The automotive industry, which was ramping up production to meet post-2020 pandemic demand, faced strong headwinds in the first half of 2021 due to various supply chain constraints, discussed later in this update. These supply issues hurt U.S. auto manufacturing, with GM, Ford, and other OEMs temporarily closing plants or reducing production. Consequently, auto parts manufacturers that feed their supplies to these plants also saw their order books being impacted in 2021. With new car output being hampered, inventories at dealerships have reached historic lows, and strong demand for new cars pushed prices to unprecedented levels.
While demand for vehicles came roaring back in the second half of 2020, automotive suppliers in 2021 are confronted with many operational and supply-side challenges that negatively impact near-term revenue and profitability goals, including:
Despite recent supply chain challenges temporarily impacting automotive sales and operational trends, the industry’s long-term demand profile remains intact. While supply-side challenges are likely to persist into 2022, IHS is forecasting sequential global production improvement starting in Q4’21 with year-over-year improvement starting modestly in Q2’22.
Over the next decade, the automotive industry will face a magnitude of change driven primarily by four mutually reinforcing trends: Connected, Autonomous, Shared, and Electric (“CASE”). These trends are enabled by the advancement of technology in electronics and software and will result in different user behaviors and mobility preferences, shifting value pools across the supply chain, innovative business models, and new entrants into automotive. Neither OEMs nor traditional suppliers are fully positioned to define the software and technology requirements of these new systems. As such, increased collaboration between OEMs and suppliers is expected to become not just more prevalent but necessary. Auto OEMs and suppliers will see new business models and changing supply chain ecosystems with emerging competition from new entrants. M&A will become increasingly important to fill gaps in capabilities to allow suppliers to deliver complete and fully functional systems.
The challenges due to COVID-19 across the automotive sector caused softness in M&A during the second quarter of 2020 as OEMs, suppliers, and retailers adapted their businesses to the pandemic (e.g., temporary shutdowns, cost cutting, government programs, etc.). M&A quickly picked up in the second half of 2020; however, macroeconomic headwinds have plagued the industry in 2021 with increasing commodity costs and the supply chain disruptions discussed previously.
Whether an automotive supplier finds itself in a healthy or challenged post-COVID environment, M&A and restructuring activity over the next 24 months could be imperative in positioning suppliers for longer-term success. Innovative suppliers seeking growth in areas like electric vehicles (“EVs”) will need to continue to invest in forward-looking technologies. Such suppliers may supplement M&A activity with partnerships that accelerate technology development. Additionally, suppliers might need to divest certain growth areas that are difficult to fund, areas where they lack the current development capabilities, or areas that they no longer feel are the right long-term strategic fit as the vehicular landscape transforms.
Public trading multiples have returned to more normalized levels after spiking in 2020 due to COVID-19 and supply-chain-related issues temporarily burdening profitability, with valuations at the time anticipating a market recovery.