The relentless drive for shareholder value is pushing back geographic boundaries

Shareholder returns in the automotive sector, as measured by the PwC Automotive Shareholder Value index, have significantly under performed the leading global indices over the last three years. The gap has widened during the course of 1999 as the financial markets have migrated towards the emerging business models of the new economy.

The challenge for vehicle manufacturers (VMs) to penetrate new and emerging growth markets is becoming ever more acute. Platform deproliferation and the development of new and innovative niche model segments has helped to fuel demand in the developed markets; however, a successful strategy to capitalize on the future potential in emerging markets is critical to long term survival.

A route to growth?

The relationship between economic growth and vehicle ownership is clear. The inter-relationship between vehicle density, economic growth and population size, illustrated in the graph above, dictates that the developing nations will be the key prize for VMs in terms of both growth rate and absolute market potential. Today, more than ever before, the Asia-Pacific market presents significant opportunity but without risk. The consolidation amongst VMs, and the pressure to compete globally, are driving unprecedented levels of mergers and consolidation for suppliers. The economic challenges of recent years have provided a unique opportunity to enter the formerly closed marketplace of Asia.

The growth opportunity

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The anticipated downturn in demand in Western Europe and North America failed to materialize in 1999; however, pricing pressures offset many of the benefits of increased volumes.

The recovery in Asian markets ran ahead of expectations, notwithstanding the flat performance in Japan. The strength and longevity of the current boom has surprised many and while the risk of a cyclical adjustment cannot be ignored, consensus forecasts for 2000 and beyond remain buoyant.

The Asia-Pacific region is a key driver of worldwide growth, representing 45% of the projected global automotive growth from 1998 to 2006. The potential for growth in vehicle density in this populous region provides a catalyst for industry growth for years to follow, for VMs and suppliers alike.

The growth picture across Asia is not uniform

In addressing the Asia-Pacific market, westerners frequently make broad generalizations about the region, when in reality the area comprises a number of distinct markets. This fragmentation is reinforced by cross-border trade restrictions, preventing suppliers from treating the region as one market. Some nations have mature automotive markets, with the challenges inherent with maturity (slower growth, lower returns), such as Japan, Asia’s largest market, and the much smaller Australian market. China, India, and other countries have emerging automotive markets, where the vehicle ownership represents a modest proportion or low density of the population. Each option for growth and expansion needs to be separately evaluated within the context of developing a global strategy in order to determine the optimum balance of opportunity and risk. While the intrinsic potential growth of the market is attractive in itself, the absolute size of the market and the current lack of penetration by Western companies provide an added dimension.

The distinct markets within the region each present differing opportunities for growth. The compound average growth rate by country ranges from a high of 21.3% for the Thailand market, to the mature markets of Japan and Australia, with growth rates of 1.1% and 2.7% respectively.

At nearly 28% of the global unit volume today, and projected to grow to 30% by 2006, the Asia-Pacific market is too large to be ignored.

VMs are also looking for synergistic opportunities in addition to this intrinsic growth potential. For example, producing attractive and affordable small cars at a profit continues to challenge both Western European and North American manufacturers. By teaming with Asian manufacturers, Western VMs can broaden their brand and product portfolio and leverage local small car expertise into other global markets.

Contribution to Growth by Region 1998 – 2006

Excess capacity

The wave of consolidation amongst VMs, energized by the groundbreaking creation of DaimlerChrysler in 1998, continued strongly in 1999.

All the signs are that consolidation will continue to accelerate in 2000, as evidenced by the recent deal between GM and Fiat and the proposed Ford / Land Rover transaction. Excess capacity however, remains a major issue and is not anticipated to peak until 2002 when the Asian market returns to pre-crisis levels. Excess capacity is a severe market destabilizer and a principal driver of the incentive culture and deflationary environment which contribute to low returns. It also serves to heighten the push for new markets – both for VMs and suppliers who are forced to make parallel investments in support of VM globalization strategies.

The Asia-Pacific market is a major contributor to global excess capacity. Overall, utilization in the broader Asia-Pacific market is projected to be in the 65 to 75% range, well below utilization rates in Western Europe and North America. It will take some time for the market to grow into its present capacity.

Global Light Vehicle Production and Capacity

Open for business

For North American and European VMs Asia represents a unique opportunity to partner with local manufacturers. Financial necessity is driving many Asian manufacturers, such as Nissan and Daewoo, towards their stronger counterparts from Europe or North America.

Transaction activity in the region is moving ahead rapidly. Asia-Pacific represented some 7% of total deal flow in 1999 and 13% by value. M&A activity is set to accelerate further in 2000 as Renault continues to implement the rescue plan at Nissan, Mitsubishi combines with DaimlerChrysler and the historic ties of the keiretsu companies are relaxed. Many Asian manufacturers are dealing with excessive debt loads or financial distress. Western European and North American manufacturers looking to acquire in Asia will need to contend with this debt burden (on and off balance sheet), and the continued prospect of very limited market pricing power.

Top Ten Deals in Asia 1999

Cultural issues

Many of the Asian economies have traditionally viewed their automotive industries as key to their success as an industrialized nation. As a result, many have adopted protective strategies in the form of tariffs or import quotas to assist the development of domestic VMs and suppliers, without regard to their competitive status globally. In addition, nearly every country in the Asia region has placed significant limitations on foreign investment in the automotive industry.

A nationalistic approach results in the politicizing of the acquisition process. When combined with the historic differences between Western and Asian corporate culture, this creates even greater challenges in consummating any transaction and, as importantly, delivering the value for shareholders from the transaction post completion. In a number of countries, the nationalistic view of the automotive industry takes on even more personal meaning. In Japan, for example, the acquisition process is extremely challenging for a North American or Western European buyer, because there is still a significant social stigma for a company to be put up for sale (in Japanese, “M&A” can be roughly translated as “miuri” or selling one’s body). As a result, few auctions occur (unless a business is insolvent) and principals are often unwilling to admit an interest in selling their company. Gathering information on the business is also difficult, partly because of a lack of transparency in financial statements. Typically advisors are utilized as a more subtle approach in making contact with a potential target. Most negotiations are exclusive, and pride and public issues tend to be more critical than price. While some might applaud these tactics in comparison with the more common auction process in the West, the result is that targets are harder to identify, and transactions are more difficult to complete. Wide gaps in valuation approaches between buyer and seller inevitably make the negotiations even more difficult.


Another culturally-based issue is that of control. Apart from the obvious physical limitations of investing so far from a company’s Western headquarters, many entities work with partners initially to establish their presence in a new market. The traditional joint venture approach may be loosening its grip as a result of the evolving Renault / Nissan relationship; however, the desire to retain control remains a major hurdle to the consummation of a successful future relationship. Deproliferation of Platforms As VMs move to an ever smaller number of global platforms and focus on global sourcing of parts, the pressure on suppliers to team up with their counterparts in Asian markets will intensify. In some instances, global sourcing will sort the wheat from the chaff – but the winning bidders will need to absorb some of the capacity previously provided by losing bidders. Unsuccessful players in platform consolidation will likely be those that offer less value-added through engineering, design and systems capability. The pressure to team up with the winning mega-suppliers will intensify. Successful companies will manage these risks. The drive, for VMs and suppliers, is to be global – the question is how to get there. Putting in place the route map is not an option; it is a necessity. The winners will be wary and prudent, but active. Barriers are being pushed aside and opportunities are opening up. The building blocks of future shareholder value creation will be put in place over the near term by those with the vision and the skills to grasp them.

Key Points to Remember

• Auctions are unusual in the region, unless driven by creditors. Exclusive negotiations can be more
• Principals can often be unwilling to admit that their company is for sale. The local reach of experienced global advisors can be critical
• Valuation approaches vary significantly from region to region. Differences in perspective should be anticipated.
• What you see is not always what you get: Be aware that sometimes the financial statements do not show all of the company’s liabilities due to off-balance sheet debt and related party transactions.
• Holdbacks, escrows or earn-out structures are not commonly utilized.

Sources: The data for this article was derived from
PricewaterhouseCoopers AUTOFACTS Release 1999.
Q3 Asia-Pacific Car and Outlook.