While media attention is focused on the megamergers that continue to sweep through the car manufacturers’ end of the global automotive industry, a new PricewaterhouseCoopers survey notes that the dealmaking is accelerating strong trends which are fundamentally reshaping the ways carmakers approach the consumer.

The Automotive Sector Insights survey shows that the consolidation of the automotive industry is fundamental and seemingly unstoppable, with global automotive deals totaled $71.3 billion in 1999, a trend that continues in 2000. But, at the same time, the report shows clearly that carmakers are being driven by larger customer- and cost-oriented trends, including Internet-enabled retailing.

“Megamergers are taking the automotive industry by storm, with 12 deals over the $1 billion dollar threshold in 1999,” said Jeffrey Sands, a director with PricewaterhouseSecurities in Detroit. “Indeed, while the total number of deals declined 12 percent last year, their average disclosed value increased 80 percent to $275 million. Pressure to improve shareholder returns, rid themselves of excess capacity and use Internet-enabled technologies have converged to drive a fundamental consolidation and restructuring of the industry. These numbers reflect key trends that are expected to continue this year.”

“Given the strength of the underlying trends, there will be more fundamental change in 2000 than in any year in the preceding decade,” said Michael Burwell, leader of PricewaterhouseCoopers’ Transaction Services group and a partner in the Americas Automotive practice. “The role of the automotive supplier will be changed dramatically and forever by e-purchasing. The dealership system, in large part because of Internet-enabled retailing, will be under enormous pressure but, at least in the big U.S. market, will survive. And the Asian carmaker market is now the last frontier for the M&A wave that has already swept through the European and U.S. segments of the industry.”

The PricewaterhouseCoopers survey points to these trends as important for 2000 and beyond:

– In an attempt to get closer to consumers and command greater
loyalty and share of wallet, vehicle manufacturers are expanding
the definition of a “car company” to cover all aspects of vehicle
ownership. Last year, big carmakers used acquisitions to enter
areas as diverse as roadside assistance and repair services,
navigational devices, driver education, motorsports, recycling,
and vehicle leasing and finance. Ford’s (no – perceived
endorsement) $1.6 billion acquisition of Kwik-Fit auto repair
centers and a surge of deal activity in roadside assistance
services, signaled this trend. Increasingly, vehicle manufacturers
are exploiting the value inherent in their brand. With quality and
reliability becoming less of a differentiator, vehicle
manufacturers need to address the car buyer’s emotional and
convenience needs, as well as purely economic considerations,
through strong branding campaigns.

– As vehicle manufacturers focus more on brand and marketing
management, as well as service and final assembly, they are
shifting even more responsibility to Tier 1 suppliers, which are
now taking on production of super modules and some assembly.
E-purchasing agreements among big carmakers is intensifying the
redistribution of assets among a smaller number of mega-suppliers
that are scrambling to adapt Internet-enabled supply chain
management – or sell to those that can. TRW’s $6.5 billion
acquisition of Lucas/Varity and Lear‘s purchase of UTA’s interior
trim business for $2.3 billion reflect this trend as does the
decision by some big players – including United Technologies and
Invensys – to exit the automotive supply business. Going forward,
Internet technologies will allow all points on the shortened
supply chain to interact more fluidly, thereby transforming
relationships as well as processes. The stakes are high. A truly
integrated, Web-enabled production and distribution system could
knock $1,000 to $3,000 off the price of the average car.

– While Internet-enabled auto retailing is still in its infancy, it
is the catalyst for change, enabling carmakers to get closer to
their customers and facilitating the introduction of new B2C
models for selling, delivering and servicing new vehicles.
Sandwiched between these two forces are independent dealer
networks whose survival hinges on their ability to use their
wealth of customer information to offer better services, build
stronger links with customers and carmakers and create a brand
image distinct from manufacturers. Deal activity in this sector
will move away from a simple search for economies of scale toward
acquisitions that improve processes and enhance dealer image.

– In an industry where growth is key, Asia looms large. While the
Asia-Pacific region currently represents 28 percent of global unit
volume, it is expected to contribute 45 percent of global
automotive production growth over the next six years. Western
carmakers are eager to tap into this growth, and a successful
strategy to capitalize on the future potential in emerging markets
is critical to long-term survival. Asian M&A is expected to
accelerate this year, as Renault implements its rescue plan for
Nissan, Mitsubishi combines with Daimler-Chrysler, and the
historic ties of keiretsu companies are relaxed. However,
investment in Asia is not without risk: Western carmakers may not
be able to move as aggressively as they would like, and may have
to contend with a lack of information, wide gaps in valuation
methods, and large amounts of off-balance sheet debt.
Nevertheless, opportunities to develop strategic positions that
convey real competitive advantages have never been better for
those with the vision and the financial strength to grasp them.

PricewaterhouseCoopers (www.pwcglobal.com) is the world’s largest professional services organization. Drawing on the knowledge and skills of more than 150,000 people in 150 countries, the organization helps clients solve complex business problems and measurably enhance their ability to build value, manage risk and improve performance in an Internet-enabled world.

PricewaterhouseCoopers Securities LLC is a wholly owned subsidiary of PwC Global Holdings BV (a member firm of the worldwide PricewaterhouseCoopers operation) and a member of NASD, MSRB and SIPC. PricewaterhouseCoopers Securities is part of PricewaterhouseCoopers’ Financial Advisory Services (FAS) group that provides creative solutions and ideas that increase value to clients during critical periods when they are making important decisions that define their future. The FAS practice is organized along five product lines: Corporate Finance and Investment Banking Services, Corporate Valuation Consultants, Business Recovery Services, Dispute Analysis and Investigations, and Project Finance and Privatization. PricewaterhouseCoopers Securities is not engaged in the practice of public accountancy. PricewaterhouseCoopers’ Transaction Services practice helps clients maximize returns on buy and sell side deals. We create tax-efficient structures, develop goodwill minimization strategies and–through The Accelerated Transition®–help clients capture value after they close a deal. As part of the diligence process, we identify deal issues, value drivers and hidden synergies so clients can negotiate better and begin integration planning sooner. Our sell side services help clients manage the entire sales process, from addressing carve-out and separation issues, through buyer screening, data room management, presentation coaching, and purchase agreement support.

To obtain a copy of our Automotive Sector Insights report visit us on the web at www.pwcglobal.com/auto.