate these risks. We are nevertheless bullish on the franchise system.